The best AI investment might be in energy tech

Venture capitalists have poured over half a trillion dollars into AI startups over the past five years, but a new report from Sightline Climate suggests that the most strategic investment may now lie in energy technology. Researchers indicate that nearly half of the announced data center projects could face delays, primarily due to power accessibility issues. Currently, out of 190 gigawatts of tracked data center capacity, merely 5 gigawatts are under construction, with only 6 gigawatts having come online last year. Alarmingly, about 36% of these projects have had their timelines pushed back to 2025. Such delays could have ripple effects, impacting large enterprises and companies that rely on AI technologies. This supply-demand imbalance presents a unique opportunity for investors. Major tech firms, including Google and Meta, are significantly investing in renewable energy projects such as solar, wind, and nuclear. They are also backing innovative technologies like Form Energy’s 100-hour battery through direct funding and collaboration with utility companies to accelerate adoption. Numerous startups are tackling the power supply challenge. Companies like Amperesand, DG Matrix, and Heron Power are pioneering new power conversion technologies, while others such as Camus, GridBeyond, and Texture are developing software solutions to efficiently manage electrical flow. Power constraints are a pressing issue for data centers, a situation that is unlikely to improve in the near future. Goldman Sachs projects that AI’s demand could increase data center power consumption by 175% by 2030. This unprecedented strain on the grid has been pushing electricity prices higher across the U.S., prompting tech companies to seek alternative energy solutions. The Trump administration has even encouraged tech firms to establish independent power sources or face increased costs, a shift many had already initiated. To reduce reliance on the grid, major corporations like Amazon, Google, and Oracle are designing new data centers that incorporate on-site or hybrid power solutions. However, less than 25% of the projects that have identified power sources are opting for these approaches, despite representing 44% of total capacity. The push towards alternative energy is partly fueled by a shortage of traditional power generation equipment, such as gas turbines. A recent deal by Google to power a new data center in Minnesota exemplifies innovative approaches to energy management. The plan involves combining wind and solar energy with a substantial 30 gigawatt-hour battery from Form Energy. Furthermore, Google has collaborated with Xcel Energy to establish a new rate structure aimed at promoting the adoption of advanced technologies in utility planning. Grid-scale batteries are expected to significantly impact the power market, with the U.S. projected to have nearly 65 gigawatts of battery storage capacity by year’s end, according to the U.S. Energy Information Administration. Companies like Form Energy are looking to leverage this momentum by raising $500 million ahead of a planned IPO. However, energy supply is just one aspect of the equation. Once electricity reaches the grid or data center, effective management is critical, a responsibility that typically falls on transformers. Most existing transformers rely on outdated technology that is over 140 years old, which is becoming increasingly inadequate as data center power demands grow. Experts warn that as server racks reach 1 megawatt in power density, the necessary power equipment could take up twice the space of the rack itself. This has led to increased investor interest in solid-state transformer startups, which aim to replace traditional iron-and-copper technology with more efficient silicon-based alternatives. Although these newer transformers come at a higher cost, their flexibility could make them economically viable by consolidating multiple pieces of equipment within a data center. While investments in battery and transformer startups may seem smaller in scale compared to the blockbuster deals in AI, they offer a more manageable proposition for investors. As global electrification continues across various industries, the demand for power is expected to grow, providing investors with a safeguard against potential downturns in the AI sector. In this context, it appears that the most promising investment opportunities may not rest within AI itself.