China is killing the US on energy. Does that mean they’ll win AGI? — Casey Handmer

Thank you. It's great to be here finally.

I think they might be accidentally correct. They called the most important thing correct, right? Which should count for something. Well, they're in a similar situation to Europe, but unlike the United States. The United States is the luckiest goddamn country on earth because it's surrounded on two sides by oceans and on the other two sides by friendly allies. China's surrounded by 15 countries who are mostly hostile to it, with no good mountain ranges or rivers or anything to really separate them. They get almost all their oil from the Middle East. From countries that they don't control, don't have strong diplomatic relationships with, on fleets of oil tankers that they can't defend because their navy doesn't have the ability to operate effectively in the Indian Ocean.

It does. It absolutely asymmetrically helps China. We're not currently working with China, we don't plan to, but the physics is very obvious. Synthetic fuels have been around for 100 years. There are projects in China right now working on synthetic fuels. It would not surprise me if they were thinking pretty seriously about this.

It levels the playing field a lot. But at the end of the day, China still contains the poorest Chinese people anywhere on earth. Never underestimate the capacity for an autocratic dictatorship to shoot itself in the foot.

Yeah. I'm saying don't underestimate it, but at the same time, we want to find the truth here. The truth is we should not count the United States out of the battle and just give up. We're very much still in the race now, provided we don't take extra effort to shoot ourselves in the foot.

My views on this are somewhat different from the mainstream, which is great because this is a podcast. The mainstream view would say China has cheaper labor, which is no longer true, because they compare to Mexico. And it's got lower environmental regulations, which is true. And that it is more business friendly, which is absolutely crazy. There's no way you could justify that your company having to have an inspector from the CCP on its board who harasses you about Xi Jinping every day helps you do your business. And also the rule of law is not great. So you're constantly having to pay bribes to people in order to stay in business. The idea that the United States cannot compete against that with mostly or fully automated solar panel manufacturing in the United States—which has cheaper natural gas by far, abundant oil, abundant human resources, great financial capacity, world leading automation, etc.—is crazy. We could literally copy paste solar manufacturing factories.

This is a good question. When Russia invaded Ukraine, I thought, finally the Europeans will see sense and they'll pull the trigger on, 'We need to localize production of solar panels from dirt to the finished module,' which is roughly a four-stage process. They didn't. They're still paying Russia a billion dollars a day for the privilege of being invaded. But at the time I thought they could probably do that in about two years. I think the United States could probably do that in two years or less if you started today. It's currently 11 o'clock. So we're going to start cutting checks by noon. You could ramp up pretty quickly. A lot of technology already exists here. It's not like it has to be invented from scratch. It's mostly a case of putting in a phone call to all the different manufacturers here, in Germany, and so on and saying, 'We need you to 10x the size of your factory, starting today, blank check, go.'

He was for a brief period. Maybe then we should put it like, 'If Elon ran the government like he ran SpaceX.' As opposed to the question of 'What is actually practically likely to happen, given that we are not treating it with World War II-level intensity.' If you look at xAI, which Elon is involved in obviously, what are they actually focused on right now? They're focused on the chips because they understand the key bottleneck is the chips, not the solar power. Even if Trump puts in a 200% tariff on Chinese solar and we're not able to bypass it via Vietnam or something, it's still a bargain. It doesn't matter. If you need solar to run your data center, it doesn't hurt in terms of the overall cost picture. It doesn't matter at all. What matters is having the chips at competitive capabilities per chip, and enough of them installed in your PCBs, in your data centers, hooked up to your liquid cooling, ready to go. That's actually something that Elon and his companies are great at. It's figuring out this mass production, semi-automated mass production. They've got this facility in Texas which is making the Starlink receivers, completely automated. At what point does, 'Oh, we don't have a solar panel factory,' become on the critical path? I very much doubt it's ever going to be on the critical path. There's dozens and dozens of manufacturers of solar panels worldwide that are all competing against each other.

