Wittbecker on aluminum: The Stargate Project could threaten electricity supply for industry

Initial equity funders in Stargate are SoftBank, OpenAI, Oracle and MGX. SoftBank and OpenAI are the lead partners for Stargate. SoftBank has financial responsibility, and OpenAI has operational responsibility.

The founders say this will “support the re-industrialization of the United States, creating hundreds of thousands of jobs and generate massive economic benefit for the entire world.”

Big claims: Are they realistic and backed by logic?

The size of the proposed capital investment was eyewatering to say the least. Elon Musk immediately came out and said they don’t have the money. He said that Softbank has less than $10 billion.

Musk also has outstanding litigation against OpenAI and does not trust Sam Altman, the CEO of OpenAl. So, Musk is not the most objective critic of this project. However, he does trigger the debate about the legitimacy of the project and the logic behind it.

Let’s think about the claims to re-industrialize the United States. This begs the question about the energy supply to support not only the AI infrastructure but also the industries it intends to revitalize.

Data centers are very hungry beasts. According to a May 2024 analysis by Goldman Sachs, an average ChatGPT query needs 10 times the electricity of a Google search. That analysis by Goldman estimated that data center demand for power would grow 150% by 2030. Data centers in the United States could consume 8% of US power by 2030.

Goldman believes $50 billion needs to be invested in new generation capacity just to feed the data centers, plus another 3.3 billion cubic feet/day of natural gas demand will be created for these data centers.

This raises the question, “If this was their outlook in May 2024, what would it look like if Stargate materializes?” And how will traditional energy consumers, such as the aluminum sector, secure competitive energy with this” Al investment on steroids”?

The recent example of Microsoft’s deal with Constellation Energy to reopen Unit 1 of the Three Mile Island nuclear plant in Pennsylvania is a frightening scenario. (Recall that the plant in 1979 was hit by a partial meltdown. It became the biggest nuclear energy crisis in the US.)

Constellation will invest $1.6 billion to reopen this reactor in exchange for a 20-year contract with Microsoft at prices estimated at $100-115 per megawatt hour (mWh). This price is at least 2 times what an aluminum smelter could absorb in the current price environment.

Stargate makes Century Green Smelter and all industrial ventures more difficult

The Stargate Project at its initial funding level would be 200 times the size of Century Aluminum’s green aluminum smelter.

On Jan. 15, the Department of Energy formally awarded Century $500 million for its aluminum project, which would be approximately 800,000 metric tons and employ 1,000 permanent jobs when in operation. Century should be commended for its dogged determination in seeking this award and its on-going efforts to find the energy to make the project happen. However, Stargate could really compound the difficulty of getting electricity.

Century’s plight is shared by many other energy-intensive industrial producers and once again underscores the lack of comprehensive national energy planning.

This leads directly into the claim that Stargate will “create hundreds of thousands of jobs.” There undoubtedly would be a big lift in construction employment during the build-out of these data centers. However, data centers are not big employers of permanent jobs. Microsoft says it typically employs 50 full-time employees per building.

There is a big assumption here that the build-out of AI will make American industrial capacity more efficient and competitive. That may be true. However, without the vital energy to power these plants, this claim may be fantasy.

To realize the vision of industrial revitalization, a national energy policy needs to be in place that accomplishes the following:

• Makes the approval process for new electric generation and transmission administered on a national scale, not bogged down with state Public Service Commission (PSC) reviews. Any power project engaged in interstate transmission should be fast tracked.
• Stranded renewables need to be connected to the respective regional grids to introduce new supply. Today, existing utilities have zero incentive to see new supply introduced into their highly regulated environment, where capital returns are set by PSCs. New competition could set them back. However, if the demand is as strong as Goldman is suggesting, there will be plenty of demand (and revenue) for the incumbents and newcomers to participate in.
• Consideration needs to be given to establishing allocations of power to industry and the AI segment. Canada is already capping allocations for the data center market.
• It is time to consider re-regulating the retail power market to ensure that power is available to core manufacturing that the administration wants to see so badly within our shores.

Stargate’s altruism seems out of step with MAGA

Another major claim of Stargate is “it will generate massive economic benefit for the entire world.”

Doesn’t this claim seem out of character with the Trump administration’s “America First Priorities” as released on Jan. 20? We are seeing a steady stream of executive orders underscoring a goal of putting the United State on top, including a State Department directive to put “America First.” So, how does the rest of the world enjoy all these benefits when job No. 1 is to make the United States No. 1?

American industry needs its own “Stargate Project” on energy

While the high-tech obsessed market may applaud Stargate, those companies in the industrial sector are more likely to view this announcement with great trepidation. Data centers were problematic competition before Stargate. The problem will get much, much bigger if it moves ahead.

Manufacturers need to join forces to lobby the administration to address the elephant in the room, which is that our energy policy is disjointed and is not fully considering the cause and effect of things like Stargate.

Editor’s note
This is an opinion column. The views in this article do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.