Big Tech farms out AI power build, keeps the risk
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By George Hay
LONDON, Oct 3 (Reuters Breakingviews) -Artificial intelligence giants are hoovering up the world’s green energy. Trillion-dollar companies like Meta Platforms META.O, Alphabet GOOGL.O and Amazon.com AMZN.O are signing chunky supply deals for their power-hungry AI data centres. Microsoft’s MSFT.O 10.5 gigawatt (GW) “framework agreement” with Canada’s Brookfield Asset Management BAM.TO, signed in May, is a case in point. Outsourcing the power build to third parties is a logical way to meet vast electricity needs, but Big Tech is still wearing the financial risk.
AI’s large language models, like Meta’s Llama range or Microsoft-backed ChatGPT, run on giant data centres that require huge amounts of energy. The combined electricity use of Amazon, Microsoft, Alphabet and Meta more than doubled between 2017 and 2021. The International Energy Agency reckons the total annual power needs of data centres worldwide will hit 1,000 terawatt hours in 2026 – about 2.2 times 2022’s level and on a par with Japan’s electricity consumption.
The scale explains why Microsoft and so-called “hyperscaler” rivals can’t just draw energy from the grid or strike small ad hoc deals with traditional utilities. One option would be for Big Tech to sink its own money directly into generating electricity. Some have made moves in this direction. Microsoft recently teamed up with BlackRock BLK.N and Mubadala-backed MGX as general partners seeding a $30 billion fund that will partly invest in green power, while Alphabet has invested in a BlackRock vehicle that will build renewable energy in Taiwan.
Yet it’s easy to see why CEOs like Microsoft’s Satya Nadella would be reluctant to build too much capacity themselves. The $3 trillion company is already investing hand over fist to construct data centres and other projects. Capital expenditure could jump from under 10% of group revenue in 2017 to around 20% in 2025, according to LSEG data. Google, Amazon, Microsoft, Meta and Apple’s AAPL.O combined capex bill will exceed $200 billion this year, Visible Alpha data shows. Bernstein analysts reckon the four other than Apple will spend $156 billion of that sum on technical infrastructure like data centres, which equates to 52% year-on-year growth.
For Nadella and peers, this outlay will already knock between 1 and 3 percentage points off operating margins in 2024 via hefty depreciation charges, the same analysts estimate. It’s understandable, then, that Big Tech may not want to add to that capex bill by also setting up their own wind and solar power projects, which would also bring considerable risks. That's why Nadella and his peers are likely to keep outsourcing the job to energy-investment experts like Brookfield and Macquarie. In the industry lingo, these third-party deals are called power purchase agreements (PPAs). They essentially involve signing contacts to buy energy for a certain number of years.
One appeal of PPAs is that Brookfield and its rivals have a global network and expertise in making green energy projects happen – something the tech giants lack. The Canadian group and Macquarie together have pipelines of actual and potential projects exceeding 100 GW. Another advantage is price certainty. In 2022, Microsoft flagged that soaring energy costs had increased its annual electricity spend by $800 million, while Amazon blamed fluctuating power prices for a 2-percentage-point hit to its cloud operating margin that year. PPAs, generally lasting 15 years or so, can be structured to give the customer more clarity over what they pay, smoothing out the volatility.
But PPAs are hardly cheap. The annual cost of Microsoft’s 10.5 GW deal, for example, could easily run into the billions. Imagine that Nadella’s agreement with Brookfield uses a price of $55 per megawatt hour, which is roughly in line with the average development cost of energy for solar and onshore wind as estimated by Lazard. Multiply that by 24 hours, 365 days and 10,500 MW. Next, assume that only 20% of that capacity can be turned into actual power, which is a typical proportion for solar energy. The overall cost to Microsoft would then be $1 billion a year, which it could be locked into paying for 15 years.
Admittedly, Microsoft shareholders might not notice that amount of money, which is tiny compared to the company’s forecast operating profit this fiscal year of around $120 billion, using analyst estimates gathered by LSEG. But Nadella’s contracted renewable-energy pipeline is growing, and currently stands at nearly 35 GW – more than three times the size of the Brookfield agreement. As that figure rises, it’s possible that the annual energy supply bill could start to take a noticeable bite out of the company’s operating margin.
Big Tech investors might also have mixed feelings about the stellar returns that capital providers promise their own investors. Brookfield, for example, discloses that it makes internal rates of return above 20%. If that’s what it’s solving for on the Microsoft agreement, Nadella may be paying a premium for his security of supply.
None of that will matter, of course, if the hoped-for AI revolution delivers a meaningful revenue boost. Analyst estimates compiled by LSEG see the top lines of Amazon, Alphabet and Microsoft growing by 64%, 71% and 98% respectively between 2023 and 2028. The issue, however, is that there’s a strong element of hit and hope with Big Tech’s AI investments. For now, the costs are much clearer than the nature of the business opportunity for Microsoft and its rivals.
