The opinions expressed here are those of the author, a columnist for Reuters.

By Gavin Maguire

LITTLETON, Colorado, May 18 (Reuters) - The AI boom is not just scaling electricity demand - it is also resetting the minimum efficient scale of power supply. The proposed tie-up between NextEra NEE.N and Dominion Energy D.N looks less like a one-off and more like a template.

The roughly $67 billion deal to merge the two U.S. firms into one of the world's largest power producers signals that utilities must consolidate to finance and build the massive electricity systems needed to run the data-heavy U.S. economy.

To keep up with record power demand growth, utilities must expand electricity supply while also upgrading transmission and generation systems that are already under strain.

That points to a new scale of utility player, one with both capital clout and technical nous. It also suggests the NextEra-Dominion hook-up may be the first of many in the U.S. market in the years ahead.

DEMAND SHOCK

U.S. electricity consumption is rising at its fastest pace in decades, driven mainly by new data centers that fuel the surging use of artificial intelligence (AI) applications.

Data center power needs are expected to keep rising over the next decade, with some estimates calling for a near tripling in electricity use by the end of the decade.

Few existing utilities are equipped to meet such a rise in consumption, especially from customers that demand round-the-clock service and cannot tolerate outages or uneven power flows.

Utilities are already pledging to spend hundreds of billions of dollars to scale up supply and firm up their power networks so that they remain fit for purpose.

Even so, most still lag the ambitious expansion plans of so-called hyperscalers, which expect their data centers to become more power-intensive as AI models grow more sophisticated and are deployed more widely.

FIRST-MOVER ADVANTAGE

Power supplies have become the single biggest constraint on data center growth, so utilities that can boost electricity supplies the fastest will emerge as the big winners in the race to power AI developers.

Yet scaling supply to meet hyperscalers' needs is easier said than done, especially for an industry that spent decades focused mainly on cutting costs and eking out operational synergies.

New data centers can trigger sudden, concentrated jumps in electricity demand, altering the load profile of entire utility networks and affecting market conditions for existing customers.

Because new generation capacity can take years to build, utilities must also squeeze more power through existing networks by adding substations and extending transmission networks so new AI hubs can be supplied as quickly as possible.

MERGED MIGHT

The proposed NextEra-Dominion merger aims to solve several of those challenges by boosting power output right where data center expansion is expected to grow the fastest, particularly in Dominion's backyard of Virginia.

The larger entity could also theoretically gain access to cheaper financing, spread risk across a bigger customer base, and deploy capital at the scale needed to bring gigawatts of new capacity online quickly.

The NextEra-Dominion combination could also become a blueprint for other utilities facing similar growth constraints and looking to pair up with other power suppliers.

Larger players with more advanced plans to expand generation capacity and transmission access should be able to secure new customers faster than fragmented rivals, while also supporting grid stability better than less integrated utilities.

Heftier power firms are also likely to be more attractive to the deep-pocketed IT giants that are driving the AI growth, with the likes of Amazon AMZN.O, Alphabet GOOGL.O and Meta META.O already regularly consuming more electricity than entire cities.

This all means that NextEra's acquisition of Dominion likely represents a new phase in the transformation of the U.S. utilities arena - one in which combining forces is no longer optional but essential for any firm hoping to serve a new generation of power-hungry customers.

(The opinions expressed here are those of the author, a columnist for Reuters.)

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