Midterm Election Results: Three Key Takeaways

Andrew Percoco: Welcome to Thoughts on the Market. I'm Andrew Percoco, Morgan Stanley's U.S. Autos and Shared Mobility analyst.

David Arcaro: And I'm Dave Arcaro, Morgan Stanley's U.S. Power, Utilities, and Clean Tech analyst.

Andrew Percoco: Today, why the AI power crunch could transform how we generate, store, and consume electricity.

It's Tuesday, November 3rd, at 10am in New York.

Andrew Percoco: So Dave, the whole AI power shortfall and, you know, how data centers [are] creating a power crunch is not necessarily a new topic. I think we've had many conversations, many people listening have probably heard this is, kind of, being a bottleneck for AI deployment.

But I'm curious, how have your views around the role of distributed power changed in terms of its role in solving some of the shortfalls in the market? I think there's a lot of debate in the industry around whether or not these solutions are "bridge." Or whether they're structural and they can be truly long-term sources of supply to the market.

So maybe just help us think about, you know, how our views have really changed, as it relates to distributed power specifically.

David Arcaro: One of the things that we have seen is that the shortfall has grown in our estimates over the last several iterations. We're now looking at upwards of an 80 gigawatt shortfall by 2029.

And how do we solve that? Well, I'd say we've leaned more into on-site power, bringing your own power. What is that? You know, if you are still waiting for years for a grid connection from the utility, what can you do as an alternative? You can bring your own power. You could bring small scale power equipment to get the high reliability in a much faster timeframe than you would waiting for the grid in comparison.

And so we're seeing that increasing extremely rapidly in popularity among hyperscalers and data center developers. And we're seeing them much more, being willing to consider it on a long-term basis.

What used to be, "Hey, I need to cover a few years just to bridge until I have line of sight to getting a connection to my utility…" Now we're seeing actually 15, 18, 20-year contracts for these, you know, what used to be considered just smaller scale, less attractive solutions.

They're now long-term, with what looks like much more permanent considerations for highly reliable data center AI power.

Andrew Percoco: I think there's a preconceived notion in the market that the grid's going to catch up; and that we won't need these solutions longer term. Or that we're building too much of it and there's too much manufacturing capacity coming to the market.

So maybe we can segment those into two separate questions.

Like one, what is actually the bottleneck? I think everyone thinks of it as a power generation bottleneck. But I think you've done some interesting work around how there's also transmission and distribution bottlenecks that don't get solved as quickly as the power generation. So maybe you can talk to that.

But then secondly, when we think about the long-term, you know, case for distributed power. Are there certain types of technologies that maybe screen better or more favorably? Or certain characteristics of certain technologies that screen more favorably when you think about this being a structural source of power rather than maybe a short-term fix?

David Arcaro: Yeah. The bottleneck is very often in the utility space. Utilities are seeing such an unprecedented demand for electricity from the data center industry. They're scrambling to keep up with it. They're not used to growing this fast, and it's often their electric transmission network that is falling behind.

It's the long distance power lines and substation equipment that the utilities are really trying to react [to] – and to grow alongside the data center industry. But we expect them to fall short; and pretty meaningfully short. You know, this is large scale infrastructure that takes years to develop and build.

So, then when it comes to onsite power, as you're growing alongside that constraint or trying to avoid that constraint. We're seeing that data centers, they're very much prioritizing speed. The quicker they can get the power the better.

But you know, more and more we're seeing other factors come into play. How supportive is the community for different applications? You know, what's the air emissions profile, the water use, the noise consideration? What are the overall emissions that you're considering here? And then also what are the operational characteristics of that equipment?

So, we've looked carefully at those. And we come down to these technologies, fuel cells, engines, turbines. The industry's really pursuing all of them in this chase for quick time to power, and to get around that bottleneck.

Andrew Percoco: And to that point, it seems like what matters to maybe the developers is changing. It used to just be cost, then it was cost plus time. And now it's cost plus time plus noise and emissions, [be]cause obviously there's always a lot of political pushback.

Take that maybe one step further and say it's not just the data center market that is looking at these technologies now. It's also commercial and industrial applications where obviously, you know, there's a big trend to onshore manufacturing; a re-industrialization of the U.S. And our teams have collaboratively estimated I think 10 gigawatts a year of incremental demand for power just from industrialization of – or reshoring of the U.S.

But one technology we haven't talked about yet is energy storage. And this is part of the... When I think about the auto industry, this is obviously where they play a somewhat critical role, which I'll talk about in a second.

But Dave, just help us understand: where is energy storage being used? And how big is that market for data centers specifically?

David Arcaro: Yeah. Storage has a number of applications out there, and one of the fastest growing applications is going to be with data centers. You know, they consume power in such a new way that data centers are ramping up and down instantaneously.

Massive quantities of electricity load, going up and down instantaneously, which is not what the grid is capable of handling, and even some of this on-site power equipment isn't ready to accommodate such quick changes in load. And so we're seeing battery storage as the solution in a growing proportion of data centers around the country.

We're expecting even by 2030, it's such a fast-growing end market, a fast-growing TAM, that we would expect the data center demand for battery storage in 2030 to even exceed the grid demand for battery storage in that year in terms of the incremental, new projects that are added in that year.

So it absolutely – a very fast-growing opportunity for lithium-ion battery storage being added to data centers.

Andrew Percoco: Yeah, I mean, that makes a lot of sense, and I think that corroborates what we're hearing and seeing in the auto industry. Where you are seeing a number of companies explore energy storage as a new end market to essentially reutilize their low-utilized capacity or underutilized capacity as it relates to EVs – just given the lower than expected demand there.

