But unlike common energy utilities, there are many fewer of these behemoths. This concentration gives them extraordinary market pricing power and rent capture ability. This can sustain the high multiples for the winners.
I semi-believe that the reason for the AI boom, and crypto before it, has little to do for VCs with how useful it is. Rather it's to lock in decades-long energy contracts on the chance that energy will become more scarce.
Unless these are completely different contracts, a multi year deal for gas-fired power won't be at a fixed price. It will have a capital component for the plant but the nat gas prices will float with the market. No gas producer has signed a long term fixed price supply deal for the amount of gas these data centers use. When the production volume of a new gas well falls by over 60% the first year they can't do it.
But unlike common energy utilities, there are many fewer of these behemoths. This concentration gives them extraordinary market pricing power and rent capture ability. This can sustain the high multiples for the winners.
Great point on concentration. totally agree these aren’t commodity utilities competing away margins.
The weird part (and why I wrote this) is they’re blending high growth with utility-like capex. That’s an unusual combo.
It means multiples eventually get tugged down not by pricing pressure, but by how much future cash is locked behind heavy fixed costs + financing.
Still incredible businesses, just structurally different valuation math than pure software.
Understood and agree.
Another excellent post - thank you
I think you were the one who told me about the Collison/Li interview, which is what started me down the capex rabbit hole, so thank you!
I semi-believe that the reason for the AI boom, and crypto before it, has little to do for VCs with how useful it is. Rather it's to lock in decades-long energy contracts on the chance that energy will become more scarce.
Are we buying energy stocks then or what
Mag 7 and AI companies no longer support decarbonization of energy production (if they ever did).
Nor will they support political parties that oppose unbridled energy production buildouts.
Unless these are completely different contracts, a multi year deal for gas-fired power won't be at a fixed price. It will have a capital component for the plant but the nat gas prices will float with the market. No gas producer has signed a long term fixed price supply deal for the amount of gas these data centers use. When the production volume of a new gas well falls by over 60% the first year they can't do it.