The role of renewable energy in the AI revolution

Paul O’Donnell

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.

Key takeaways

1. 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.
2. Exponential growth in data centre demand is translating into substantially increased demand for power globally.
3. 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.
4. 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. Locally, Africa’s data centre industry is also experiencing substantial growth with $5 billion projected to be invested by 2026 - $3.1 billion of which is destined for South African shores.

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.

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