The next winner of the AI boom is also one of its biggest problems

Earlier this year, Google (GOOGL+2.24%) and Microsoft (MSFT-6.14%) released separate reports showing that neither company is on track to meet its climate goals by the end of the decade. They both blamed the same culprit: data centers.

Despite the environmental toll, experts say data and other artificial intelligence infrastructure will be the winners of AI’s next phase as companies seek to power their growing AI offerings.

While AI chips developed by companies such as Nvidia and AMD are crucial to the current phase of AI development, the broader data center industry is “very well positioned” to be at the center of the next phase of AI expansion, Tejas Dessai, director of research at Global X, told Quartz.

“Where I think you have the highest probability of naming winners is in the picks and shovels category — who’s building the infrastructure that’s going to power all this,” Rowan Trollope, chief executive of data platform Redis, told Quartz. “No matter who, what app, or what model wins, we sit in the middle and we make them all better.”

Data is a ‘winning category’

As companies deploy more AI clusters, there could be “an uptake in memory solutions, in storage solutions, in networking solutions,” Dessai said, followed by companies specialized in comprehensive data center solutions.

“Currently, the principle that many of these companies are operating with is: The more the number of chips that we can put together in terms of training these models, the smarter and smarter the outcome is that we can get out of these models,” Dessai said in a separate interview with Quartz.

But he says there are still “a lot of physical constraints” such as GPU clusters, which run on hundreds of thousands of chips. And data centers can take years to come online, meaning there is still some “running behind” when it comes to having enough capacity for AI workloads.

“We’re still very early in that cycle and you see companies like OpenAI trying to get access to data center capacity from anywhere and everywhere that they can find it,” Dessai said.

Sarah Friar, chief technology officer at OpenAI, reportedly told the startup’s shareholders that its partner and investor, Microsoft, was too slow at supplying it with enough computing power. After the company completed its $6.6 billion funding round, the startup’s leaders told some employees that it would start leaning less on Microsoft for data centers and AI chips, according to The Information, which cited unnamed people familiar with the matter.

In the short to medium term, Dessai said he sees data centers remaining attractive to companies as construction increases and vacancy rates reach “an all-time low.”

“Companies are really wanting to buy pretty much any capacity that they can find their hands on,” Dessai said.

“Data is the big winning category,” Trollope said. “We don’t know who in the data category is going to win, but I think the incumbents have a really good shot.”

The demise of climate goals

Microsoft, which set a goal in 2020 to be “carbon negative” by the end of the decade, said in May that its carbon emissions are almost 31% higher than when it set the commitment. The increase was mostly due to building data centers, it said, as well as hardware like semiconductors and servers.

Meanwhile, Google said in July that its carbon emissions have risen by 48% since 2019, and were up 13% year-over-year in 2023 — mostly because of data center energy consumption. The tech giant set a goal in 2021 to reach net-zero emissions across its operations and value chain by 2030.

By the end of the decade, data centers could consume up to 9% of electricity in the U.S. — more than double what is being used now, according to the Electric Power Research Institute.

Tech giants are eyeing nuclear power as a solution

In April, Ami Badani, chief marketing officer of British chip designer Arm, said data centers powering AI chatbots such as OpenAI’s ChatGPT account for 2% of global electricity consumption. One query on ChatGPT needs almost 10 times as much electricity as a Google search, according to a study by Goldman Sachs (GS+1.41%). That level of energy demand, Badani said, could eventually slow down AI progress.

Tech giants are seemingly taking note of this obstacle. In July, the Wall Street Journal reported that a third of the U.S.’s nuclear power plants were discussing deals with tech companies to supply electricity for data centers.

“We have to make up for this energy deficit in one way or another,” Dessai said. “We can’t burn more coal, we can’t use more fossil fuels. So naturally nuclear energy becomes the answer to it.”

As big tech seems to be moving toward nuclear energy, “we’ll continue to see more deals in that direction,” he said.

Earlier this week, Google announced that it was signing “the world’s first corporate agreement to purchase nuclear energy” from Small Modular Reactors, or SMRs, developed by California-based Kairos Power.

Google said it expects to bring Kairos Power’s first SMR online by the end of the decade, and others are planned through 2035. Through the deal, 500 megawatts (MW) of 24/7 carbon-free power will be available to U.S. electricity grids.

Amazon (AMZN-1.08%) also signed agreements this week “to support the development of nuclear energy projects,” including by building “several” SMRs which have “a smaller physical footprint, allowing them to be built closer to the grid,” the company said. Compared to traditional reactors, the smaller SMRs can come online faster due to lower construction time, according to Amazon.

In September, Constellation Energy (CEG+4.46%), which owns most of the country’s power plants, announced a 20-year power purchase agreement with Microsoft. The deal will restart the Unit 1 reactor on Three Mile Island, and launch the Crane Clean Energy Center. The CCEC, which is expected to come online by 2028, will add more than 800 MW of carbon-free electricity to the power grid, a study by the Pennsylvania Building and Construction Trades Council found.