Ninety One

Powering the AI revolution: a superscale clean-tech opportunity

Powering the AI revolution: a superscale clean-tech opportunity

By Deirdre Cooper, Head of Sustainble Equity, Ninety One

As use of artificial intelligence (AI) accelerates, AI power consumption is expected to explode. The amount of electricity consumed by AI is forecast to exceed 85 terawatt hours annually within a couple of years, more than many small countries¹.

AI Workloads are projected to grow at 25-30% annually to 2028, to 15-20% of total datacentre power consumption.

_[1]_{Source: Scientific American, October 2023.}

AI has the potential to significantly change trends in electricity demand in developed countries. For decades, a combination of improving energy efficiency and offshoring of manufacturing have led to little or no electricity demand growth in advanced economies. But this is starting to change. McKinsey and the U.S. Energy Information Administration (EIA) expect a 38% increase in U.S. power demand over the next two decades, a startling increase from the 9% increase seen over the previous 20 years.

Expected growth in U.S. power demand (thousand TWh)

This is not a buy, sell or hold recommendation for any particular security.

[2] Bloomberg, 15 May 2024

AI leaders are committed to clean energy

In the short term, the datacentres that enable AI are likely to use existing local electricity networks, rather than build their own off-grid systems, increasing greenhouse-gas emissions. However, in the medium-term, datacentre owners are expected to seek renewable-energy contracts to meet their increasing energy needs, providing financial and market support for new renewables projects.

This is partly because the biggest investors in AI thus far have been companies with strong commitments to net zero. Following the ramp-up in AI spending, some of the ‘Big Tech’ companies have already started to miss their climate targets. As Brad Smith, President of Microsoft, said in an interview earlier this year², “In 2020, we unveiled what we called our carbon moonshot. That was before the explosion in artificial intelligence. So in many ways the moon is five times as far away as it was in 2020”. Yet Smith and Microsoft shows no sign of backing away from either AI investment or net zero: “We fundamentally believe that the answer is not to slow down the expansion of AI but to speed up the work needed to make it more environmentally friendly.”

Clean-tech value chain

We expect efforts to power AI with clean energy to drive growth for a select group of businesses, and consequently investment opportunities across the clean-tech value chain.

The market for power is already changing in favour of clean-power providers. Big Tech companies have historically negotiated hard to lower prices in offtake contracts (in which companies agree to buy power at an agreed price), which are crucial to securing financing for future renewables projects. But in the last year, power purchasers have become much less price-sensitive. This gives pricing headroom to companies across the clean-tech value chain, not just developers like NextEra Energy, Iberdrola and Orsted, but also renewable and battery equipment manufacturers like Vestas Wind Systems, LONGi, First Solar, Sungrow, CATL and Xinyi Solar.

A question of power

The biggest bottleneck for AI datacentres in the short term is not, in fact, electricity generation (the amount of electricity produced over a period of time). Rather, it is electrical power: the maximum capacity in megawatts that a datacentre needs available to be able to operate. A typical co-location datacentre needs 20-30MW, but a dedicated AI campus might need 100-500MW. Gartner estimates that, by 2027, 40% of existing AI datacentres will be restricted by power availability.

We see an opportunity for companies that provide technologies and services that are crucial to solving this power (as opposed to generation) challenge. Since locating a datacentre close to high-voltage transmission infrastructure is helpful in achieving higher power, renewables developers with better sites – such as NextEra Energy, which has significant undeveloped land rights in good locations – are likely to see their competitive advantages strengthen.

The clamour for power has also resulted in surging demand for certain electrical equipment, including high-voltage transformers and switchgear. This has led to some significant shortages, with lead times for some technologies now running to years. We would expect datacentres’ electrical-equipment requirements to be a growth opportunity for companies like Schneider Electric, Hitachi, ABB and WEG.

Alongside the need to ramp up power availability, there is a heightened focus on improving datacentre efficiency, specifically server and infrastructure efficiency. Gains in datacentre efficiency have flatlined in recent years. But with AI ramping up power demand, it is likely AI companies will seek efficiency gains, driving growth for companies supplying technologies that enable efficiencies, such as Delta Electronics, a leader in high-efficiency liquid cooling technology.

Investing through uncertainty

Much uncertainty remains about how AI will shape our lives. What we do know is that this emerging technology is energy intensive. As a consequence, we see opportunities for sustainable investors not only in select producers of renewable power, but in a swathe of energy-efficiency solutions across semiconductors and electrical equipment.

General risks

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Specific risks

Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market.

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.