The next play for AI investors is electricity infrastructure

Hello from New York, we had another chaotic weekend of politics. Former President Donald Trump is safe after another apparent assassination attempt on Sunday. There are 49 days left for the election.

In today’s edition, I report on the latest developments in artificial intelligence and the increasing demand for electricity. You may remember Simon’s recent piece on virtual power plants and the development of UK-based Octopus Energy. Today, I look at companies that could profit from the power-hungry growth of AI.

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Electricity providers ‘next generation in AI’

As the demand for artificial intelligence technologies continues to grow, a new type of company is emerging as a way to play in this field: electricity providers.

“Investors are looking for the next generation in AI,” James West, senior analyst for sustainable technology power at Evercore ISI, told me. “Tech investors who call us ask about power.”

“This is the next big bull market, especially as some AI derivatives like chips are running out of capacity,” he added. Nvidia, the stock market darling of the AI ​​phenomenon, saw its shares sink after its latest earnings report in late August. “It’s going to be difficult for Nvidia to increase revenue further because their capacity is tightening,” West said.

West said companies poised to do well if the change happens include GE Vernova, which has spun off General Electric’s power and renewable energy divisions, or Fluence, a battery provider that competes with Tesla.

As the energy needs of data centers accelerate, renewable energy development is happening at a rapid pace, he said. By 2025, global renewable electricity generation is expected to surpass coal power for the first time, according to the IEA.

But that may not be enough. There are two broad approaches to meeting AI’s rapidly growing power needs, experts reckon. One path is “re-carbonisation” – restarting or maintaining fossil fuel power plants. This trajectory reveals the risk that AI and data centers will ultimately increase carbon emissions. Microsoft’s emissions rose 30 percent between 2020 and 2023, largely due to data centers for its AI development systems, the company said in its annual sustainability report this year.

AI data centers “demand 99.99 percent reliable electricity,” Thomas McAndrew, founder and chief executive of Enchanted Rock, a Texas-based microgrid provider, told me. This demand will further strain power grids and require greater reliance on existing coal and new natural gas plants, he added. Demand for AI data centers is driving higher electricity costs for residential and higher carbon emissions, McAndrew said. “Speed ​​to Power Matters in AI Arms Race.”

An alternative to ‘re-carbonisation’

But there is a second path. If tech companies can offset power gaps with natural gas microgrids and battery storage, “AI data centers can ease grid stress and feed surplus electricity back to the grid, supporting wind and solar expansion, thereby reducing costs and carbon emissions,” McAndrew said.

While not a zero-carbon fuel, natural gas can be used more efficiently to reduce emissions and fuel data centers, said K.R., founder and chief executive of Bloom Energy. Sridhar told me.

Bloom provides back-up energy sources for data centers and has been one of the star portfolio companies for blue-chip venture capital firm Kleiner Perkins, which has backed tech giants such as Amazon and Google. San Jose-based Bloom can take heat from natural gas energy and recycle it to power cooling systems for data centers, Sridhar said.

If Nvidia and other leaders in the AI ​​space seem overhyped to some investors, there are other ways to ride the AI ​​wave. Electric infrastructure companies may not be as flashy as Nvidia’s semiconductors, but they could be an AI investment theme for 2025.

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