Is renewables’ role in power-hungry data centers overstated?

Investing.com -- Artificial intelligence has triggered an unprecedented wave of investment in data centers, with governments and hyperscalers treating the technology as a strategic priority. Yet, as spending soars, power supply emerges as the main bottleneck.

According to BCA Research, AI data centers “will prioritize energy reliability over cost and environmental considerations.”

“Renewables’ role in the AI power mix is overhyped,” the firm added in a Tuesday note.

The International Energy Agency (IEA) expects renewables to provide nearly half of new data center electricity demand through 2030, lifting their share of the mix to close to 40%. But BCA doubts these projections, highlighting persistent infrastructure and policy headwinds.

A lack of transmission capacity is a key constraint, with renewable plants often far from demand hubs.

Interconnection delays mean vast amounts of renewable projects remain stuck in queues: in the U.S. alone, nearly 2,600 GW of capacity was awaiting connections at the end of 2023, with 95% of that coming from renewables.

Europe faces similar backlogs, while Chinese provinces with high solar and wind potential continue to curtail output due to grid limits.

Storage presents another headwind. By 2030, forecast capacity additions in the U.S., Europe and China are expected to cover only about two-thirds of what would be required to support data centers running on intermittent sources.

Even where onsite microgrids or behind-the-meter connections are developed, they still depend on large-scale battery storage to ensure stable flows.

Policy developments have also turned less favorable. In the U.S., the One Big Beautiful Bill Act shortened eligibility for solar and wind tax credits, threatening $263 billion worth of announced projects.

In China, pricing reforms that moved renewables away from coal-linked benchmarks to market-based pricing have lowered revenues, discouraging new investment.

Furthermore, political pressure is mounting. Data centers already consume more than 4% of U.S. electricity, a share that could triple by decade’s end. Rising household electricity bills are fueling discontent, with Democrats likely to exploit the issue in upcoming elections.

This could create additional headwinds for new project approvals, BCA warns.

Against this backdrop, fossil fuels are set to carry the load. Natural gas is the likeliest substitute in both the U.S. and Europe, where combined-cycle gas turbines provide cost-efficient baseload power.

Europe’s reliance on LNG is increasing, with import capacity expanding by 50% from pre-Ukraine war levels by 2027. Five countries that host nearly half of Europe’s data centers account for 85% of LNG capacity under construction.

In China, coal remains the fallback, particularly in eastern provinces where data centers must sit close to end-users.

BCA also warns that inflated load forecasts may be distorting the debate. Multiple grid connection requests allow data centers to overstate expected demand, with one estimate suggesting that 90% of all AI chips produced globally through 2030 would have to go to U.S. facilities if projections held true.

There are scenarios where renewables may still play a bigger role. Hydropower additions in Quebec, coupled with new interconnections to the U.S. Northeast, could supply data centers with clean baseload energy.

Onsite power generation and improved AI efficiency could also reduce reliance on fossil fuels.

Still, BCA concludes, “natural gas will be the primary energy source filling in for renewables” through this decade.

On the investment side, BCA sees natural gas demand rising alongside global LNG expansion, which should narrow Henry Hub’s discount to international benchmarks.

Manufacturers of turbines and power cables have already gained from optimism around AI and electrification but could face corrections if capex momentum slows, while battery producers remain exposed to volatile lithium prices.