Power 2026 - Electricity Pricing in the Age of AI

INDEX

AI demand is exploding. But while there's been plenty of discussion on the GPU and memory supply chains, the real constraint to expanding AI capacity is power.

Data centers already account for ~5% of US power consumption[1]. With data center power demand doubling every two years[2], demand would in theory outpace total US power generation by the mid-2030s.

Building a data center requires thoughtful planning around permitting, surrounding infrastructure, and anticipated power prices. In many cases, the variable cost of power determines whether or not a data center is viable at all.

I'm a former quant researcher at a major hedge fund who covered power and gas, and I've spent much of the last couple of years advising founders and investors on data center buildouts (procuring GPUs, negotiating with coal plants, identifying sites).

This primer on power and data centers is for a broader audience who senses there's an opportunity in energy markets and wants to get up to speed.

By the end of this primer, you'll understand:

Part 1: how power plants work , how data centers are developed , and how companies might respond (for founders/investors).

Part 2: how to price the US power markets (for traders).

If you're really interested in power, I'd advise you to read the whole thing. Hopefully you find it timely and interesting.

Thanks to Tina He and Samuel Spitz for editorial feedback.

Part 1: All About Power Plants

In This Chapter

Commodities are governed by a system balance equation that ties together supply, demand, net exports, and change in storage.

In a competitive market, the price of a commodity equals the marginal cost to serve an additional unit of demand.

Due to the physical constraints required for grid stabilization, the power market in particular is often managed by an independent system operator (ISO).

Before we dive into power, you have to understand where it sits in the broader context. There are three major commodity categories: energy (e.g. power, crude oil, natural gas), agriculture, and metals. All commodities have some basic properties in common that set them apart from other asset classes.

Equities vs. commodities

Equities and commodities are different from each other in two major ways.

First, a stock doesn't have any sort of forcing function collapsing the price to its fundamental value. A commodities contract, in comparison, has a fixed settlement date. On the settlement date, someone will come and physically buy or sell that tradeable commodity. If the corn is too expensive, they're not going to buy it. Prices must collapse to reality.

Second, the underlying companies that equities represent have various relationships with each other that are sometimes hard to untangle, such as contracts, shared customers, supply chains, and so forth. Commodities feed into each other in a much more straightforward way. A wellhead drilled into the ground results in some amount of crude oil and some amount of natural gas (mostly methane).[3] Crude oil is great because it can be shipped easily all over the world. Its global market means that prices abroad impact us here in the US, hence the widespread concern around the closure of the Strait of Hormuz. That crude oil has a market price, and refineries buy it to produce distillates: petroleum products like gasoline, diesel, and jet fuel. That's the same gasoline that you buy at the gas pump.

If a well produces almost no oil, we call it a dedicated gas well, and that's where the majority of domestic natural gas comes from. Natural gas cannot be shipped in its raw form so easily, but you can cool it and ship it in the form of liquefied natural gas (LNG). The prices for natural gas abroad have lately far exceeded the prices in the US, so we export as much as we can. As a result, natural gas prices abroad don't impact us here in the US as much in the short-term[4]. In a simplified sense, the natural gas we have here in the US is the supply that couldn't be physically exported[5]. Natural gas is consumed by some industrial use cases (e.g. chemical manufacturing), residential-commercial (e.g. heating your home), and power[6] - the focus of this primer.

The system balance equation

The commodities market has to "solve" in a particular way at each location:

Supply = Demand + Net Exports + Change in Storage[7]

Supply is the amount that the local merchants need to produce. Demand is how much is consumed at a specific location. Net exports are the units exported from a region minus whatever was imported. Change in storage is the quantity stored minus the amount drawn from storage. This equation must hold true at every location in the entire world. There are additional constraints:

You can only transfer so much supply from one point to another (only so many trucks/ships available, or a power line can only support so much transmission - more on this later)

You can't draw more from storage than...