Renewable energy sources are supplying about half of the electricity needed for the new data centers being built to power the AI revolution. Why not 100%?
Power supply is the main constraint on data center growth for hyperscalers. Big tech and data center developers are scrambling to get electricity online as quickly as possible, which often means “behind-the-meter” energy production colocated with the data center to avoid permitting and long waits for grid connections. Increasingly, that energy is generated by solar and wind power, with battery storage to smooth out the variability.
Renewables are now competitive with new gas on a levelized cost basis, even without subsidies, according to BloombergNEF. Gas turbine costs and wait times have ballooned due to supply chain constraints, narrowing the advantage gas held for data center load. Gas turbine orders placed today are not likely to be delivered until 2030 at the earliest.
“The fastest and cheapest way to deploy energy today is through clean energy,” H.E. Majid Al Suwaidi of Alterra, the UAE’s $30 billion climate fund, said at the BNEF conference in New York last week, where AI-driven energy demand dominated the discussions.
The demand for any available electron is pulling through a new generation of cleantech startups around mini-grids, co-location and grid management.
“This massive build out in AI infrastructure is creating huge demand for clean energy technologies and material clean materials in ways that we haven’t seen before,” said Dawn Lippert of Elemental Impact on the latest Agents of Impact podcast. “That’s creating really strong market pull for many of the technologies we back.”
The massive buildout represents an inflection point in the deployment of clean energy generation, which has been growing rapidly despite political headwinds.
In the US, the Trump administration has rolled back climate policies and incentives, thwarted renewables permitting and is even paying wind developers to switch to natural gas. It has also scuttled global agreements and pressured bodies such as the World Bank to abandon decarbonization policies. Despite those efforts, record solar and wind deployments met virtually all new electricity demand growth last year, according to research firm Ember.
Even with the cost advantage of solar and wind, natural gas still captures half of the data center demand. Elon Musk infamously installed 35 unpermitted mobile gas turbines at his Colossus data center in Memphis to get it up and running quickly. Eleven gas-fired data centers being built by companies including Meta, Microsoft and OpenAI will generate as much greenhouse gas emissions as some countries, a Wired analysis found.
One reason is the need for so-called firm power that can run reliably 24/7 and can be ramped up or down, as needed. The default for firm power is often natural gas; hyperscalers are also lining up hydropower, nuclear energy and even fusion energy for future “baseload” energy sources.
But the advance of long duration batteries that can store power generated from wind and solar for days and even weeks is making renewable energy an increasingly viable firm power option, at least with grid or natural gas backup. The Republican One Big Beautiful Bill ended many clean energy incentives, but extended the storage tax credit to 2032.
“It is firm power that we require,” said Karen Fang of Bank of America at the BNEF conference. “You can do renewable energy and plus storage, but it’s not 24/7 firm baseload. So we definitely see the trend going to a basket of all solutions,” she said, citing renewable energy plus storage, gas-fired generation, fuel cells, and eventually, small modular nuclear reactors.
“If you look at just our financing pipeline, where money is going to in energy generation, renewable energy and storage, being that it’s still much faster and cleaner and cheaper, is representing a lot of the new generation pipeline,” added Fang, who heads leads the bank’s global infrastructure and sustainable Finance and co-leads its global capital solutions.
Some 27 states have pending legislation to prod data center operators to source their energy cleanly, and to avoid saddling ratepayers with cost increases.
New Jersey legislators have proposed requiring data centers to derive all their energy from renewable or nuclear sources, while a New York proposal would require clean energy and restrict fossil fuel incentives in data-center power deals. Illinois’ POWER Act would require hyperscalers to pay for their own energy generation, sourced from new renewable energy and storage facilities.
Google, Meta, Microsoft and Amazon plan to spend a combined $725 billion on their AI buildouts this year alone. “The AI capex wave is the single largest accidental subsidy to climate infrastructure in the last 20 years,” as Yoann Berno of Climate Insiders notes.
Ready-to-scale
Climate investment reflects the shift from early stage innovation to ready-to-scale deployments. Clean energy, energy efficiency and industrial electrification drove global energy transition investment to a record $2.3 trillion in 2025, up 8% from the prior year, according to BNEF.
Early-stage climate tech deals, on the other hand, fell to their lowest level since 2020. Seed and Series A activity declined 19% and 22% respectively, with investors shifting toward more mature companies positioned to deploy at scale, according to a separate tally from Sightline Climate.
Before they can be widely deployed, climate tech startups have to make the jump from promising technology to revenue-generating commercial production. That involves building their first plants, which are typically as novel as the technology they produce. The project finance required is not suitable for venture investors, and is typically too risky for commercial lenders or growth-stage investors.
Funding for such first-of-a-kind, or FOAK, or nth of a kind, known as NOAK, projects has always been hard to come by. With the retreat of Breakthrough Energy Catalyst, a key FOAK funder, the gap has become more acute.
“Without that bridge to bankability for those FOAK projects, we delay resilient energy systems, domestic manufacturing, and local job creation,” Elemental’s Lippert tells ImpactAlpha. “And given how many of the technologies we need are still in early stages of commercialization, that delay has real consequences for both climate progress and economic opportunity.”
A recent FOAK win: Fervo, a 9-year old geothermal startup that uses horizontal drilling borrowed from frackers to tap into the Earth’s heat, in March secured $421 million from a consortium of banks to build out its Cape Station plant in Utah. The oversubscribed round, which included backing from RBC Capital Markets, Barclays, BBVA, HSBC, MUFG, Société Générale and JPMorgan, demonstrated the “bridge to bankability” that FOAK financing can provide.
And others are stepping up. The All Aboard Coalition, a collaborative investment vehicle organized by a couple dozen leading climate tech investors, has raised $100 million towards a $300 million goal to fund FOAK projects for potentially transformative climate tech companies.
In January, the coalition invested in Salt Lake City-based Zanskar, which uses AI to supercharge geothermal exploration and development. It made its second investment late last week, a $22 million investment in Terra CO2, a green cement startup building its first commercial-scale production plant.
Once climate tech companies cross the chasm into commercial production, they can graduate to bank financing or infrastructure investment.
Infrastructure funds, which invest in mature, cash-flowing assets such as solar farms, battery storage or recycling plants, made up more than three-quarters of new climate capital raised in the US last year. The funds are putting massive amounts into deployment.
“What the conflict has done is put a renewed spotlight on the importance of energy security,” Brookfield Renewable Partners’ Connor Teskey said on the firm’s earnings call on Friday. That is “reinforcing investments in renewables, which are the lowest cost form of generation to meet demand today and do not rely on imported fuel,” as well as nuclear energy, he said.
The firm, with some $143 billion in assets under management, commissioned more than nine gigawatts of new capacity over the past 12 months, nearly double what it added just two years ago.
“The demand for energy is going to require all types of sources,” said Teskey. “We are seeing the greatest growth in renewables because they are quick to deploy and they are cheap, but we are going to see demand across all types of energy to meet the demand forecast going forward.”
