Technology, clean energy and the infrastructure of the future

December 2024 | EXPERT BRIEFING | SECTOR ANALYSIS

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Technology and energy are more interlocked than ever. The future of both will define the next decade or more, not only intrinsically within those sectors, but also economy-wide, while at the same time reaching into geopolitical policy and tensions.

At the centre of this evolution sits clean energy, a now commonly understood transition away from fossil fuels, with less well understood technological and financial implications arising around the world as the current shift accelerates.

It is not strictly possible to know if Russia’s illegal invasion of Ukraine in February 2022 hastened these movements, but what it did do was elevate existing clean energy to the forefront of the political and economic agenda. Countries sought energy security and thereby also set upon arresting inflation associated with ensuing energy price rises as Russia’s oil and gas were no longer an option.

We can now see that within a year of that moment, the clean energy landscape was rewritten – including the subsidies and policy regime – in the US and Europe, while US-China industrial policy firmed the most since the 1970s reengagement era between China and most countries, and microchip export bans by the US, due to China’s refusal to sanction Russia’s illegal war efforts became accepted norms.

In the same year, artificial intelligence (AI)(as dependent on advanced-chips as the weapons targeted by the US chip ban), rose to prominence following ChatGPT’s launch in November 2022. The subsequent timing of billion-dollar bets by technology companies on energy gives a strong indication of the links between these superficially differing, yet now apparently overlapping, sectors.

Together these movements have settled at the end of 2024 with soaring technology share prices, inflation – as well as interest rates – lowering to a new normal, war nonetheless continuing in Ukraine and on other fronts, while AI revenue and enthusiasm whipsaws as major companies play catch-up with AI technology and its potential uses. Together, this means the old assumptions of decision makers must give way to new reflections when setting priorities to account for the established and still emerging infrastructure of the future, whether in energy or technology, or increasingly both.

The role of technology in propelling clean energy

Google, Amazon and Microsoft, alongside nuclear and other energy sources, may not seem natural press release partners, however such is the transformative influence of AI and the magnitude of the energy transition. Major technology companies are in a race to deploy AI in all manner of settings beyond ChatGPT.

Indeed, AI has economy-wide deployment potential, as apparent from chipmaker Nvidia’s $3 trillion market capitalisation boom (now second in the world only to Apple’s valuation) and the 2023 US listing of ARM on the NASDAQ to much acclaim and some hand-wringing in the UK where the chipmaker was founded, as a new Labour government there resets industrial and economic policy that faltered under the weight of distractions that beset its 14-year Conservative predecessor.

The core reason for these deals is that AI has immense energy requirements, leading technology majors to look to clean electricity to power a new wave of AI data centres and to maximise tax credits. Microsoft, for example, recently sealed a 20-year power purchase deal in the US with Constellation Energy to reopen the Three Mile Island nuclear plant in Pennsylvania, a location synonymous with the worst nuclear incident in US history, which occurred when one of the reactors suffered a partial meltdown in 1979. In announcing the deal, Microsoft called it a “milestone” in its efforts to “help decarbonise the grid”.

Not to be outdone, its rivals Amazon and Google have also secured power purchase arrangements to build new next-generation nuclear reactors to provide low-carbon electricity to power Amazon and Google’s AI data centres. Rather than looking anew at old nuclear sites, these deals look to small modular reactors (SMRs) as nuclear solutions with faster build times and closer locations and connections to electricity grids to get clean power online sooner in the AI race. Google has otherwise said it expects to spend $16bn globally by 2040 to purchase clean energy, rivalling many participants dedicated to clean energy and taking place while some energy majors, such as BP, reduce clean energy commitments.

At the same time that mainstream adoption of electric vehicles highlighted the need for efficient battery storage, so too has the generation of power supplied by clean energy sources produced from solar and wind farms. Together, these moves have led to record private-sector investment in the US in battery technology, particularly battery energy storage systems (BESS), which over the last two years has exceeded $20bn.

California and Texas are denominating the deal ladder due to those locations also doing particularly well in attracting other renewable energy projects that will operate alongside BESS to increase always-on energy grid security from low or no-carbon power that can be stored. Texas is home to some of the largest solar projects in the US, including SB Energy’s and Google’s Orion Solar Belt adjoining solar farms, which, having gone online in late 2024, will provide 875MW of clean energy, which is essentially the same as a traditional nuclear reactor.

