Venture capitalists are increasingly betting big on AI startups, investing more than $5 trillion in the space over the past five years.
But a report from Sightline Climate suggests that the smartest AI investment these days may be in energy. Researchers found that up to 50% of announced data center projects can be delayed. One of the biggest causes is access to power.
Of the 190 gigawatts worth of data centers the company tracks, only 5 gigawatts are under construction. Last year, approximately 6 gigawatts of data center projects in Sightline’s database came online. A much larger proportion (approximately 36%) have pushed their schedules to 2025. Delays could eventually trickle down and impact large enterprises and other businesses that use AI for business.
This tight supply and demand situation is an opportunity for investors. Here’s why:
Big tech companies like Google and Meta have devoted large portions of their balance sheets to developing solar, wind and nuclear projects. These companies also support emerging technologies, such as Form Energy’s 100-hour battery, through direct investments and work with utilities to accelerate their adoption.
Dozens of startups are pursuing technology to tackle power issues. For example, Amperesand, DG Matrix, and Heron Power are developing new power conversion technologies, while companies such as Camus, GridBeyond, and Texture are building software that can manage the flow of electrons.
Power remains one of the most important constraints for data centers, and this shortage is not likely to change anytime soon. According to Goldman Sachs, AI is expected to increase data center power consumption by 175% by 2030.
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These grid shortages are unprecedented in modern times and are driving up electricity prices across the country. This has led many technology companies to look for alternative ways to power their data centers. (Sensing the impending political crisis, the Trump administration is encouraging tech companies to build their own power sources, pay higher rates, or both. Of course, most companies already had plans to do so.)
Grid alternatives
Amazon, Google, Oracle, and other major technology companies have worked to minimize their dependence on the power grid. Some data centers are planned using on-site power or a hybrid approach that combines on-site power and grid connectivity.
The largest data centers are leading the way. Less than a quarter of projects that identify a power source use on-site or hybrid. Together, they account for 44% of the total capacity.
Contributing to this change is a lack of power generation equipment, namely gas turbines, and an outdated power grid. This paved the way for alternative energy sources.
Google’s latest deal to power a new data center in Minnesota represents one approach to tackling this problem. The company will combine wind and solar power with a 30 gigawatt-hour high-capacity battery made by Form Energy. Google also said it has worked with Xcel Energy to create a new rate structure that helps utilities accelerate the adoption of new technology in their planning processes.
Form Energy’s batteries aren’t the only example. Grid-scale batteries are poised to have a major impact on electricity markets. By the end of this year, the U.S. should have nearly 65 gigawatts of battery storage capacity, according to the U.S. Energy Information Administration. Like many of its peers, Form Energy is looking to capitalize on this momentum by raising $500 million ahead of an eventual IPO.
Underrated technology
Energy supply is only part of the story. Once power is delivered to a power grid or data center, it needs to be managed, and much of that work falls on the humble transformer.
Most of today’s transformers use giant iron blocks wrapped with copper wire, a technology that is about 140 years old. Although reliable, they are becoming too large as data center power demands increase. One expert told TechCrunch that by the time server rack power density reaches 1 megawatt, the power equipment needed to run the server rack will take up twice as much space as the rack itself.
That’s why investors, hoping that silicon-based power electronics will replace ancient iron and copper technology, are flocking to back solid-state transformer startups these days. Although these are more expensive than existing transformers, they are also flexible enough to replace multiple pieces of equipment within a data center, making them cost-competitive.
Overall, the size of the investment in battery and transformer companies is much smaller than some of the blockbuster rounds we’ve seen in the AI industry to date.
That’s not a bad thing. These rounds are more manageable for investors. Additionally, as the world continues to electrify everything from transportation to heavy industry, the need for electricity will only increase, giving investors a hedge against AI failure. Perhaps the best investment in AI is not AI at all.
