Venture capitalists have increasingly directed substantial funds into AI startups, with over half a trillion dollars invested in the sector over the past five years. However, a recent report by Sightline Climate suggests that the most strategic investments may now be shifting towards the energy sector, particularly due to challenges facing data center projects.
Research indicates that nearly 50% of announced data center projects could face delays, primarily due to power supply issues. Of the 190 gigawatts of planned data centers being tracked by Sightline Climate, a mere 5 gigawatts are currently under construction. In the previous year, only about 6 gigawatts of new projects became operational, while a significant portion — roughly 36% — experienced timeline extensions into 2025. Such delays could have cascading effects on large enterprises and companies that rely on AI technologies for their operations.
The rising constraints on power supply have created an intriguing opportunity for investors. Major tech firms like Google and Meta are investing heavily in renewable energy initiatives, dedicating resources to develop solar, wind, and nuclear projects. These companies are not only funding these initiatives but are also collaborating with startups and utilities to facilitate the integration of emerging technologies, such as Form Energy’s ambitious 100-hour battery system.
A collection of startups is actively working to address the persistent power challenges. Companies like Amperesand, DG Matrix, and Heron Power are innovating power conversion technologies, while others, such as Camus, GridBeyond, and Texture, focus on creating software to efficiently manage electric flow. Power shortages remain one of the primary bottlenecks impacting data center operations, and forecasts by Goldman Sachs suggest that AI’s demand for electrical power could increase by 175% by 2030.
The current power shortages are unprecedented in modern history and have resulted in rising electricity costs across the nation, prompting many tech companies to investigate alternative energy solutions. In response to the looming energy crisis, government officials have encouraged companies to establish independent power sources or pay elevated rates, although many tech giants had already begun considering these changes.
Prominent corporations like Amazon, Google, and Oracle are actively working to reduce their reliance on traditional power grids. Many new data centers are designed to utilize on-site energy production or hybrid solutions that combine both grid and on-site power systems. However, less than 25% of projects that have determined their power sources currently plan to adopt these hybrid or on-site models; these initiatives collectively account for 44% of total data center capacity.
This shift in strategy is influenced by the scarcity of power generation equipment, particularly gas turbines, and the challenges posed by an aging power grid. Additionally, alternative energy sources are being explored more vigorously.
For example, Google has recently announced a plan to power a new data center in Minnesota through a combination of wind and solar energy, supported by a substantial 30 gigawatt-hour battery from Form Energy. The tech giant also collaborated with Xcel Energy to establish a new rate structure that is expected to promote the adoption of innovative technologies within the utility’s operations.
Grid-scale batteries are emerging as a significant player in the energy sector, with projections indicating that the U.S. will reach nearly 65 gigawatts of battery storage capacity by year’s end. Form Energy, capitalizing on this momentum, is in the process of raising $500 million ahead of a potential initial public offering.
While energy supply innovations are crucial, the effective management of that power is equally important. Currently, conventional transformers, which rely on outdated iron-and-copper technology developed around 140 years ago, are struggling to meet the demands of modern data centers. As power requirements escalate, the infrastructure necessary to support them may begin to outpace available space.
As a response to these challenges, investors are increasingly backing solid-state transformer startups, which utilize silicon-based power electronics aimed at replacing traditional heavy transformers. Although more expensive initially, these advanced solutions are flexible and could consolidate the functionality of multiple devices within a data center, making them potentially cost-effective.
In terms of overall investment, funding for battery and transformer startups is far less prominent than the substantial rounds seen in the AI sector. However, this could work in favor of investors, as the energy sector’s growth trajectory aligns with the global trend towards electrification across multiple industries. As demand for power continues to rise, investors may find more security in energy-related opportunities, suggesting that the best investment in the current landscape might not necessarily lie within AI itself.
