A datacenter in the Netherlands. The power-hungry industry is facing scrutiny of its growth path. Source: funky-data/iStock via Getty Images.

Europe's datacenter boom is a welcome demand boost for utilities, but as the rollout of artificial intelligence gathers pace, questions are being asked about the technology's impact on grids, electricity prices and society at large.

According to Adair Turner, chair of the Energy Transitions Commission think tank, datacenter electricity usage could become a practical and moral problem in the coming years.

While the commission expects sufficient clean energy to become available in the long term, power-hungry datacenters could burden consumers with higher prices until the supply of clean energy can catch up.

"If we are going to encourage people to move their residential heating from gas boilers to heat pumps, we need to be thinking about what the price of electricity is to drive those heat pumps," said Turner, who sits in the UK's House of Lords. "And if we have hugely growing electricity demand for AI datacenters, that could be making it more difficult."

A question of "fundamental economic justice" arises when datacenter operators make AI products targeting high-income consumers, while lower-income households pay more to heat their homes, Turner argued.

In Germany, grid operator E.ON SE is working to connect 6 GW of datacenter capacity by 2030, CEO Leonhard Birnbaum said Aug. 14. In terms of annual power consumption, that is like adding "Berlin, Hamburg, Munich and probably Cologne together. So, it's a lot," Birnbaum said.

Across the EU, datacenter power demand is set to rise 50% to reach 150 TWh in 2026, according to the International Energy Agency (IEA).

Overall electricity consumption in Europe remains depressed following the energy crisis of 2022. Power demand from the industrial sector dropped 6% in 2023 after a similar decline in 2022, according to the IEA, and EU demand will not return to 2021 levels until 2026 at the earliest.

Assuming the industrial sector gradually recovers as energy prices moderate, EU electricity demand growth is forecast to rise by an average of 2.3% between 2024 and 2026. Datacenters, alongside electric cars and heat pumps, will be strong pillars of growth over the period, the IEA said.

Regulatory scrutiny

While European utilities are upbeat about a boom in datacenter power demand, the impact of the sector is less significant than in the US.

"What is happening in the US, we don't see it yet in Europe," said Tancrede Fulop, senior equity analyst at Morningstar, adding that deindustrialization more than offsets gains from growth areas like AI.

Some datacenter hubs are also struggling to accommodate the increased demand.

Alphabet Inc.'s Google LLC was refused planning permission in Dublin for a new datacenter Aug. 26, with the city council citing "insufficient capacity in the electricity network and the lack of significant on-site renewable energy" as reasons. Google also had not provided clarity around power purchase agreements and had not presented clear plans for a linkup with the local district heating network, the council said.

Tech giants such as Google, Microsoft Corp. and Amazon.com Inc. are the leading buyers of clean energy PPAs in Europe.

The companies are keen to show best-in-class behavior, perhaps partly recognizing that datacenters are not creating jobs to the same degree they are consuming power. Microsoft launched a Responsible AI Innovation Center in Sweden, where several of its European datacenters are located.

"Responsible AI goes beyond merely deploying the technology; it also involves its creation and management," a spokesperson for the company said in an email. Microsoft pledged to become "carbon negative" by 2030, aiming to power all of its datacenters with renewable energy.

Asked whether the company expects increased regulatory scrutiny, the spokesperson said Microsoft "[supports] progressive policies" regarding the sustainability of its power demand, infrastructure and supply chain.

"We encourage building on existing and emerging sustainability policy frameworks to include AI," the company said. This would include setting rules for achieving targets under the EU's Energy Efficiency Directive.

Energy efficiency for datacenters varies across Europe, data from S&P Global Market Intelligence 451 Research shows. Locating in Spain requires significantly more energy than building in Sweden, mainly due to cooling requirements.

Microsoft also said it welcomes new rules for what constitutes sustainable AI in the EU's sustainable finance taxonomy, the bloc's rulebook for environmental, social and governance investments. While the issue is on the radar of environmental, social and governance professionals, data gathering and rule creation around the environmental and social implications of AI are still at an early stage.

The policy ought to require AI datacenter planners to directly enable additional renewable energy sources for their operations, Turner said. "Not just going in and competing for the existing supply and saying, 'Aren't I good; I'm buying 100% green electricity.'"

The companies behind AI deployment boast huge capital market valuations, selling products at huge implicit prices, said Turner, who chaired the country's Financial Services Authority between 2008 and 2013.

"Within that, there are some use cases of AI which I would try and regulate away," Turner added, pointing to cryptocurrency as an example.

AI different from crypto experience

In Europe, high power prices and regulatory intervention have already severely limited crypto mining activities.

While lawmakers have taken aggressive stances on bitcoin and other cryptocurrencies, datacenters powering AI applications are not expected to face similar scrutiny.

"People look at this in a very different way to the crypto story," said Michael Lewis, head of ESG research at asset manager DWS, pointing to the use of AI in the automotive, healthcare and robotics industries.

Tech companies have been leading the charge on clean energy adoption, and are well-placed to find further sustainability solutions, Lewis argued.

In the EU, tech businesses are also among the drivers of the commission's Digital Decade initiative, which aims to improve digital infrastructure, business, skills and government, Lewis added. "You try to solve one thing on an ESG basis, and another thing pops up," Lewis said about the regulatory balancing act.

Microsoft emphasizes the benefits of AI in sustainability efforts. "It helps identify patterns, predict outcomes and optimize performance. A good example of this is when AI has been effectively used in wildfire management," the spokesperson said.

For developers and electricity providers, questions over the AI use cases their datacenter customers run are not front of mind.

"Frankly, the ethics standard in the AI environment [and] ecosystem is under scrutiny and remains to be defined. So, as a supplier of electricity, I think this is a far-fetched risk for the time being," said José Entrecanales, executive chairman and CEO of Acciona SA, when asked about the issue on a recent earnings call.

Acciona's renewables subsidiary Corporación Acciona Energías Renovables SA sees itself well-positioned to benefit from the boom in datacenter deployment.

Tech companies continue to grapple with the profitability behind their datacenter push. Whether they can persuade consumers to pay for services like ChatGPT remains to be seen, and a stock sell-off was in part due to investor nervousness about the business model behind AI.

However this plays out, demand — once created — will be sticky, according to Morningstar's Fulop.

"Big Tech [companies] are now investing billions in datacenters," Fulop said. "If it doesn't pay off, they will not be shut down."

451 Research is a technology research group within S&P Global Market Intelligence.