Yeah. Right now the hyperscalers are making decisions about the data centers that they're building. They're going to be 1-2 gigawatts, 5 gigawatts in Meta's case. They're making decisions about how they're going to be actually powered. The people with actual money on the line are choosing natural gas. It's not like they can't see the learning rate. They're building things which will be online in 2028 or 2030. Why are they wrong and you're right? It's their job. They probably know more about it than I do. But in all seriousness, if you're like xAI right now trying to build the Colossus data center in downtown Memphis, you want to get it done super fast. 'What are all the different things we need? What are the factors of production to build this? We need a building. We don't have time to build a building so we'll buy a building. Okay. We'll adapt it. We need power, we need thermal cooling.' That stuff you can deliver on a truck so that's what they did. You need access to gas. They had access to gas there. They could tap into a local gas line. If you can tap into a gas line, generally speaking, you can get enough power. The energy transmission capacity of your regular gas delivery pipelines is way, way higher than electricity overhead lines, and it's easy to upgrade. So if you're in this situation right now, you say, 'Are we constrained by our ability to go and rent gas turbines?' No, they're not, because there was enough available once, maybe twice. But at a certain point, you realize as you grow, you start to touch all these additional constraints. Some of those constraints include gas availability. So there's a lot of chat about doing this in Pennsylvania where there's quite a lot of stranded gas, and in parts of Texas. But at the same time, the United States is gearing up in its ability to export natural gas overseas, so the price will not be infinitely low forever. You start to run into constraints around turbine manufacturing rate, around transformer production rate, around grid capacity, and also running into problems where the AIs and the humans who depend on legacy electricity production and delivery utilities are competing with each other. We just saw this recent forward auction in PJM result in very high, unsustainably high prices for consumers who depend on cheap electricity to heat and cool their houses and have general prosperity. If you look far enough in the future, you can just turn up the dial arbitrarily high. You can say we're going to put in a gigawatt a year. Well, we can meet that constraint with gas turbines. We're not going to run out of natural gas at 1 gigawatt per year indefinitely. What if we're doing 5 gigawatts per year? What if we're doing 50 gigawatts per year? What if we're doing 100 gigawatts per year? You can just break the situation.

Here I'm quite bullish on xAI in particular because the Elon cinematic universe has just done so much industrial stuff compared to the Googles and Metas of this world. They can reach all the way through down into primary material supply if they need to. The reason that these current plans are being done based on natural gas is that this is the sort of… PJM has all kinds of different sources of power. They have nuclear as well, they have gas, they have coal, all kinds of stuff. This price here is probably driven more by the delivery cost growth than by the generation cost growth, if that makes sense. When you pay your utility bill, the cost is sometimes broken down into a delivery cost and a generation cost, sometimes importation costs and other things. The delivery cost is what it costs the utility to build and maintain all the power lines that connect all the houses to all the power plants in some gigantic area divided by your marginal usage, with all kinds of other complicated rules designed to make it fairer. The problem that we see—and the reason that PG&E here in California, for example, is perpetually on the brink of bankruptcy—is that even though the cost of an additional solar panel or additional wind turbine or additional gas turbine or whatever is relatively cheap, getting that power to your house is really expensive. Why? Because you've got generally unionized labor that has to build and maintain power lines in areas that already have built up infrastructure. You have multiple collisions, whether this is a power pole on your own street or building a new transmission line which requires you to eminent domain land. So you're in court for years and years and years spending public money litigating against other people who are also spending public money to litigate against you on behalf of other interest groups and so on and so forth. Then you've got wildfires. It's just the poster child for Baumol cost disease. One of the reasons that we're going to see large-scale pruning of these grids is that we just can't afford under our current regulatory regime to maintain.

It's fairly clear to me that for really large captive loads, like AI data centers or aluminum refineries or whatever, you're going to have to build your own power plant for them, which is how it used to work. If you had an aluminum plant back in the day, you would be building your own power plant for it as well.

