Left field factors combine to enhance the outlook for electricity demand growth

Key points

• President Trump’s signing of energy-focused executive orders as well as declaring an ‘energy emergency’ and endorsing the ‘Stargate Plan’ are, in our view, overwhelmingly positive for electricity demand.
• DeepSeek has lowered the barriers to entry (particularly cost) to access AI on a global scale and achieve meaningful innovation, thereby increasing overall demand for AI and therefore increasing demand for electricity.
• Tariffs and longer term trade friction would be likely to increase demand for energy related infrastructure, capital equipment and industrial metals as economies look to strengthen vital supply chains and energy security.
• While some executive orders (e.g. freezing parts of the IRA and withdrawing from climate initiatives) served to perpetuate the existing negativity in parts of the energy supply chain (e.g. renewables), we reflect that this was nothing new or unexpected, so doesn’t amount to much more than background noise.

Summary

During January markets were rattled by a number of unrelated left-field factors (US presidential executive orders; the unveiling of DeepSeek and the announcement of new tariffs). While each caused short term uncertainty and elevated volatility, major indices recovered to post fresh all-time highs. Looking below the surface, we believe that each factor will have a positive impact on electricity demand, which is suddenly growing in the US for the first time in 20 years. We are very constructive on the fundamentals of the electricity generation industry as well as transmission and distribution grid infrastructure and all of the associated supply chains (from critical minerals, to transformers and cables, to the latest nuclear reactor technology).

Executive orders

Immediately after his inauguration, President Trump signed a series of executive orders including energy policy shifts, deregulation, and trade-related directives. The key orders impacting energy fundamentals (and perceptions) were:

• An order calling for the development of an Artificial Intelligence (AI) Action Plan to ensure the US can achieve and maintain global AI dominance;
• An order to establish energy dominance through new policy actions and rescinding orders from previous administrations. It aimed to support traditional energy exploration, revise permitting processes, and pause disbursement of funds from the Inflation Reduction Act (IRA); and
• An order directing the US to formally withdraw from the Paris Climate Agreement and related UN climate initiatives.

These orders combined with President Trump declaring an ‘energy emergency’ and endorsing the ‘Stargate Plan’ are, on the whole, overwhelmingly positive for electricity demand on the basis of the clear top-down signal to the public and private sectors on the priority attached to energy and the magnitude of investment being committed to data centre infrastructure which will require significant volumes of electricity which is not yet being generated.

The Stargate Plan is a US$500 billion joint venture announced involving OpenAI, Oracle, SoftBank, and MGX with a primary goal to build large-scale data centres across the US to support the development of advanced AI systems to help secure US leadership in AI.

We believe the orders freezing parts of the IRA and withdrawing from climate initiatives are worse for short-term sentiment than they are for the medium and long-term fundamentals.

DeepSeek

DeepSeek, a Chinese AI startup, announced the release of a new AI model, DeepSeek R1. The key points in summary were:

• The model was purportedly developed at a fraction of the cost of its US counterparts (approximately US$6 million compared to billions) and claims to rival leading AI systems such as OpenAI’s ChatGPT;
• The breakthrough was apparently achieved using a combination of advanced Nvidia microchips as well as less expensive, less advanced alternatives. What still isn’t clear is whether its development (and operation) was more or less electricity intensive than existing models using more advanced microchips; and
• DeepSeek is ‘open-source’, which means its code is freely shared and available for anyone to download, copy, and build upon and makes it more transparent, more flexible and makes data security more easy to manage (closed-source models require data to be uploaded to external servers).

DeepSeek’s announcement triggered a sharp selloff in US tech stocks and global equities notwithstanding its assertions (regarding its capabilities and use of microchips) are yet to be fully verified, along with allegations that it has stolen intellectual property from OpenAI. Nvidia was hardest hit in absolute terms losing nearly $600 billion (approximately 17%) of its market value on the day of the announcement as investors reevaluated the outlook for AI and its supply chains (especially high-end microchips and electricity).

We reflect that while this creates some obvious questions about Nvidia’s hegemony and appears to indicate that the US is unlikely to remain universally dominant in AI, we believe the clearest and most significant implication is that it will lower the barriers to entry (particularly cost) to access AI on a global scale and achieve meaningful innovation, thereby increasing overall demand for AI and therefore increasing demand for electricity.

Tariffs

President Trump announced significant new tariffs targeting imports from Canada, Mexico, and China. These included a 25% tariff on all imports from Canada and Mexico (with Canadian energy resources subject to a reduced 10% tariff) and a 10% tariff on all imports from China.

While these tariffs were set to take effect on 4 February, implementation for Canada and Mexico was delayed by one month following eleventh hour agreements in relation to improved border security (aimed at reducing the flow of the illicit drug fentanyl into the US).

It’s not clear which of President Trump’s tariffs are genuine and what is ‘the art of the deal’ (positioning to assist Trump to achieve a separate outcome). Aluminium appears to be a good example of this. The US is dependent on imports of aluminium and during 2024 imported over 5 million tonnes while producing less than 1 million tonnes domestically. Approximately 60% of imports come across the border from Canada. We believe placing a tariff on this Canadian aluminium would be totally irrational. Not only inflationary but economically destructive and unlikely to be able to stimulate US domestic production in a reasonable timeframe, yet it remains on the table.

The 10% tariffs on China proceeded and is a continuation of the tightening trade policy that began during Trump’s first term (imposing significant tariffs on Chinese goods in 2018) and was largely maintained and escalated by the Biden administration (in May 2024, President Biden raised tariffs on Chinese electric vehicles, solar cells, steel, aluminium, and medical equipment).

Notwithstanding the uncertainty, these announcements appear to be the first moves in a period of escalating global trade friction with retaliatory actions from affected countries expected to follow in the near future.

While the consequences are perceived as inflationary (therefore may impact the outlook for interest rates) and would create headwinds for global trade and economic growth, we believe that they are likely to increase demand within our focus area for industrial metals and energy as economies look to strengthen supply chains and energy security. The situation is complex and dynamic and will remain uncertain for the foreseeable future.

Conclusion

While some executive orders (e.g. freezing parts of the IRA and withdrawing from climate initiatives) served to perpetuate the existing negativity in parts of the energy supply chain (e.g. renewables), we reflect that this was nothing new or unexpected, so doesn’t amount to much more than background noise. Overall, we believe the fundamental environment for energy is very strong and the developments during the month contribute to increasing tailwinds on the basis that:

• President Trump’s signing of energy-focused executive orders as well as declaring an ‘energy emergency’ and endorsing the ‘Stargate Plan’ are overwhelmingly positive for electricity demand on the basis of the clear top-down signal to the public and private sectors on the priority attached to energy and the magnitude of investment being committed to data centre infrastructure which will require significant volumes of electricity which is not yet being generated;
• DeepSeek has lowered the barriers to entry (particularly cost) to access AI on a global scale and achieve meaningful innovation, thereby increasing overall demand for AI and therefore increasing demand for electricity; and
• Longer term tariffs and trade friction would be likely to increase demand for industrial metals and energy related capital equipment and infrastructure as economies look to strengthen supply chains and energy security.