Batteries and the demands on this source for grid power have also brought traditional miners into the renewable energy race. Global miner Rio Tinto started Q4 2024 with a $6.7bn all-cash play for US-listed Arcadium Lithium, with the target said to drive innovation and “power a more sustainable world in which lithium enables exciting possibilities for renewable energy, electric transportation and modern life”. In announcing the deal, Rio Tinto said it was seeking increased exposure to “energy transition commodities”, with lithium a fundamental component of battery technology.

Subsidies

Over the last two decades, subsidies have played a crucial role in accelerating the growth and adoption of green energy technologies. However, this was propelled to new hights with the expansion of subsidies and associated policy in August 2022, when the evenly divided US Senate voted on the Inflation Reduction Act (IRA), resulting in its passage with the tie-breaking vote of Kamala Harris, vice president, and 2024 Democrat nominee for US president.

The name of the law was itself written as result of events in 2022 that led to a surge in inflation. Now both major parties are currently locked in tight race for the White House, having taken different positions on the IRA.

As passed, the IRA introduced, among other things, $369bn of federal funding toward clean energy, as part of meeting the 2030 goal of significantly reducing carbon emissions and an effort to promote further innovation and industrial productivity in the US. All manner of counterweights have been introduced elsewhere, including the European Union’s (EU’s) 2023 Green Deal Industrial Plan, which builds on the existing efforts of EU states to enhance Europe’s net-zero industry, as set out under previous plans like the 2022 REPowerEU plan.

The sheer size of the IRA’s subsidies and the status of the US as home to the world’s largest technology companies, all now making billion-dollar plays in clean energy, illustrate the size of the struggle ahead for other countries, but also the tests for the IRA, as the project announcements it spurred transition to investment and energy facility commissioning dates.

Allocating subsidies can, relevantly, also create political tension due to opportunity costs that arise between competing policy interests of meeting long and short term goals. For example, any government seeking to obtain investment for clean energy technology, in circumstances where it is not the most cost-competitive producer, is faced with choosing subsidies and the riskier longer-term goal of spending on innovation to become competitive.

There are fears, therefore, that recent global events may inadvertently result in increased policy changes through subsidies that may distort economies and global integration. In this vein, China’s central bank announced in September 2024 its most aggressive stimulus measures to restore gross domestic product growth in China since the coronavirus (COVID-19) pandemic, including with increased monetary stimulus and interest rate relief for the domestic economy.

How this plays out against established trends in China and other major economies remains to be seen, as interest rates and inflation begin to normalise in open-market economies.

The infrastructure of the future brings risks and opportunities ahead

The clean energy and technology infrastructure of the future is taking shape. While it is clear it will not look like it did in the past, its exact future is still not fixed. What is clear is that technologies differ from the past, including AI technology, SMRs and global electrification generally, as well as renewable energy to power this boom with subsidies designed to stimulate the economy, and energy sectors in the shadow of war and rapid monetary policy shifts.

The current and future-focused investments made by the major technology companies does point to clean energy as a necessity for sustainably powering these technological advances in a way that will continue to render mainstream fossil fuel use unfeasible.

Thus, while on one view, as the US heads to its November 2024 elections, the IRA hangs in the balance, the investments made since its passage make it unlikely the IRA or the Paris Agreement it was designed to foster can be unwound, including because non-climate geopolitics have shifted in their favour.

Away from incentives, restraint and regulation will change in the years ahead, including antitrust competition in the face of cross-sector moves for at least some vertical energy and technology integration, as well as associated talent wars, broken deals and even protectionist stances from some countries.

It is therefore important to ensure, as the dust settles on the current phase, decisions are made to maximise opportunities by looking at different, and not necessarily traditionally related, sectors and taking stock of multiple positions in the private and public sectors of the global economy.

Adam McWilliams is a partner and Xavier Casey is an intern at Quinn Emanuel Urquhart & Sullivan UK LLP. Mr McWilliams can be contacted on +44 (0)20 7653 2052 or by email: adammcwilliams@quinnemanuel.com.

Adam McWilliams and Xavier Casey

Quinn Emanuel Urquhart & Sullivan UK LLP