The role of renewable energy in the AI revolution
In the first of a series of articles exploring how sectors across the economy are driving demand for renewable energy, Schroders Greencoat’s Paul O’Donnell explores how the boom in AI applications is fuelling a rapidly increasing need for data centre capacity, which in turn is amplifying the need for sustainable power sources.
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Key takeaways
- The data centre market has expanded rapidly amid ongoing digitalisation and the AI revolution – and there is growing demand to develop data centre capacity further.
- Exponential growth in data centre demand is translating into substantially increased demand for power globally.
- Access to renewable energy to meet this demand is critical to ensure tech companies and governments can meet their decarbonisation targets – and can be vital to ensuring projects pass planning hurdles.
- Contractual mechanisms, such as power purchase agreements, to secure necessary renewable power to fuel data centres could further underpin and enhance the value of renewable assets over the long term.
We are living in the digital age. Growing adoption of smart phones and internet connectivity globally, the rise of cloud computing, shifts to e-commerce and contactless or digital payment methods, and increasingly diffuse working arrangements in the post-Covid era, have all contributed to growing demand for data processing and storage – and of power to feed that demand.
Then there is the revolution in artificial intelligence (AI) technologies, a global mega-trend that could re-shape almost every industry across the economy, but which relies on vast consumption of data – and by extension of power. A ChatGPT query, for example, is said to consume 10 times more electricity than a Google search.
Beyond changes to how we live and work, this growth in data demand has profound implications for our energy needs. After all, it is no coincidence that the capacity of data centres is typically measured in mega or giga watts (MW, GW), both units of power. Over the period from 2012 to 2023, power demand from data centres, which support the computational and storage of digital and AI applications, experienced a compound annual growth rate of 14%. This is in sharp contrast to the 2.5% growth in the total electricity demand.
According to a report by the International Energy Agency (IEA), the share of global electricity demand coming from data centres is predicted to double from 2022 levels by 2026, equivalent to Germany's entire power needs (see graphs). Taking one example, in Ireland, the European base of tech giants including Google and Meta, the IEA expects data centres to consume 32% of total electricity by 2026, up from 17% in 2022.
Data centres: A growing need
Not only are data centres consuming more power, but there is a need for more of them to keep up with rising data demand that is only expected to increase further as AI use increases, and AI models evolve.
Currently, there are more than 8,000 data centres worldwide, with a significant and growing concentration in the US and Europe. More are being planned and substantial investment is being made into the sector. Linklaters reported that a remarkable $22 billion was invested globally in data centres during the first five months of 2024 alone, marking an acceleration compared to the already substantial $36 billion invested in 2023.
Much of this investment is coming from large technology firms that rely on data centres for their services to function. For instance, Amazon Web Services has this year announced plans to invest €15.7bn ($17bn) in data centers in Spain until 2033, and a further £8bn ($10bn) to expand its digital and AI infrastructure in the UK by the end of the decade. Additionally, Microsoft has announced future investments totalling at least $16bn to build data centers across the US, Europe and Asia, while Google has similarly committed billions to projects around the world.
But more capital will be needed. According to latest data from McKinsey, demand for data centre capacity is expected to increase to around 35GW by 2030, more than triple the 10GW of demand today. The consultancy says that more than $250-300bn of investment will be needed in new data centre infrastructure to meet this demand.
Opportunity for renewables
Infrastructure assets related to energy generation present an attractive and relatively low-risk opportunity to capitalise on the growth of data centres. This is especially true of renewable energy assets, which provide a sustainable source of electricity to meet this growing power demand and are therefore well positioned to benefit from the exponential growth of the data centre sector.
Major technology companies, along with governments around the world, have set ambitious decarbonisation and net-zero targets to address the threat of catastrophic climate change. To meet these targets, there will need to be huge investment to increase renewable energy capacity. Demand for power from data centres alone could require around 100 GW of new wind and solar projects by 2035, implying €115 billion of capex spending.
The issue has already come to a head in some locations, including a number of Europe’s largest data centre markets such as Amsterdam and Dublin where de facto limitations on new data centre development have been imposed due to grid capacity and sustainability concerns. A commitment to provide new renewable power to meet increased demand can often be the key to unlocking these hurdles. This in turn means re-thinking the approach to data centre development, shifting the focus away from brownfield sites towards locations with existing or potential connectivity to renewable energy sources.
In short, the renewables sector is at the intersection of two global mega-trends – the AI revolution and global decarbonisation. These trends are truly global, but there are key regions and markets, including those mentioned above such as the UK & Ireland and Spain, that are already well advanced in investing in and developing renewable power networks, and so that are especially well positioned to capitalise on the related and growing demand for both data and energy.
PPAs: New opportunities for renewables generators
The opportunity for renewables is not confined to development demand. There is also potential for the growing need for data centre operators to secure power for their sites to translate into increased use of contractual mechanisms that will help to underpin and enhance the value of renewables assets.
Traditionally, the return on investments in renewable assets was influenced by inflation and broader market power prices. However, data centre operators, which have obvious needs relating to reliability of supply and certainty of pricing, have increasingly begun to find, or develop, their own sources of renewable power.
At the same time, an interesting parallel trend has emerged involving companies securing renewable power directly from renewable electricity generators, through bilateral agreements. These agreements, known as power purchase agreements (PPAs), are legal contracts between generators and end-users. They enable companies to fulfill their increasing demand for renewable electricity, while at the same time providing renewable operators with stable, long-term and contracted revenue streams.
The number and value of renewable PPAs in Europe has been growing steadily over recent years, amounting to close to 46GW of cumulative contracted capacity since 2013 (see graph). Greater demand for renewable energy, coupled with volatility in wider energy prices, such as for gas, provides an opportunity for owners of assets to lock in attractive prices through these PPAs.
Schroders Greencoat has been in the PPA market for many years. As an example, earlier this year our listed investment trust, Greencoat Renewables Plc, signed a 10-year agreement with Keppel DC REIT for the supply of renewable energy to power its two data centres in Dublin. We think this strategy is helping to underpin the long-term value of renewable assets over and above their initial period – and our view is this will continue, with expectations of a significant number of similar transactions in the market in coming years.
Conclusion: A long-term opportunity
It is clear that there is demand for increased investment and development to grow data centre capacity. It is equally clear that there is a corresponding need to increase the supply of renewable energy to meet an escalating need for power in a sustainable manner – part of a wider need to invest in technologies across the energy transition to enable a low-carbon future.
Global technology companies and utilities are already investing heavily in this area and are expected to benefit from these fast-moving trends. But there is a need for more capital, especially from investors with a long-term growth horizon. We believe there are clear synergies between traditional real estate and core renewable infrastructure investments, which translates to attractive opportunities that can unlock long-term value.
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