The risk with PPAs is that Big Tech doesn’t find enough customers to use all the data centres they’re building, potentially leaving the hyperscalers stuck paying for power they don’t need. In that scenario, Microsoft and its rivals should be able to sell surplus electricity to other users. But if PPA prices are higher than prevailing market rates at the time, doing so might involve taking a loss.
Given the scale of the prize on offer, the hyperscalers can’t really do anything other than chase the AI opportunity. And it makes sense to outsource the power supply to experts. But Big Tech’s shareholders should know that they’re potentially on the hook if it all goes wrong.
Follow @gfhay on X
CONTEXT NEWS
BlackRock, Global Infrastructure Partners, Microsoft, and Abu Dhabi’s MGX on Sept. 17 announced the Global AI Infrastructure Investment Partnership (GAIIP) to make investments in new and expanded data centres to meet growing demand for computing power, as well as energy infrastructure to create new sources of power for these facilities.
GAIIP will initially seek to unlock $30 billion of private equity capital over time from investors, asset owners and corporates, which in turn will mobilize up to $100 billion in total investment potential when including debt financing.
Big Tech's soaring capital-expenditure bill https://reut.rs/3N8soOn
Microsoft and Amazon are the biggest buyers of green power https://reut.rs/4euVKmm
Editing by Liam Proud and Pranav Kiran
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تازہ ترين خبريں
دستبرداری: XM Group کے ادارے ہماری آن لائن تجارت کی سہولت تک صرف عملدرآمد کی خدمت اور رسائی مہیا کرتے ہیں، کسی شخص کو ویب سائٹ پر یا اس کے ذریعے دستیاب کانٹینٹ کو دیکھنے اور/یا استعمال کرنے کی اجازت دیتا ہے، اس پر تبدیل یا توسیع کا ارادہ نہیں ہے ، اور نہ ہی یہ تبدیل ہوتا ہے یا اس پر وسعت کریں۔ اس طرح کی رسائی اور استعمال ہمیشہ مشروط ہوتا ہے: (i) شرائط و ضوابط؛ (ii) خطرہ انتباہات؛ اور (iii) مکمل دستبرداری۔ لہذا اس طرح کے مواد کو عام معلومات سے زیادہ کے طور پر فراہم کیا جاتا ہے۔ خاص طور پر، براہ کرم آگاہ رہیں کہ ہماری آن لائن تجارت کی سہولت کے مندرجات نہ تو کوئی درخواست ہے، اور نہ ہی فنانشل مارکیٹ میں کوئی لین دین داخل کرنے کی پیش کش ہے۔ کسی بھی فنانشل مارکیٹ میں تجارت میں آپ کے سرمائے کے لئے ایک خاص سطح کا خطرہ ہوتا ہے۔
ہماری آن لائن تجارتی سہولت پر شائع ہونے والے تمام مٹیریل کا مقصد صرف تعلیمی/معلوماتی مقاصد کے لئے ہے، اور اس میں شامل نہیں ہے — اور نہ ہی اسے فنانشل، سرمایہ کاری ٹیکس یا تجارتی مشورے اور سفارشات؛ یا ہماری تجارتی قیمتوں کا ریکارڈ؛ یا کسی بھی فنانشل انسٹرومنٹ میں لین دین کی پیشکش؛ یا اسکے لئے مانگ؛ یا غیر متنازعہ مالی تشہیرات پر مشتمل سمجھا جانا چاہئے۔
کوئی تھرڈ پارٹی کانٹینٹ، نیز XM کے ذریعہ تیار کردہ کانٹینٹ، جیسے: راۓ، خبریں، تحقیق، تجزیہ، قیمتیں اور دیگر معلومات یا اس ویب سائٹ پر مشتمل تھرڈ پارٹی کے سائٹس کے لنکس کو "جیسے ہے" کی بنیاد پر فراہم کیا جاتا ہے، عام مارکیٹ کی تفسیر کے طور پر، اور سرمایہ کاری کے مشورے کو تشکیل نہ دیں۔ اس حد تک کہ کسی بھی کانٹینٹ کو سرمایہ کاری کی تحقیقات کے طور پر سمجھا جاتا ہے، آپ کو نوٹ کرنا اور قبول کرنا ہوگا کہ یہ کانٹینٹ سرمایہ کاری کی تحقیق کی آزادی کو فروغ دینے کے لئے ڈیزائن کردہ قانونی تقاضوں کے مطابق نہیں ہے اور تیار نہیں کیا گیا ہے، اسی طرح، اس پر غور کیا جائے گا بطور متعلقہ قوانین اور ضوابط کے تحت مارکیٹنگ مواصلات۔ براہ کرم یقینی بنائیں کہ آپ غیر آزاد سرمایہ کاری سے متعلق ہماری اطلاع کو پڑھ اور سمجھ چکے ہیں۔ مذکورہ بالا معلومات کے بارے میں تحقیق اور رسک وارننگ ، جس تک رسائی یہاں حاصل کی جا سکتی ہے۔
