In this conversation, Tyler Rosenlicht of Cohen & Steers maps the full system dynamics of the booming energy demand, revealing that the obvious solutions for infrastructure investment are insufficient and often lead to hidden costs. He highlights how the current energy landscape is shifting from an era of abundance to scarcity, driven by escalating demand from data centers, EVs, and industrialization, while simultaneously facing pressure for cleaner energy. The hidden consequence is that while immediate needs for energy are paramount, the long-term sustainability and affordability of this energy are being tested, creating significant dispersion in investment outcomes. This conversation is crucial for infrastructure investors, asset managers, and policymakers who need to understand the complex interplay of demand, regulation, and capital in the evolving energy sector to identify durable opportunities and avoid costly pitfalls.

The Unseen Bottleneck: Navigating the Energy Infrastructure Boom

The headlines are clear: energy demand, particularly for electricity, is surging. Yet, beneath this obvious trend lies a complex system where conventional wisdom about infrastructure investment is proving insufficient. A recent conversation on the Odd Lots podcast with Tyler Rosenlicht, a Senior Vice President at Cohen & Steers, illuminated a critical, often overlooked, aspect of this boom: the hidden consequences of meeting this insatiable demand. While the immediate need for more energy is undeniable, the systems thinking required to navigate this landscape reveals that simply building more infrastructure is not a guaranteed path to success. Instead, it highlights how immediate discomfort and difficult choices now can forge lasting competitive advantages, while overlooking downstream effects can lead to significant, compounding problems.

The prevailing narrative often focuses on the sheer scale of investment required, assuming that companies providing the "picks and shovels" of this energy transition will inherently profit. However, Rosenlicht’s insights suggest a more nuanced reality. The link between technology, like AI-driven data centers, and traditional infrastructure is creating unprecedented volatility. What was once considered stable, long-term infrastructure investment--toll roads, airports--is now subject to rapid technological obsolescence. This dynamic challenges the traditional infrastructure investor’s preference for predictable returns, introducing a significant risk that technological upgrades could render existing investments obsolete or require constant, costly reinvention. The conversation underscores that understanding the full causal chain, from immediate demand to regulatory responses and long-term economic viability, is paramount for anyone seeking to capitalize on this energy boom.

The Escalating Demand: More Than Just Data Centers

The conversation with Tyler Rosenlicht began by dissecting the explosive demand for energy, a trend that has moved from the periphery to the front page of financial news. While the proliferation of AI and its associated data centers is a significant driver, Rosenlicht emphasized that this is only part of a larger, more complex picture. He outlined a model for global energy demand based on three core factors: population growth, economic expansion, and energy intensity. Even with assumptions of decelerating population growth and increasing energy efficiency, the projected increase in global energy demand by 2040 is substantial, requiring an unprecedented build-out of supply.

This demand is not solely for electricity to power servers. Rosenlicht highlighted that electric vehicles (EVs) and a broader re-industrialization effort are also significant contributors. This multi-faceted demand surge has fundamentally shifted the energy landscape. Historically, from 2007 to 2020, U.S. electricity demand saw virtually zero growth. Now, it is projected to grow at 2.5% annually, a significant acceleration that strains existing capacity. This isn’t just about adding capacity; it’s about managing the tension between the need for more energy, the desire for a stable supply, and the imperative for cleaner sources. The order of these priorities, Rosenlicht noted, has shifted. Five years ago, the emphasis was on clean, then stable, then more. Today, the urgency is for more, followed by stability, with cleanliness becoming a critical, but sometimes secondary, consideration.

The Data Center Dilemma: Affordability vs. Growth

The impact of data centers on utility bills offers a prime example of the hidden consequences in this energy boom. Rosenlicht explained the utility business model: utilities invest in their rate base, earning a return on that investment. If demand increases significantly without a corresponding increase in customers, the fixed costs are spread across a smaller customer base, potentially leading to higher bills. However, the influx of data centers can, in certain circumstances, actually alleviate this pressure.

When a data center consumes power that would otherwise be a fixed cost for residential ratepayers, it can effectively lower individual bills. This is not a universal benefit, however. It depends heavily on the specific utility’s asset base, generation capacity, and regulatory environment. Rosenlicht cited examples in Wisconsin where data center tariffs have been negotiated to ensure no impact on local ratepayers, with hyperscalers guaranteeing returns on utility capital expenditures.

