A clash of mega-themes?
A clash of mega-themes?
‘AI’ (Artificial Intelligence) and ‘Net-zero’ (tackling climate change) are not particularly new ‘mega-themes’ having arguably been in existence for over a decade. However, both have come to the fore for governments and investors alike. AI is dividing opinion as to whether it can deliver game changing productivity improvements on a broad scale. However, investment and sector growth just to enable AI has been a key driver of financial markets in recent months. Look no further than Nvidia (a world leader in AI computer chips whose shares are up 144% year to date to a market capitalisation of $2.9 trillion).
NVIDIA CORP Share price year to date
Source: Artorius, Bloomberg
Past performance is not a guide to future returns
The profile of Net-zero is also increasingly clear given the ongoing reports of rising global temperatures and volatile weather patterns. What is interesting is that there is interaction between these themes at an investment level. The question is do they clash or are they synergistic?
AI – a significant consumer of power
Whilst AI is a software solution with a wide range of capabilities and applications, its use is largely seen as a way to drive productivity improvements. However, the use of AI also requires a significant amount of power. AI uses software models that are trained and run on vast computer systems using energy intensive computer processing chips within data centres.
These data centres require significant amounts of electricity. In simple terms, the energy needs of an AI data centre could power 30,000 homes according to Bloomberg. This is significant and can have a destabilising effect on local supply depending on the location. Goldman Sachs forecasts the growth in numbers of AI data centres will result in their share of power demand in the US rising from 3% currently to 8% by 2030. This may not sound a lot, but overall US power demand has been broadly flat for over a decade. It is now expected to grow by around 2.4% annually to 2030. Whilst not all of this growth is specific to AI, it is a key driver of the increase.
US data centre power demand forecast
Source: McKinsey, Artorius
Net Zero
Net Zero is both a theme for investors and a policy for governments and corporates. Its aim is the goal of balancing the amount of greenhouse gas produced and the amount removed from the atmosphere to fight global warming. To achieve this there is a focus on decarbonisation which is the removal of greenhouse gases such as carbon dioxide (produced by burning fossil fuels) and methane (from agriculture). A major part of decarbonisation is being delivered through the transition away from fossil fuel use to renewable energy sources such as solar, wind and hydropower.
How does Net zero happen as AI stokes energy demand?
Growth in AI development certainly appears to be adding pressure to energy demand. Data suggests this is often more of a localised issue than global problem as it stands. Whilst AI is energy intense, computing power generally is requiring more energy as it evolves to meet greater processing needs. Large companies utilise them to support other services like cloud computing, data processing and storage.
Looking at the bigger picture, AI arguably still remains in development mode at present so assuming it gets to the point of full rollout, it is clear it will need a significant amount of energy to support its evolution going forward. This comes at a time when globally, the aim is to transition to clean fuels to provide power whilst limiting the rise in global temperatures.
Solar and wind energy has inbuilt volatility as energy production from them is related to weather patterns. Therefore, this increased energy requirement puts additional pressure on the net-zero target. What does this mean practically? It potentially makes it harder for, say, the US to meet its current 2030 aim of reducing emissions by 50-52%. Whilst extra ‘clean energy’ sources can be built, at significant cost, this will be to meet new energy demand rather than to replace existing ‘dirty’ energy generation.
Driving innovation
Building infrastructure to support the rise of AI is a challenge from an energy standpoint. There is also significant competitive tension for the big tech companies involved in its development. All are committing significant capital expenditure including building the necessary data centres to drive its progression.
What we believe is really interesting, is tech giants involved in AI such as Alphabet, Apple, Meta, Amazon and Microsoft also have ambitious sustainability targets in place. Notably, they seem to be holding on to them despite the rising energy need challenge. In fact, it appears to be driving innovation in delivering greater energy efficiency and sustainability. Microsoft has committed to being carbon negative by 2030, making substantial investments in renewable energy projects. They have also announced plans to power all their data centres with renewable energy by 2025. Similarly, Alphabet has been aiming to match its entire energy consumption with renewable energy purchases since 2017.
A force for good?
The need to build additional energy sources for AI, and the desire for economies to become ‘net-zero’ may accelerate how quickly ‘clean energy’ replaces ‘dirty’ energy generation. The recognition at an industry level of AI’s significant energy needs is important. Major players look to be finding ways to meet the additional power demand through sustainable and clean energy means. Their broader business sustainability targets remain unchanged. This is being enabled by an increased focus on innovation including finding efficiencies. If successful, these learnings and capabilities might be able to be applied into other industries helping the bigger picture sustainability targets. Overall, this could be a force for good.
The run up to the US election intensifies
It would be remiss not to mention recent events in the US. Following several weeks of pressure from his own party and its supporters, President Biden announced last Sunday his decision to not run for re-election in November. At the time of writing, it would seem that Kamala Harris, the current Vice President is highly likely to be the new Democratic nominee. Betting markets still expect Donald Trump to win the election with the Republicans taking control of the House of Representatives and the Senate as well as the Presidency. Therefore, the impact on market expectations at this stage is largely unchanged. A Trump Presidency may hinder the ambition of a net-zero economy and slow the speed to which US economy moves in upgrading and ‘cleaning’ its energy supply.
2024 US Election Winning Candidate - Betting Odds (%)
Source: Artorius, Bloomberg
Phil Carroll
Head of Alternatives
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