During previous energy crises, such as in the 1970s, the cost of energy became a wildcard for consumers and businesses alike. As a new energy crisis looms, which could come as soon as the end of this decade, supply constraints will be a key concern. Industrial sector owners and managers need to start preparing now to ensure uninterrupted operations and mitigate the risk from power outages, experts say.
“At a high level, the grid is proven to be fairly resilient and handle the power requirements of today, but there's increasingly more demand coming, and supply is not keeping pace with it,” warns Chad Griffiths, SIOR, a partner with NAI Commercial Real Estate in Edmonton, Alberta, Canada, regarding the situation throughout North America. “This will really be a problem five to 10 years out.”
DEMAND/SUPPLY IMBALANCE
Mushrooming demand for electricity is happening right now, due to a variety of factors. In the United States, nationwide electric demand is forecast to increase by 15.8% by 2029, according to a December report by energy consultancy Grid Strategies, citing the latest revised estimates by the Federal Energy Regulatory Commission. The summertime load in 2029 is expected to reach 947 gigawatts (GW), which represents growth of 128 GW from current demand. Only two years ago, the commission forecast growth of only 23 GW by 2029, and in 2023, the estimate was revised upward to 39 GW.
“While some of the additional growth merely reflects corrections to last year’s incomplete forecast update, major changes have occurred in several regions,” the report notes. “In particular, Texas (ERCOT) has recently added about 37 GW to its 2029 forecast – resulting in an updated forecast of 43 GW in load growth through 2029.”
Two power-intensive growth industries are spurring much of the surge in demand: namely data centers, which are striving to accommodate growth in AI and other data-intense activities like cryptocurrency mining, and manufacturing, such as semiconductor chip making, which is returning to North America for political and economic reasons. Another contributor to demand growth is widespread electrification, including the partial conversion to electric vehicles and other decarbonization efforts. Changes in the real estate industry, including how industrial properties are designed and operated, are adding to power demand as well.
As demand grows, electric supply will have a hard time keeping up. No nuclear power plants are under development at the moment in the United States or Canada, while at the same time plants that generate power by burning fossil fuels are being retired. Coal, in particular, is being phased out, with operators retiring about 37 GW, or 17% of the coal-fired fleet, since the beginning of 2021, according to the U.S. Energy Information Agency. Solar and other renewable sources of energy are expanding, but still represent a relatively small share and face challenges of their own, such as inadequate infrastructure to deliver power from where it is generated to where it is needed.
Another significant challenge is the aging power grid. Investment in the grid has increased in recent years, but it isn't clear whether that will be enough. “About 70% of transmission lines are over 25 years old, and they're ending their life cycle, and unable to continue to support the modern needs, or manage increasing electrification in transportation, commercial buildings and other sectors,” says Ra’eesa Motala, SIOR, co-founder of Evoke Partners. “We in the industry should be concerned about the increased risk of outages. More interruptions are going to be pushed forward by extreme weather events or disruptive incidents.”
We in the industry should be concerned about the increased risk of outages. More interruptions are going to be pushed forward by extreme weather events or disruptive incidents.
ENERGY AWARENESS AMONG INDUSTRIAL OWNERS
The first step for industrial real estate owners and managers facing an energy-constrained future is to be aware of the situation. "The reliability of the grid so far means that the issue isn't on everyone's radar," notes Griffiths. “If you're operating a facility right now, you probably have 99% up time on your power, with the odd blackout or brownout, but it's very limited. So just by the nature of people not experiencing this problem right now, it's not top of mind.”
Awareness of the energy problem is more growing in some places than others, however. In Texas, for instance, the shock of the grid failure in the winter of 2021 put the state's energy supply at the forefront, including among industrial space users, even as demand in the sector is being fundamentally reshaped by technology that needs more electricity.
“I've been doing this about 26 years, and for inquiries about industrial real estate from 20,000 to a million square feet, I've never experienced higher electric electrical capacity requirements than I had in my entire career than I have in the last 18 months,” says Mark Graybill, SIOR, a principal with Lee & Associates in Dallas. “Manufacturing production requirements have grown exponentially. In a distribution building, you turn your lights on, charge the forklift, and you're done. Now an occupant is manufacturing in the same space, and they put 10- to 20-fold more demand on the electrical infrastructure.”
