Climate tech startups are banking on an energy-guzzling sector: data centers

• Climate tech startups are finding new opportunities in the AI and data center boom.
• AI growth increases demand for data centers, in turn driving the need for clean energy solutions.
• Big Tech's clean energy commitments can also help startups scale at a time when funding has slowed.

Climate tech startups may be focused on reducing carbon emissions, but some are capitalizing on soaring demand for the energy-intensive data centers powering the AI boom.

Tech giants such as Amazon and Microsoft are ramping up their AI infrastructure investments, while simultaneously looking to bring down costs and carbon emissions.

That's created new opportunities for climate startups to scale in a market known for its notable carbon footprint. Data centers currently account for 1-2% of global electricity use, and Goldman Sachs Research estimates this will rise to 3-4% by the end of the decade.

"We're definitely feeling a lot of market pull because of the AI boom," said Luca Mezossy-Dona, CEO of Ionate, a London-based startup developing hardware to detect disturbances in the power grid.

There are a lot of challenges associated with connecting data centers to the grid, Pippa Gawley, partner at climate fund Zero Carbon Capital, told BI. "We've had people say it may take two to five years, in some geographies, to get data centers connected to the grid," she said. "So, as a result, getting an uninterrupted power supply is important to them."

Data centers can also put additional strain on local networks. For example, Elon Musk's startup, xAI, has requested 300 megawatts of grid power for its supercomputer in Memphis and has been granted approval for 150 megawatts.

It's not just startups connecting data centers to the grid that are getting a boost from the AI boom. Gawley said she's seeing growing interest in more reliable and decentralized energy sources, such as nuclear, clean hydrogen, and energy storage.

Matthew Nordan, general partner at Azolla Ventures, told BI he is seeing growing demand for data center startups among his firm's portfolio. He pointed to startups such as Scalvy, which makes modular power electronics for data center racks to convert voltage and current with lower losses, and Zanskar, a startup using AI to increase the success rate of geothermal power, which he called a "critical" source of electricity for "power-hungry AI data centers."

Big Tech boost

Hardware energy startups, often capex-intensive entities, are finding new customers with deeper pockets — hyperscalers and Big Tech companies.

Harry Morgan, a principal at 7percent Ventures, told BI that startups are leveraging Big Tech's clean energy commitments to scale their technology, as giants like Microsoft and Amazon test out emerging technologies such as small modular reactors to get projects to deliver energy quicker.

"It's less on the pure play energy generation side, but what we've seen recently has been focused on project construction and the ability to deploy things at speed," said Morgan. "We're seeing applications like robotics for solar plant manufacturers and the integration of batteries for next-generation assets."

These revenue opportunities come off the back of a slower funding period for climate startups. In the first quarter of 2025, climate startups secured $10 billion, down 50% from the $20 billion raised in Q1 of 2024, per Pitchbook data.

Balancing decarbonization with profit

Still, climate tech startups will have to contend with the challenge of balancing their wider goal of decarbonization with the environmental impact of serving a carbon-intensive sector.

Founders and investors told BI they don't see it as a mutually exclusive situation because they believe it's an opportunity to make the industry more sustainable.

"The broader impact of data centers could be really positive from a climate perspective," Morgan said. If more renewable energy sources are used to consistently power data centers, then solar and wind will become more deployable, lowering the cost of these energy sources, he added.

Nordan agreed with the sentiment. "I don't see an inherent tradeoff in this for climate tech startups. When you're only good at lowering the embodied emissions of cement or converting voltage with lower losses, it's impactful whether you're doing that in a data center or some more prosaic environment," he said.

"The first job of any CEO is to capitalize the business, and the tide may be going out in this category for a while," Nordan added, referring to the decline in climate startup funding and the need for founders to find tenable revenue streams.

"So any leader worth her salt is going to be figuring out how to use data centers as an entry market and cost-down for others as they scale," he said.

Data centers are power hungry, Mezossy-Dona said, "but the right innovations will make them fundamentally more efficient."