The power sector’s data center mania just got a dose of reality.
Instead of looking forward to huge increases in electricity demand from data centers that power artificial intelligence tools, companies are facing the possibility that this growth may be smaller and less predictable than previously thought.
China-based DeepSeek released information this month about its AI systems and showed a combination of high performance and low cost. The company’s sudden emergence undermined the idea that the United States has a big lead in AI and also suggested that AI can be done in a way that uses less energy.
The popularity of DeepSeek’s newly released chatbot sent shockwaves through financial markets this week. The chip-maker Nvidia, which has a central role in supplying AI developers, lost about $600 billion in market value on Monday. Power companies also suffered, both regulated utilities and independent power producers such as Vistra Corp. and Constellation Energy.
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Does this mean the future of AI has definitively changed? It’s difficult to say. But the outlook is more uncertain, with implications for the energy transition.
Eric Gimon, a senior fellow at the think tank Energy Innovation, said the hype surrounding AI had many of the signs of an investment bubble, and the arrival of DeepSeek shows that U.S. dominance on this front was threatened.
“Not a lot about this is surprising,” he said.
He compared the situation to the dot com bubble that expanded in the late 1990s and burst in 2000. Many companies went bust, but the internet didn’t go away. It just entered a new phase.
He expects that AI data centers are still going to expand in the United States, and they will still contribute to an increase in electricity demand. The big change is that the growth is likely to be more erratic—some projects won’t get completed and some companies might fail.
Power companies and utility regulators will need to be cautious. If a company is proposing to build an AI data center, electricity suppliers will need assurances that they are protected if the project gets canceled.
“You want to be very careful about risk management, like who you’re getting in bed with, how much commitment are they getting from you in terms of capital, and how sure you are that they’ll be able to pay you back,” Gimon said.
DeepSeek shows an ability to provide AI services at a low cost. If competition among AI companies becomes a contest over who can provide the most value, this is good for renewable energy producers, he said.
Utility-scale wind and solar are some of the cheapest, if not the cheapest, sources of electricity. At the same time, options such as new nuclear plants may struggle because they cost much more to build and maintain.
Natural gas plants may be appealing for some data center developers, but they come with risks in the form of price volatility, he said.
Arvind P. Ravikumar, a University of Texas at Austin professor of petroleum engineering, also is not surprised that a competitor has risen to take on U.S. dominance in AI, and sees the reaction by the markets as a natural part of a hype cycle.
“Everyone should be skeptical of hyped claims of electricity demand growth,” he said in an email. “To be clear, demand will increase and not just from AI—in fact, AI is only a small portion of the electricity demand increase we will see in the next decade or two.”
The key question is not whether demand will grow, but how rapidly, he said. If growth reaches a certain pace, it will be more than can be covered by the cleanest sources, and that’s when companies are more likely to rely heavily on natural gas.
The market losses for some stocks this week indicate a declining confidence that rapid growth is going to happen.
Since DeepSeek released information about its products, analysts have worked to make sense of the implications for the power sector.
“Is Jan. 27, the day the power world changed? Or a bump in the bullish road?” asked Julien Dumoulin-Smith, an analyst for Jefferies in a note to clients. “After stark selloffs in power, utility and technology stocks on Jan. 26, the question is whether the data center boom is done before it even truly started.”
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Stephen C. Byrd of Morgan Stanley wrote that investors have overreacted to DeepSeek and affirmed his company’s view that U.S. AI infrastructure “will continue to grow rapidly.”
James Egelhof, chief U.S. economist for BNP Paribas, wrote of the possibility of rising market volatility.
“Transformative technological change creates winners and losers, and it stands to reason that the consumer of AI technologies—individuals and firms outside the technology industry—may be the main winner from the release of a high-performing open-source model,” he said in a research note. “This creates the risk of significant market volatility over time, should DeepSeek’s reported innovations stand scrutiny.”
An important caveat is that it is not clear that DeepSeek is accurate in its descriptions of its quality and efficiency. For example, one audit has produced disappointing results.
Monday’s stock selloff happened in a country that was just a week removed from the inauguration of President Donald Trump, an event which brought its own kind of turmoil.
Gimon views the Trump administration as ill-equipped to deal with the harmful effects of market volatility. He points to executive orders restricting wind energy and promoting fossil fuels as pretty close to the opposite of what’s needed.
“The administration has made things a lot worse,” he said.
And chaos, while entertaining in the short run, gets old pretty quickly.
Other stories about the energy transition to take note of this week:
Trump Freezes Funding for Federal Programs, Gets Blocked By Federal Judge: The Trump administration sowed “disarray and outrage,” as my colleague Nicholas Kusnetz reports, with a directive that federal agencies suspend federal payments that might not be aligned with the policies of the president. The halt in payments includes climate and renewable energy spending. Opponents immediately sued and a federal judge temporarily blocked the order on Tuesday, but an air of uncertainty remains over federal funding ahead of a larger court battle. On Wednesday, the administration said it was rescinding the memo that called for the suspension of payments, and it wasn’t immediately clear how that affects the legal case.
Oil Companies Are Unlikely to ‘Drill, Baby, Drill’: Trump’s return to the White House was financed in part by fossil fuel industries and they welcome his desire to obstruct competing sources of electricity such as wind energy. But they are unlikely to increase production of oil and gas by much since the country is already producing at high levels and prices are not high enough to justify an increase, as Rebecca F. Elliott reports for The New York Times.
Michigan Continues to Aim for EV Future, Despite Trump: Auto manufacturers and dealers in Michigan say the need to prepare for a shift to electric vehicles remains even with the arrival of a president who wants to cut federal funding that helps these vehicles. The fear, especially among manufacturers, is that the U.S. auto industry risks getting left behind in a global market that is quickly shifting to embrace EVs, as Alexa St. John reports for the Associated Press.
Floating Solar Power Has Huge Potential: The National Renewable Energy Laboratory has found that federally owned or managed reservoirs have enough room to accommodate enough solar panels to power about 100 million homes each year. Even developing a small share of this potential could make a big difference for the U.S. electricity supply, as Akielly Hu reports for Canary Media.
Maryland Renewable Portfolio Standard Fails to Deliver: Maryland’s ambitions to move toward a cleaner energy system have suffered due to many missteps and policy failures, according to a new report from Public Employees for Environmental Responsibility. The state’s program has been around for nearly 20 years and it may have done more to hinder progress than to help, as my colleague Aman Azar writes.
Inside Clean Energy is ICN’s weekly bulletin of news and analysis about the energy transition. Send news tips and questions to [email protected].
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Dan Gearino covers the midwestern United States, part of ICN’s National Environment Reporting Network. His coverage deals with the business side of the clean-energy transition and he writes ICN’s Inside Clean Energy newsletter. He came to ICN in 2018 after a nine-year tenure at The Columbus Dispatch, where he covered the business of energy. Before that, he covered politics and business in Iowa and in New Hampshire. He grew up in Warren County, Iowa, just south of Des Moines, and lives in Columbus, Ohio.