The downstream effect, though, is that this dynamic creates significant dispersion in investment opportunities. Some utilities will struggle with affordability issues and regulatory pushback, while others that can strategically integrate large energy consumers like data centers may see their bills decrease and their investment cases strengthen. This highlights a critical point for investors: the "obvious" solution of inviting data centers to boost demand is insufficient. A deeper understanding of local regulation, generation capacity, and the specific contract terms is necessary to discern which utilities will thrive and which will face stranded asset risk if data centers depart after a few years. This complexity means that what appears to be a straightforward growth opportunity can, in reality, harbor significant downside.

The Era of Scarcity: Re-evaluating Natural Resources

Beyond electricity, the conversation delved into the broader natural resources sector, where Rosenlicht observed a fundamental shift from an "era of abundance" to an "era of scarcity." This transition is driven by years of underinvestment in natural resources, leading to significant consolidation and concentrating expertise within a few key players. This scarcity, he argues, is not a temporary blip but a persistent condition that allows these companies to earn above-average returns and achieve more predictable growth.

This perspective challenges the traditional view of companies like Caterpillar as purely cyclical. While cycles will always exist, the underlying scarcity of resources means that the peaks and troughs are likely to be higher and deeper, and the periods of growth longer. The cure for high prices -- high prices themselves -- may no longer be as effective when supply is fundamentally constrained by a lack of new entrants and consolidated production capacity.

However, this scarcity also introduces the risk of overcapacity, a familiar specter in commodity markets. Rosenlicht acknowledged that this is an unavoidable part of the cycle. The key for investors, therefore, is not to avoid cycles entirely but to understand when market expectations become excessive and to position themselves to sidestep the worst of the downturns. The current environment, he suggests, is still early in a secular growth trend for many natural resources, offering a different risk-reward profile than a decade ago.

The Government's Hand: Catalyzing Supply Chains

A recurring theme in the discussion was the role of government intervention in addressing supply chain constraints, particularly in critical minerals and nuclear energy. Rosenlicht pointed out that market forces alone are insufficient to spur the necessary supply response for things like uranium and copper. Investors, he explained, have been burned by past capital expenditures in these sectors, leading to a shareholder base that demands discipline and penalizes increased CapEx.

This reluctance means that while prices may be high, the natural market signal to increase production is muted. Consequently, governments are stepping in to bridge this gap. The U.S. government, for example, is taking direct equity stakes in critical mineral projects and providing backstops for cost overruns in nuclear power plant construction. Rosenlicht envisions a scenario where the government guarantees the cost overrun risk for new nuclear facilities, potentially absorbing losses to ensure their completion, and then selling them to the highest bidder.

This direct government catalyst is seen as essential for building out supply chains that cannot organically materialize due to market hesitations and historical investor distrust. The implication for investors is clear: opportunities exist not only in the direct play of commodity extraction but also in understanding how government policy will shape the future of these essential industries. The "BANANAS" world, where "Build Absolutely Nothing Anywhere Near Anything" was the mantra, appears to be slowly transitioning, with a growing pragmatic desire in Washington to build infrastructure, albeit with significant government support.

The Nuclear Renaissance: A Pragmatic Rebirth

The conversation turned to nuclear energy, a sector poised for a potential resurgence. Rosenlicht outlined a phased approach to a "nuclear renaissance," beginning with halting the shutdown of existing plants, then restarting previously decommissioned ones, and finally progressing to new builds and Small Modular Reactors (SMRs). He characterized the current stage as being in the "seventh inning" of stopping plant closures and the "fifth inning" of restarting some.

The primary driver for nuclear’s appeal is its unique ability to provide reliable, 24/7 baseload power with a clean emissions profile. This dual capability addresses the core needs of energy consumers, from industrial users to data centers, who require consistent power without the intermittency of wind and solar. While SMRs and other advanced technologies are still in earlier stages of development (2035-2040 timeframe), the immediate focus is on revitalizing existing capacity.

Regarding the U.S. context, Rosenlicht expressed optimism about new nuclear facilities being built, but with a crucial caveat: utilities will not undertake these massive projects alone due to the high risk of cost overruns. He believes government intervention, similar to its role in critical minerals, will be necessary to backstop these projects. This suggests a future where new nuclear power is a joint venture between private industry and government, driven by strategic energy security goals rather than purely market forces. This pragmatic approach, acknowledging the need for financial and regulatory support, is key to unlocking nuclear's potential.

Geopolitical Shifts and Regulatory Risks

The discussion also touched upon the geopolitical landscape and its impact on energy infrastructure. The situation in Venezuela, with its vast oil reserves but significant political instability and underinvestment, serves as a stark reminder of the risks involved. Rosenlicht highlighted regulatory risk as a paramount concern for infrastructure investors. This includes not only overt government policy shifts but also the subtle, yet impactful, decisions made by utility commissions.

