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Artificial Intelligence – Accelerating the energy transition?

This article is part one of a two-part update.

One of the best parts of my job is meeting incredibly talented and intelligent individuals who work in various industries from every corner of the globe. That said, even I was a bit surprised when, about six years ago, we were offered a call with the CEO of Microsoft. Thankfully, before I started preparing a long list of questions for Satya Nadella, I read beyond the subject line of the email, which explained the call would be with Lucas Joppa, the company’s chief environmental officer (which I was definitely just as excited for!).

I was reminded of this call as Microsoft recently announced its company emissions had jumped by around 30% over the past three years as it races to meet AI demand. It’s an interesting conundrum because, on the other hand, Microsoft has set a broad array of climate targets, including to become carbon negative and achieve zero waste by 2030.

To keep up with competitors like Amazon and Google, the company is investing significantly in building out the infrastructure needed to support generative AI. Microsoft has invested billions of dollars into OpenAI, the company behind ChatGPT, and is also building its own AI tools, which will be a power-intensive exercise.

Most of the 30% increase was related to the construction of AI and cloud computing data centres, which are part of the backbone of computing. These are industrial buildings, often covering large areas of land, that house the physical components underpinning computer systems such as servers and chips. The emissions linked to building new data centres come, in part, from critical construction materials such as cement and steel, which are carbon-intensive to produce, and those that go into computer chips and other hardware.

US data centre electricity consumption is expected to grow from 4-6% of total demand by 2026, while the AI industry is forecast to expand “exponentially” and consume at least 10 times its 2023 demand by 2026, said the International Energy Agency. Developers are looking to build sites in growing areas such as the US states of Ohio and Texas, regions of Italy and eastern Europe, Malaysia and India, according to analysts. Finding appropriate sites can be challenging, with power just one factor to consider, along with the availability of large volumes of water to cool data centres.

The concerns have driven interest among data centre developers in options such as onsite power generation and nuclear energy, with Microsoft hiring a director of nuclear development acceleration at the start of this year.

The soaring demand for electricity from data centres and other energy-intensive industries has resulted in defensive utilities being one of the best performing sectors since mid-April, staging a remarkable turnaround. Typically, this would indicate that the rest of the market is struggling, but what it actually shows us is that the market has taken note of who the beneficiaries will be as a result of the build out of AI infrastructure. This makes us very happy as we have a number of underlying investments that sit within our ‘environmental solutions’ theme that should benefit as this trend plays out over the long term.

We are invested in sector-leading companies with healthy balance sheets and management teams that prioritise returns and growth in free cash flow per share across the Ravenscroft fund range.  For example, in the Global Solutions Fund, we have underlying exposure to renewable developers who should benefit from the buildout of incremental power capacity and higher power prices. Moving one step down the value chain, the suppliers of renewable power generation and ancillary equipment skewed to US utility-scale projects, such as Vestas, First Solar and Array, all stand to benefit. To maximise the utility of clean power generation, battery solutions from Fluence, powered by cells from Samsung SDI and CATL should see an increase in demand.

Finally, businesses such as Schneider Electric, which provide data centre owners and operators with a suite of cooling and power management solutions, and Nexans, whose cables are used for connecting offshore wind farms to the shore and for the expansion of power distribution networks, also stand to benefit from the secular growth in data centre capacity.

Infrastructure is the second order, and often overlooked, beneficiary of artificial intelligence. Ravenscroft Global Solutions invests in many of these companies that are finding innovative solutions to some of the world’s challenges.

Perhaps it is worth another call with Lucas and his team, maybe Satya will join this time…

Part two of this update will be released in the next few weeks.

Please note that Global Solutions is an offshore fund only available in the Channel Islands and Isle of Man.