AI Data Center Boom Pushes U.S. Power Equipment to the Breaking Point

Big Tech is pouring trillions into artificial intelligence, driving the construction of data centers to support large language models. This AI push is reflected in stock markets, but it's not the only sector benefiting. The electricity required to run these centers and the equipment that delivers it from generators to consumers is facing a shortage.

The heart of the issue lies in power equipment like transformers and substations, which have been in short supply for at least two years due to the rapid growth in electricity demand, primarily from the tech sector, and the grid's inability to expand quickly enough to meet it.

Transformers, crucial for converting high-voltage electricity to lower-voltage currents for end users, including data centers, are 15% short according to Wood Mackenzie. Substation shortages are even more pronounced, with an 8% deficit. This situation is set to worsen with a recent U.S. executive order banning imports of bulk power equipment from China.

Power equipment makers are facing order backlogs stretching over three years, with major players like Hyundai Electric reporting a 23% increase in order backlog to $8.5 billion over the first half of the year.

The shortage of power equipment, along with gas turbine tightness, will impact the pace of the AI revolution, as both are time-consuming to manufacture. Cooling systems, also in high demand due to Big Tech's AI ambitions, will face supply constraints as well, potentially leading to a supply chain crisis. McKinsey estimates that Big Tech could absorb up to 40% of the power equipment supply in the U.S. over the next few years, highlighting the urgent demand that manufacturers struggle to meet.