It would seem inefficient, but if you are sensitive to the cost of power expressed in supply elasticity or something like that, you just have to do it. There's no two ways about it. Is it inefficient for the xAI Colossus data center to have its own captive power plant, which it does on the backs of a bunch of trucks in the parking lot? No, it's not inefficient. It's the cheapest way for them to get power.

We haven't completely exhausted the supply of turbines relative to GPUs.

Everything before about 2030 is spoken for at this point. Yeah, you could make more turbines. The funny thing is that it's actually relatively expensive to spool up additional production of these turbines. Here's one thing you have to grapple with sooner or later. Conventional power generation is a steam engine. You have some kind of chemical that you find inside the earth that is out of chemical equilibrium with the atmosphere and you burn it and it makes heat. It could be coal, could be gas, oil.

Yeah, exactly. And it makes heat and you boil water. The water goes through some kind of mechanical contrivance that creates motion. That motion twists a magnet and generates an electrical field which then pushes electrons down wires, which then push electrons through a series of gates that then approximate thinking. It's kind of complicated. But the key step in this is converting heat into electricity in the most efficient way. The most common way is the same for a nuclear plant or a gas plant, combined cycle plant or a coal plant or whatever. It's what's called a Brayton cycle. The jet engine on an aircraft is a Brayton cycle as well. Anytime you have a Brayton cycle with a bunch of Inconel spinning at high speed, it's just going to cost you a bunch of money.

It's just inherently expensive to build.

I don't actually know what the retail price is. I would suspect that if their price is flexible, it would have gone up a lot. But if I recall correctly, $35 a megawatt hour is just the flag-four cost for…

$35 a megawatt hour just for the Brayton cycle. We're not talking about the fuel, we're not talking about the heat exchanges, we're not talking about the cooling ponds or anything like that. Just the amortized cost of the high-speed, high-temperature spinning components is $35 a megawatt hour.

To be clear, they don't care about the cost of power. This is very counterintuitive. For Grandma Kettle in Pennsylvania, she's very sensitive to electricity costs. We don't really want her to suffer in her retirement from unaffordable electricity costs and having to sit there shivering. That's not the image that we want. At the same time, what is the economic value to you of using Claude or Grok or whatever you use on a monthly basis?

Yeah, easily. Let's say the subscription is on the order of $10. The value is on the order of $100. No, it's probably more like $100 and $1,000. How much does it cost xAI or Anthropic or whatever to serve your usage? The marginal variable cost of serving it, in electricity, is less than 10% of the actual cost of… Well, their cost of serving it is maybe a buck per million tokens or something like that. The cost of electricity is about 10% of that. So 10 cents of electricity is generating $1,000 worth of economic value. It's very obvious that Anthropic could be like, 'Our electricity cost basis has increased by a factor of 100.' Now instead of paying 10 cents on your bill, on your $100 bill for power you're paying $10. So we're putting your subscription up to $110 for an electricity capacity charge. Then they could go out and buy turbines for prices that would make your eyes water.

There aren't enough turbines being manufactured. But also, I think in the early 2000s… We can probably overlay the graph of how many turbines were being manufactured. Right now, we're at historical— They've ramped up basically to the early 2000s rate again. But I don't know, you have to make more solar panels as well, right? There will be supply elasticities for both solar and natural gas. Is there some reason to think that it's worse for the supply chain involved in having a natural gas-powered data center than a solar one? Yeah I do. The learning rate for natural gas is nowhere near as steep as solar. It just tells you that it's easy to make solar panels, much easier to make solar panels. There are very few manufactured products which are easier to make. The Wright's Law coefficient is 43%. So every time we double cumulative production, we get a 43% reduction in cost.

