Powering the artificial intelligence boom

After a decade-plus of little to no growth, we expect U.S. power demand to step up to the 2.0% to 2.5% range through 2030 (see Chart 1). This step increase in demand is driven by multiple factors, some of which have been percolating for the past couple years (electric vehicle penetration, reshoring of manufacturing and supply chains, broad electrification of the economy) while a major driver, data centers, entered the scene more recently. In fact, data centers are expected to provide roughly half of forecasted power demand growth (about 1 percentage point of the 2.0% to 2.5%) and by 2030 represent close to 10% of total U.S. energy consumption, up from about 4% today.

Chart 1: Electricity generation outlook through 2030 Source: U.S. Energy Information Administration (EIA). As of July 23, 2025. E=estimate.

All of the above

To meet this increase in demand for generation, we foresee an all-of-the-above approach by the Utilities sector with renewable power continuing to grow given speed-to-market advantages, additional natural gas-fired facilities coming online, and nuclear largely holding share while coal-fired generation continues to shrink, albeit at a slower pace than predicted previously. Deployment of energy storage (batteries) is also expected to continue.

At year-end 2024, major components of the U.S. power generation stack were natural gas at 42% of total, nuclear 19%, coal 16%, wind 11%, hydro 6%, and solar 5% (see Chart 2). Looking forward to 2030, the Wells Fargo Securities Utilities team expects natural gas’ share to grow slightly to 44%, nuclear and coal to shrink to 15% and 6% respectively, wind to grow to 15%, hydro to remain roughly flat at 5%, and solar to grow to 13%.

As noted previously, overall demand is expected to increase, implying significant wind and solar additions alongside additions to natural gas-fired generation. Despite losing favor in the One Big, Beautiful Bill Act (OBBBA), we still see robust deployment of renewable power (wind and solar) through the end of the decade. This is due to continued demand from corporate customers, state clean-energy goals that are still in place, the fact that deployment can be relatively quick when compared to other forms of generation, and the end-of-decade sunset for tax incentives. Natural gas-fired generation is currently the preferred option given its dispatchability and reliability but is constrained by turbine manufacturing timelines (if you get in line today, you would likely get your turbine in 2030). Coal’s continued role as a share donor is evident in its dramatic decline. However, to meet demand, we believe further delays of coal-fired generation retirements are likely.

Chart 2: Sources of net electricity generation Source: U.S. Energy Information Administration (EIA). Data represents the percentage of net electricity generated by source during full-year 2024.

Expanding the grid

Grid investments will be an essential element to bring this new capacity online. For reference, the grid is the long-range infrastructure that carries electricity from where it is generated to where it is consumed. Like the overall electric system, the grid is owned and operated by numerous entities ranging from investor-owned utilities and private infrastructure companies to regulatory agencies and government entities. This decentralized model means grid investments and financial returns will be dispersed across many entities.

The major component of the grid is transmission. According to the Edison Electric Institute (EEI, an electric utility industry association), transmission investment for the 2024 to 2027 period is expected to be about $158 billion, an increase of 49% compared to the prior four-year period. Historically, adding long-range transmission has been difficult due to many factors, most notably siting and cost allocation given the distance covered by transmission lines and the number of parties involved (states, counties, regulatory agencies, etc.). The Inflation Reduction Act and Bipartisan Infrastructure Law include provisions for facilitating grid investment and easing the regulatory burden but, in our view, building long-range transmission will likely remain difficult and a potential stumbling block to meeting expected power demand.

Current state of play in nuclear generation

In our view, nuclear generation will remain a key component of the U.S. power stack. We expect nuclear generation from a megawatt perspective to grow despite losing share in the overall power mix. Stated differently, nuclear output will continue to increase but at a slower rate than overall power growth. Megawatt growth is expected to come primarily from uprates (increasing the output of existing facilities) but restarting shuttered facilities is also likely, albeit on a limited basis. We believe new nuclear construction by an investor-owned utility is unlikely (although not a 0% chance) in the near future given the industry’s recent challenges with completing projects on time and within budget. Advanced nuclear generation — including small modular reactors and generation IV technology — is in our view, potentially attractive but still many years from widespread commercial deployment.

