The building blocks of the digital age could reach one trillion dollar investment per year by 2027

Data centers, the warehouses of our digital lives, are being built everywhere. Fueled by AI and digitalization, investment is spreading fast. But can data centers embrace renewable energy to meet the climate challenge? 

Fueling the AI revolution

Investment skyrocketed to a staggering $250 billion in 2023 (Fierce Network), and this trend is expected to accelerate further. According to Fierce Network, data center investment could reach $1 trillion thanks to AI by 2027.  Big Tech and investors such as Apple, Microsoft, Google and Nvidia are pouring billions into AI, which relies heavily on large datasets and processing power. Data centers provide the critical infrastructure for AI to learn, develop, and reshape our increasingly digital dependents lives. Imagine the vast amount of data needed to train a self-driving car or a complex language model, data centers are responsible for storing and managing this information, catalyzing these technological advancements.

Blackstone's big bet

Blackstone Inc., the world's largest private equity firm with $10 trillion of assets under management, confirms this trend. After acquiring data center operator QTS in 2021, they're bankrolling the development of massive facilities to handle crucial computing needs. This investment represents a clear backing of the private equity players into the next ten years of AI's potential. Several private equity groups, including Black Rock CEO Larry Fink have said that data centers could be one of their fastest growing investments. 

The energy challenge

However, this growth comes with significant carbon emission externalities. Data centers are energy-hungry, consuming a significant portion of global electricity. Estimates suggest they could draw up to 21% of the world's electricity by 2030 (International Energy Agency). This has led to concerns about data centers relying on fossil fuels to meet their demands. States like Virginia and Wisconsin are experiencing unexpected electricity demand hikes due to new data centers, forcing utilities to extend the lifespan of coal and gas plants which were previously planned to be decommissioned. On the positive side of this coin, large smart cities projects such as NEOM in Saudi Arabia (500-billion-dollar investment) are being built fully relying on wind, solar and green hydrogen, bypassing the carbon hurdle. 

The need for efficiency

Beyond the environmental impact, there's also a need for increased efficiency within data centers themselves. Newer facilities are implementing innovative cooling systems and server designs to reduce energy, and water consumption. Additionally, a trend towards smaller, geographically distributed "edge centers" is emerging to improve response times and reduce the overall energy footprint and therefore accelerating decarbonization.

A climate opportunity

Despite the challenges, there's potential for a positive climate impact as decarbonizing data centers provide investment opportunities in cooling and energy efficiency technologies for data centers. Data centers can become greener by procuring their own renewable energy sources, such as solar and wind power. Given that 40% of data center needs is allocated to cooling the servers, finding efficient cooling solutions represents a big investment return.  Additionally, the AI applications they support could play a role in optimizing and accelerating the clean energy transition. We can imagine a near future where AI is helping manage energy grids more efficiently or identify new sources of renewable energy available as a supply.  This is where the decarbonization opportunity lies. Major tech companies like Apple, Google, and Meta have already committed to using carbon free energy by 2030 (Mckinsey), demonstrating a shift towards sustainability and clean tech in Silicon Valley. 

Investment on the rise

The investment trend will continue as the data center boom is attracting very high funding from PE and large corporations. Deal flow is accelerating, with a 40% increase from 2020 to 2021 and a strong performance through 2023. As we break down the investment type, private equity firms are the leading investor, accounting for over 90% of deal value in the first in 2022. This influx of capital signifies the growing importance of data centers in the digital landscape. A good proxy of the data center growth, is the energy needs projected to be consumed by data centers. In the US market alone, demand for electricity is expected to be 35 gigawatts (GW) by 2030, up from 17 GW in 2022, according to McKinsey. The United States accounts for roughly 40 percent of the global market.

Looking forward

Data centers are undeniably crucial for our digital future. They store our data, power our online experiences, and enable AI to prosper. However, it's essential to ensure their growth aligns with sustainable practices and that we have sufficient power generation to fuel data center growth. By prioritizing renewable energy, energy-efficient technologies, and cooling systems, data centers can become a force for good, powering the digital age while helping reach the Paris climate agreement. The future of data centers lies in reaching a balance between technological progress and net-zero carbon emissions.