Roughly speaking, there's 10,000 manufacturing process engineers working on this full-time. That could be true of any process, but no other process sees the kinds of learning rates that solar is seeing. That's not strictly true. In order to sustain this over a long period of time, you obviously need to have demand elasticity that exceeds your learning rate. Otherwise, you would, after a couple of OOMs, saturate your market at the current price and you'd have no additional growth. But in this case, roughly every two years we're doubling production. Every 2-2.5 years, we're doubling production and the price is coming down by a factor of ~40%. So it's roughly 15-20% per year. Then just as a result of that price reduction, demand skyrockets by probably six times more than that additional marginal production capacity increase. This is one point where I'll say the so-called pros are definitely wrong. Conventional wisdom is that solar demand is going to saturate this week. It's going to saturate. We've got a graph here somewhere that's like, 'This year is it, it's never going to grow anymore.' Instead, it's just blasting out the top of the graph. This conventional wisdom is wrong. Not only are solar adoption, production, and price decreases continuing, they're accelerating. And the rate at which they're accelerating is still accelerating.

In the sense that its fitness for the markets that it is being produced for is increasing over time. So it's still extremely early. We're still in the Apple II computer era of solar.

Let's say you're a bank, and you're trying to decide whether to lend GE a bunch of money to expand production of their gas turbines. You can write them the check today. They'll start scaling up their factories. They'll start to see the benefits of that in three or four or five years. You don't know if the AI bubble will have burst by then. You don't know if China will have invaded Taiwan by then. You don't know if Siemens or Philips or someone will have outcompeted you. You don't know if GE's major looming structural problems will cause it to be unable to compete, as it has in the past. In order to make that money back, you also have to then operate that plant at that capacity for 20 years. If I was looking at the same charts as they're looking at right now, I'd say, 'What are the odds that in 25 years' time we can produce gas turbines at a price that is relevant in a world where solar is already at its current price and batteries are at the price where they're already?' You cannot win.

I think so. Well, so when someone says, 'We can't do it, we won't do it, no way, no how,' what they're saying is, 'Write me a check.' And they did. Now Samsung's coming on board in the States to build AI6 with xAI, I think. So they all got there in the end.

Yeah. Obviously legacy production, coal and stuff, is going to retire over time. If a gas plant is still making money, people will keep operating it. But at a certain point… It is the case right now that operating a coal plant costs more than building a new solar plant. So it's just cheaper to turn off. Also, capacity is going to increase a lot so that helps to dilute the existing production. And the amount of use is going to increase a bunch. The amount of data center use of energy will just be exponentially higher. So the new stock matters a lot as compared to the existing stock.

The question to ask is, what is the major constraint on that ramp up? Then everything else will just draft in behind. I suspect that the hardest thing to make will always be the silicon, like the GPUs. So the question is really, 'How quickly does TSMC ramp up its production of GPUs?' That's a question for you, not for me.

You're not the first person to give me a call and ask me about this. I'll put it that way. I'm not going to name names. Pretty much all the names you've heard of have given me a call and said, 'We know that you're a minority voice on the paper that came out recently with Scale Microgrids talking about how you could do 90% solar, 10% gas.' I said, 'You can go all the way 100% solar.' I wrote a blog post about it. So they always call me up and say, 'What about this?' They're all talking like 5 gigawatts in the next few years. That's just like 90+% solar for just those. So within a few years, we'll probably see that the majority of new data centers that are going in will be mostly solar.

Let's say by 2027, the majority of new data centers going in at that point would be mostly solar.