The buildout of data center capacity in the U.S. is emerging as a clear future demand driver for natural gas but is still in relatively early stages. Ultimately the impact that data centers will have on natural gas demand will depend on the cadence of data center development and other variables while current forecasts vary widely based on differing assumptions. Importantly, we note that data centers are just one of the secular drivers that are expected to grow natural gas demand in the coming years. Other notable contributors to U.S. natural gas demand growth include the buildout of additional liquefied natural gas (LNG) export capacity, onshoring of manufacturing capacity, and additional coal-to-gas switching to meet growing power demand needs as outlined above.

As an aside to the topic of domestic power demand growth, we would be remiss not to highlight the subsequent growth in U.S. LNG exports as another important near-term driver of natural gas demand growth based on the amount of export capacity currently under construction. According to the U.S. Energy Information Administration, or EIA, domestic LNG export capacity is currently 14 billion cubic feet per day (bcf/d) with an additional 13.3 bcf/d currently under construction through 2029 — an increase of 95% — and another 9.1 bcf/d of potential projects that have received regulatory approvals but have not been sanctioned yet. Additionally, there are a number of proposed LNG projects in early stages of development that have not filed for regulatory approval yet. The Wells Fargo Securities Midstream Energy team estimates that U.S. LNG capacity could increase by a total of 150% over the next seven years from current and proposed projects.

The importance of Energy infrastructure

Chart 3: Natural gas demand forecast through 2030- billion cubic feet per day (Bcf/d) Source: Wells Fargo Securities. E=Estimate. As of July 25, 2025.

Wells Fargo Securities predicts that the combination of factors outlined above will result in compound annual natural gas demand growth of 5.4% from 2024 – 2030 (see Chart 3), with further growth expected beyond then. The U.S. has an ample supply of natural gas to meet this growing demand, as the world’s largest producer of natural gas (accounting for over 25% of global production), with approximately 80 years of recoverable reserves at current production levels — the acceleration of demand growth represents a significant structural shift for the domestic natural gas industry landscape. We believe that natural gas producers are generally in a good position to meet this demand growth with increased supply.

We view infrastructure as the missing link to bridge the expected supply and demand growth in this environment, which is critical to our favorable view of the Midstream Energy sub-industry. We expect natural gas focused midstream energy companies to benefit from a fairly steady runway of incremental growth opportunities, as well as higher utilization and an extended useful life for existing assets. In this environment, a number of midstream energy companies have reported improved fundamental growth outlooks and expanding project backlogs with increasingly attractive returns. Some midstream companies are even expanding into downstream independent power generation verticals through partnerships with data center hyperscalers¹ aimed at developing specialized behind-the-meter power solutions for specific data centers.

With regard to our expectation for continued growth in renewable energy generation over the coming years, we note that the intermittent nature of renewable energy generation still requires natural gas as a backup source — which employs significant natural gas infrastructure. A number of midstream companies have reported higher utilization — and in turn, higher tariff rates — of natural gas storage assets in conjunction with recent growth in renewable power generation.

Natural gas prices may become more volatile

As noted, we believe that natural gas producers generally have the capacity to increase supply in response to future demand growth. However, the timing of both supply and demand growth will be a key variable that we expect to result in periods of imbalances. It is also worth noting that the cost of production in certain regions that are expected to contribute to supply growth (such as the Haynesville basin), is higher than it is for much of the existing U.S. production today. As a result, we see the potential for increased volatility and modestly higher natural gas prices on average in the coming years.

Despite our expectation for higher natural gas prices on average, we believe it remains a challenging environment for investing in pure-play natural gas producers due to the uncertainty around timing of future supply and demand growth, potentially higher production costs, and our expectation for elevated volatility. For investors seeking to benefit from the potential for future higher natural gas prices, from a commodity perspective, we would instead favor diversified integrated oil companies and exploration and production (E&P) companies that have exposure to both oil and natural gas. These companies would stand to benefit significantly during periods of higher natural gas prices while also providing diversified exposure to crude oil and less downside exposure to natural gas volatility.

¹ Hyperscalers, also known as hyperscale cloud providers, are companies who develop and operate networks of data centers to facilitate cloud computing.

In the Industrials sector, we would note three key phenomena — namely the amount of power consumption, the growing importance of electrical and HVAC (heating, ventilation, and air conditioning) equipment, and the draw on equipment powered by a variety of fuel sources.