Obviously Tesla, a very obvious player in the market that has a very large energy storage business in the U.S. Ford is now building an energy storage business in the U.S. and has started to build a rather large backlog.

So, I think there's some obvious ways in which the auto industry is essentially, you know, taking the opportunity where EV demand has been lower to reutilize that in the energy storage market, which is faster growth. And in potentially some cases, you know, higher margin than they've seen in the EV industry.

So, that – to me – is like the most obvious opportunity for the auto industry in terms of how they can participate in the growth in AI power infrastructure.

The second derivative would be, you know, power generation itself. And we've seen some suppliers, auto suppliers essentially; take their automotive grade technology and repurpose it into turbine generators, into energy storage systems, into microgrid inverters to essentially serve this market with existing technology that they manufacture today for vehicles. Just repurposing it for the data center industry.

So, you know, it's an auto industry that hasn't really seen much growth over the last five years, so it's a very interesting opportunity for these companies to, with very little incremental capital investment, find areas of growth outside of their traditional sub-sectors.

David Arcaro: And as we're looking for new creative sources of power, electric vehicles are an area that some are exploring to become a source of power rather than just consuming it. I guess, how meaningful could vehicle-to-grid technology become for the broader energy system?

Andrew Percoco: I think over time it could be fairly significant. I mean, today if you look at California, there's some existing vehicle-to-grid or home-to-grid systems or programs in place. And they dispatch between 500 to 1,000 megawatts of power to the California grid during peak periods of time.

So, it is fairly significant. It's fairly isolated to California 'cause there's a very high degree of EV penetration and also residential solar with battery storage. So [it] makes it a somewhat of a unique market to be able to provide that.

But over time, as we start thinking about, you know, 20, 30, 40 percent of annual EV sales or annual vehicle sales being EVs across the U.S., that's when that could start to become a much more significant contribution to the overall power supply.

So it's probably more of a 2030 plus conversation, if I'm going to be honest in terms of when it starts to move the needle. But in places like California, you are already starting to see it, you know, contribute fairly significantly during peak periods of time.

Andrew Percoco: All right. Well, I think we can wrap it there. So Dave, thanks for taking the time to talk.

David Arcaro: Great speaking with you, Andrew.

Andrew Percoco: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Welcome to Thoughts on the Market. I’m Stephen Grambling, Morgan Stanley’s U.S. Gaming, Lodging, and Leisure analyst.

Today: how AI could transform hotel bookings and reshape the economics of the travel industry.

It's Monday, November 2nd, at 10am in New York.

So we all love dreaming about and going on vacations, right? But you know what we don’t love as much?  Scrolling through dozens of hotel listings, comparing prices across websites, contemplating where and how much we can use our rewards or maximize points or wondering if we’re getting the best deal for the right experience.

So, imagine the relief of having an AI assistant understand you and your families’ preferences, all of your status and loyalty points, aggregated details and reviews of all the hotels you’ve ever travelled to and might want to travel to – and all you need to do is evaluate locations? Then it finds the right hotel and books it for you.

That future is coming into focus, and it could reshape the economics associated with the marketing and distribution behind the $640 billion global hotel industry.

We estimate that every year the lodging industry spends between $22 to $55 billion on marketing. Add roughly $30 billion in fees collected by online travel agencies, or OTAs, and we're talking about $55 to $85 billion in spending that AI could influence.

Today, when you book through a third-party travel website, hotels typically pay commissions of 10 to 20 percent if it’s a branded hotel, or 20 to 30 percent if it’s independent. Booking directly through a hotel's website costs the brand closer to only 5 percent. That difference can have a meaningful impact on profitability for their owners.

As AI agents increasingly help travelers find hotels, compare options, and potentially book on their behalf we could see a major pivot in brand preference and booking channel. In our analysis of hotel searches across eight U.S. destinations, traditional search engines directed travelers to official hotel websites just 13 percent of the time. With AI-powered searches, that jumped to 97 percent.

But perhaps the most interesting finding involves loyalty programs. When we told the AI agent that a traveler belonged to a hotel loyalty program, 100 percent of the resulting links pointed to official hotel websites. When we specified a membership in an online travel agency's loyalty program, the results shifted entirely to that third-party booking platform. That means the AI agent is already factoring in your rewards, memberships and loyalty preferences into travel recommendations.

We saw similar effects in Europe.

For major hotel brands, this creates a significant opportunity. Their large loyalty programs and established customer relationships could help drive more direct bookings at a lower cost. And even small shifts add up. We estimate that moving just 1 percent of bookings from third-party platforms to hotel websites could boost hotel owners' EBITDA by roughly 0.1 percent to 0.5 percent.

Looking ahead, we expect hotel margins to start benefiting from these savings in the second half of 2027, with further gains in 2028.

Independent and boutique hotels could also profit as AI gets better at matching travelers with unique properties that fit their preferences. Meanwhile, online travel agencies aren't going away. Their extensive hotel inventories, loyalty programs, and  scale in payments and fulfillment remain important competitive advantages.

For now, AI-driven referrals still account for only a small fraction of travel website traffic. But as AI platforms develop their own advertising and commission models, the economics could change.

So, what does this mean for the travel industry?

AI could help hotels attract guests at a lower cost while making it easier for travelers to find the right stay.  Hotel brands have an edge with their loyalty programs; whereas online travel agencies can leverage unique inventory, boosting independent hotels. It's too early to declare an outright winner, but expect more from us as this battle evolves.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.