He emphasized the importance of understanding the local political dynamics, including whether utility commissioners are elected or appointed. Elected officials, he noted, are more likely to be swayed by the immediate concerns of their constituents, such as rising energy bills, which can lead to regulatory decisions that hinder investment or punish utilities for CapEx. Conversely, appointed officials might prioritize long-term energy security or infrastructure development, even if it entails short-term cost increases.

The example of a Midwestern utility facing a projected demand surge from data centers underscores this tension. The utility, which took 100 years to build 11 gigawatts of capacity, is now facing demand for an additional 15 gigawatts from data centers alone. This rapid, energy-intensive growth, without proportional local economic benefits from the data centers themselves, invites public backlash and regulatory scrutiny. Investors must therefore assess not only the technical feasibility of projects but also their social license to operate and the political winds that will shape their regulatory environment.

Opportunities in an Underappreciated Sector

Despite the complexities and risks, Rosenlicht sees significant opportunities in the energy and infrastructure sectors, particularly for those who can navigate the nuanced landscape. While the narrative of energy as a bottleneck is widely understood, he believes certain segments remain underappreciated.

Utilities, for instance, are currently trading at lower multiples than a few years ago, despite exhibiting higher growth rates. This compression, he suggests, is due to investor concerns about regulation and rising interest rates. However, the dispersion in outcomes is widening, creating opportunities for investors who can identify the "best in class" utilities that possess superior growth prospects and robust execution capabilities. The premium paid for superior growth has significantly decreased, making these investments more attractive on a risk-adjusted basis.

Beyond utilities, the "picks and shovels" companies--those providing engineering, construction, and equipment for the data center and re-industrialization build-out--continue to present opportunities. While multiples have risen, their growth rates are accelerating and becoming more structural. These companies, akin to those who profited during the gold rush, offer a less volatile path to capitalizing on the energy boom compared to direct commodity plays.

The core takeaway is that while the demand for energy is a clear and present reality, the path to profiting from it is fraught with hidden consequences and requires a systems-level understanding. The companies and investors who can look beyond the immediate demand and anticipate the downstream effects of regulation, technological change, and geopolitical shifts are the ones most likely to build lasting advantage in this dynamic era.

Key Action Items

• Deeply Understand Regulatory Environments: For any infrastructure investment, conduct granular analysis of local and national regulatory bodies, including the composition and political leanings of utility commissions. This is crucial for anticipating regulatory surprises that can significantly impact asset valuations and project viability.
• Prioritize "Best in Class" Utilities: Focus on identifying utilities with demonstrably superior growth rates and execution capabilities, even if they trade at a slightly higher multiple than the average. The current market compression offers an opportunity to acquire these leaders at more attractive valuations. (Time Horizon: 1-3 years for separation of performance).
• Invest in "Picks and Shovels" for Energy Infrastructure: Identify companies providing essential goods and services for data center and re-industrialization build-outs. These companies offer less volatile exposure to the energy boom compared to direct commodity plays, with accelerating and structural growth. (Time Horizon: Ongoing, with payoffs over 3-5 years).
• Scrutinize Data Center Integration Strategies: When evaluating utilities or infrastructure projects related to data centers, analyze the specific contractual terms and the long-term impact on local ratepayers and the utility’s asset base. Avoid investments where data center integration creates significant stranded asset risk or alienates local stakeholders. (Immediate Action).
• Assess Government Catalysts for Supply Chains: For investments in natural resources like uranium or critical minerals, evaluate the extent to which government intervention (subsidies, guarantees) is driving supply chain development. These government-backed initiatives can de-risk investments but also introduce new layers of political dependency. (Time Horizon: 3-7 years for full payoff of government-backed projects).
• Factor in Operational and ESG Risks Holistically: Beyond environmental impact, assess the operational integrity and maintenance practices of infrastructure assets. Understand how incentives, local stakeholder relationships, and management’s commitment to asset upkeep mitigate risks like spills or outages, which can lead to severe asset impairment. (Immediate Action, ongoing monitoring).
• Develop Scenarios for Geopolitical and Regulatory Shifts: Given the increasing role of geopolitics and regulatory uncertainty in energy, build investment theses that account for multiple scenarios, including regime changes, shifts in energy policy, and evolving international relations. This requires patience and a willingness to endure short-term discomfort for long-term resilience. (Time Horizon: 5-10 years for durable advantage).