First, current data centers require a very large amount of power. In fact, the data center with the highest current nameplate capacity in the U.S. is quite possibly the largest single facility power consumer in the country (see Chart 4). Data centers have been around for a while now, so what is changing here? Most importantly, the server rack power density required to train a generative AI-based large language model can require up to five to seven times more power than server racks used for traditional information technology (IT) workloads in a data center. Not only is the overall power consumption high, it is worth noting that data centers typically have a relatively consistent demand pattern and are also highly price inelastic. In plain English, most of these facilities operate on a near continuous basis both due to issues that can arise from interrupted service (such as, internet outages) and the business need for high levels of asset utilization on what is an increasingly expensive kit. The other facilities listed in Chart 3 either operate on a non-continuous production cadence in which power consumption is ratable during working and off hours or are much more sensitive to price signals on energy costs.

Chart 4: Annual power consumption — megawatt hours (MWh) Sources: Company reports, syracuse.com, wvmetronews.com, KERANews, AFL Hyperscale, Assembly Magazine, Energy Star. As of August 2025.

If it walks like a duck…

So how is the cost of the facility broken down and what does this mean for industrial companies? When it comes to a breakdown by structural trade area, consultancy, Dgtl Infra estimates that approximately 35% – 45% of the cost is related to land, building shell, and basic building fit-out. These areas are addressable by companies that supply steel, aggregates, cement, and water equipment and — by extension — construction and engineering firms and broad non-residential construction suppliers such as industrial distributors. Dgtl Infra also estimates that 40% – 45% and 15% – 20% of the remaining cost can be attributed to electrical and HVAC systems respectively. We would note that there are a relatively limited number of scaled suppliers of large electrical equipment, commercial HVAC systems, and diesel generators. We would also note that these figures likely underestimate the amount of incremental demand for data centers as depending on geography, they could require incremental investment in both the electrical grid and power generation, which are again significant end markets for the leading players in electrical end markets.

One corollary to this is that many of today’s winners were also yesterdays. What do we mean? Industrial equipment suppliers operate in many geographies and typically a number of end markets, so cycles never look quite the same. But we are somewhat reminded today of the initial stages of the shale boom that took place in North America during the first two decades of this century. The rapid scale-up of the infrastructure required to support materially higher levels of hydrocarbon production, transportation, and storage was a significant call on the country’s industrial capacity. What we would call outdoor factories were stood up quickly, driving significant construction spending and the corresponding need for mobile and stationary equipment. Think of cement and aggregates, excavators, severe-service electrical equipment, off-grid power generation, large-scale natural gas generators. If this all sounds familiar with stories you may be reading surrounding this current wave of investment, that is because it should.

HVAC, electrical, and gas power leading the way

There are a few important differences today. The first would be that electrical and HVAC equipment do have a higher level of importance in data centers than they do in the oil fields and traditional industrial facilities. The second would be that data centers are likely to have decades-long lives and operate with a much higher level of power generation demand. In turn, we view this as likely to drive higher levels of investment in all levels of the power market. Given the scale of demand and rapid development of the market, we believe this should be a benefit to those companies that provide equipment into fossil-fuel powered generation and renewables. We see it as an all of the above backdrop. To summarize, although data center owners may wish to operate facilities primarily with renewable power sources, we believe that for the foreseeable future the majority of these facilities will at the very least be constructed with large-scale backup generators powered by natural gas.

Bottom line, this is now a meaningful end market for a growing number of companies in the Industrials sector and a tailwind for select companies in the Electrical Equipment, Building Products, and Machinery sub-industries. Multiple electrical equipment vendors are expanding their facilities to support the broader increase in demand for electrification. HVAC suppliers have expanded their technology portfolios to better serve the cooling needs of this market. Even makers of large-scale diesel generators and gas turbines have announced facility or line expansions targeted for prime and back-up power supply in this area. Based on company disclosures, we believe that for most companies involved, this end market represents anywhere from a low-single-digits percentage of revenue on the low end to a high-teens percentage on the high end.

Any opinions or estimates contained in this report are as of the date of this publication and are subject to change without notice.

All investments are subject to market risk which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors due to numerous factors some of which may be unpredictable. Be sure you understand and are able to bear the associated market, liquidity, credit, yield fluctuation and other risks involved in an investment in a particular strategy.

Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

Global Securities Research (GSR) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Securities Research (GSR). Opinions represent GSR’s opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GSR does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Past performance is no guarantee of future results.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC. Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.

©2025 Wells Fargo Investment Institute and subject to the CC BY-NC-ND 4.0 DEED. All rights reserved. v08.13.25