Groundbreaking at that point. But if you're groundbreaking in 2027, you're probably planning it now, right? That's why they're calling me. My consulting fees are extremely affordable. But I don't have deep visibility—because I'm not in the same room with the Meta people—as to when we're going to hit the wall on transformers and when we're going to hit the wall on just how much municipal peak load we can shave off, which is the latest thing that's been doing the rounds. It turns out there's a handful of places in the United States—and by handful, I mean literally a handful—where there might have used to be an aluminum smelter. There's a bunch of latent capacity in the grid. And there's also a bunch of generators on the grid that are notionally turned down. They operate at, say, 40-50% capacity factor, but they max out at about 80% capacity factor because you've got to bring them down for maintenance pretty often, especially if they're old. So they're saying, 'Well, you know, we could pay you just to operate this old coal plant or something at higher capacity. It'll go down this power line to this place where the smelter used to be. We'll set up there, and then we promise to curtail when you need the power.' That basically means they just have a massive captive battery plant as well. Which is fine, you just buy that and it arrives on a truck. The major advantage to doing that over the pure solar play is that the power is already there, so there's no risk there. And you don't need a massive amount of land. The problem with the solar approach is that there's no two ways about it. It's a farming operation. You need a huge amount of land. The total amount of land that you're using, less than 1% is under batteries, under roads, under data center structures, etc. It's mostly solar.

I was talking to somebody in this space and they said, 'Obviously, the cost of energy for these data centers is a small fraction of the total cost. Most of the cost is going towards chips. So then the issue is just, can you make the energy available?' They were saying that even though solar panels themselves you can acquire, the issue is getting that much contiguous land and getting the permitting to interconnect it. That's apparently a big hassle. It's kind of a nightmare. So they're like, 'Well, at that point, is it actually easier than just getting on the grid or…?' Anyway, if you need tens of thousands of acres of solar, where can you do that? Basically in Texas. There's this very popular misconception that there's not enough land to do solar. This is garbage. If you've ever flown in an aircraft in the United States and you've ever looked out the window, you'd be like, 'Oh, wow, look, there's a lot of land you could put solar on.' Especially west of like 110°.

No. Doesn't matter. Do trees grow on mountain slopes? So it doesn't matter. For reference, Nevada is something like 80 million acres. Just Nevada, which is like 90% federal land, is 80 million acres. I would never say that we should sacrifice Nevada to the AI and pave the entirety of Nevada from one wall to the other. But I just saw a bunch of things in my feed the last couple of days that Vegas is falling apart. The boomers are retiring. No one goes there anymore. People would go to see the 100 million acres of solar. Even if you did it in Nevada— We can do it anywhere. You can do it anywhere you can find the land. People say that you can't do this in Europe because Europe doesn't have solar power. Europe has solar power. I've been to Europe in the summer. It's sunny for 20 hours of the day. It's a bit seasonal. But that's not a big deal.

In practice, what happens is… Let's say Europe hypothetically awakens from its slumber and decides it wants to participate in AI. I hope it does. They say, 'Well, we're going to have to put 100 gigawatts of solar down at some point to build these data centers.' It will most likely be in southern Europe. Spain is not particularly heavily populated. That's a great place to start. So we put in 100 gigawatts of solar data centers in Spain. Basically, if you're spending AI hyperscaling money on your GPUs, you want to have four nines of uptime in order to maximize your tokens per dollar spent on the entire project, not just on that. This is a very subtle point. I can go into vast detail on it later on maybe. Let's just say you need four nines of uptime. In order to achieve four nines of uptime in the middle of winter, you need to have a lot of solar overbuilt. Is solar overbuilt a bad thing? No. Is the fact that we produce 40% more food than we need a bad thing? No. It's much better than producing 40% less than we need. It just means that effectively, you have a giant captive power plant attached to a data center that 99.9% of the time produces more power than it needs. 99% of the time it produces much more power than it needs. That can now actually be the source of power for the local utility, which, instead of being like, 'Naughty, naughty data center, you must disconnect when we tell you to', they say, 'Hey, data center, I noticed you've got a bunch of power you're not using 360 days of the year. Would you mind ever so much if we threw a power cable over the wall and we powered our entire town off your spare power at essentially zero marginal cost, plus whatever residential batteries that we need in addition to local power supply.' Brian Potter had a good analogy in his blog post about this. He's like, 'My MacBook has a terabyte of storage and I use 100 gigabytes. I just got the terabyte version because it's cheap enough and I might need it at some point that it's worth it.'