As awareness grows, the next step for owners and managers is to obtain better information. “My first response would be to literally have a conversation with my local electrical provider and ask, what is the power load in our particular area? And what will happen in the times of high peak demand? Will you be considering brownouts?” says Bryce Custer, SIOR, a broker/advisor with Canton, Ohio-based NAI Spring Commercial. “If am a property manager, if I am a building manager, or if I do manufacturing inside an industrial park, I need to be very concerned about high peak demand times when it's very cold outside, or when it's very hot outside.”
It is important for facility management to have solid data on current power usage – something most probably do – but even more important to understand how much a facility or portfolio is going to need in the coming years, Griffiths says. “If I have x amount of power right now, is that sufficient for what's coming down the road in terms of automation and electrification? And if it is inadequate, can I apply to get more power? Because it's quite possible that power companies might not be able to provide more power. The sooner you know that, the better, because the time to be proactive is now, instead of reactive, five to 10 years down the road, when everybody's going to be scrambling to get power."
ENERGY MANAGEMENT, RENEWABLE POWER, AND OTHER POSSIBLE SOLUTIONS
One strategy for dealing with energy uncertainty is to run more energy- efficient industrial operations. That approach involves more than just installing energy-efficient machinery. The timing of energy usage is also critical, as demand on the grid —while not totally predictable —does follow certain patterns. Usage varies by time of day, but also in weather extremes.
Participating in a utility-lead program to reduce energy consumption during peak time can earn financial incentives, but also support grid stability, Motala said. A smart system to optimize energy-intensive industrial processes during off peak hours is helpful, as is maintaining alternative temporary sources of energy for weather-related or other outages, such as diesel or natural gas generators.
“Monitoring and optimizing energy use has been so overlooked, as we've recognized the last few years,” Motala said. “So, we created our own proprietary software for our customers because we couldn't find anything on the market. A good energy management system provides portfolio clients with real-time market intel and predictive pricing.”
As new industrial properties are developed, the sector will also become more energy efficient, as demand from tenants for sustainable features remains strong, according to Lowney Architecture COO Anthony Cataldo, who is based in California. New designs will allow for better energy management, though it will take time for them to work their way into the sector.
“One thing we're seeing that's more popular, especially with clients who don't want to be and can't be down even for a day or two, is that we determine during the design phase what's critical for operational uses, so that if you're running on a backup battery, you're only feeding your critical systems,” Cataldo said. “The time to look at the question is before the emergency. When you need it, the system is already in place.”
Tapping directly into renewable power systems, particularly solar panels fixed to a property roof, is, for now, a solid option to mitigate power risk and reduce costs – in many cases, at least. Besides at least partial energy independence, other benefits include a potential increase in property values and a step toward decarbonization that helps fulfill corporate sustainability goals. The cost of solar installations has also consistently come down in recent years, dropping by around 20% every time the global cumulative capacity doubles, according to the International Renewable Energy Agency. Over the last four decades, solar power has gone from one of the most expensive sources of power to a relatively cheap one, though part of the drop is due to incentives, and it isn't clear whether they will endure under the next U.S. presidential administration.
The time to look at the question is before the emergency. When you need it, the system is already in place.
Battery storage on-site will be a more cost-effective option in the future, according to Greybill, who cites a 10 MW battery energy storage system recently installed at a Prologis property in Arlington, Texas, as a harbinger of things to come (though he stresses that the tech is still in its infancy). The system is adjacent to a newly constructed distribution center and is the first of nine such projects that the giant industrial REIT will undertake throughout the state by the end of 2025, which will provide 100 MW in capacity.
Though sometimes an option for industrial buildings, solar isn't a panacea. Upfront costs can still be considerable, and they aren't appropriate for some places, though coupling them with battery storage can be an option – at more expense. “If I put solar panels on my roof, I have to have a very substantial battery storage system, which is expensive and probably not going to last more than 24 hours,” Custer explains. “So, I do need some type of a robust backup system, which is either going to be diesel powered or natural gas. When I look at renewables, I'm looking more toward solar and wind to augment my existing power. But I would hate to rely on them in a time of crisis, when the power goes out.”
This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.
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