Onsite power and why it matters for AI data centers

Quick note: Before we begin, be sure to check out our Smart Society Show pod. We launched Season 2 last week with an awesome conversation on energy and AI with Former UK Prime Minister Boris Johnson and Octopus Energy Founder and CEO Greg Jackson.

In prior weeks, I’ve written about AI-enabled power systems and their role in the future of the energy market. We define an energy system as one that generates new electricity in a scalable and intelligent way. Normally this intelligence is derived from a business model that integrates AI-enabled software with energy generation. This week, I’m doing a deep dive on another part of the energy value chain - onsite power.

As the AI boom and electrification accelerate, the world needs to generate a lot more power, fast. Our current energy and power infrastructure just isn’t set up to meet or manage this demand. As a result, we see the opportunity for massive growth of onsite energy systems co-located with customers (data centers, manufacturing, infrastructure, hospitals, neighborhoods) that can fill this gap. As an example Bloom Energy recently signed a $5B strategic AI partnership with Brookfield to power their AI data centers.

We’re going from a world where a few power plants generated energy and connected to a grid that transmitted power to customers, to a world where many, many, many distributed energy generation systems make power and sell it directly to customers, to the grid and through microgrids, all at the same time. This complexity is why energy software is intimately linked to any energy and infrastructure conversation today. We need a “brain” to manage this scale of complexity with efficiency, flexibility and reliability. We’ll talk more about the energy software market in the coming weeks, but today, I want to dive deeper into the various types of onsite energy that we are excited about.

We define onsite energy systems as modular, scalable power generation technologies that can co-locate with one or many customers to provide power to them. Different technologies provide different scales of electricity generation, from megawatts to gigawatts. We get most excited about the technologies that can adjust their power output through modular designs that scale onsite, or by deploying across many nearby sites to create a “portfolio of electrons”.

Onsite energy systems differ from infrastructure investments (eg. power plants) they are not one single “plant”. Rather, as an investor said to me this week in Houston, “The energy market has gone from being about large energy exploration and centralized power production, to technology innovation, manufacturing and scaling. This is a massive shift.”

While new onsite power technologies start life out as venture capital and growth equity investments, as they scale they start to look like infrastructure companies managing large portfolios of electrons, long-term customer energy contracts and stable cash flows. At this point, they’re great candidates for exits to infrastructure funds, corporates and public markets. This week an investor asked me how SSV might compete with the “near unlimited resources” of today’s infrastructure investors for onsite energy investments. “We don’t,” I said. “We scout for them.”

At a high level, we break the onsite energy market down into three sub-segments of onsite power: gas, nuclear and renewable / thermal. We’ll cover each of these in the next few sections.

The gas-to-power onsite energy market includes technologies across natural gas, hydrogen, biofuels and synthetic fuels, as well as electricity generation tied to gas infrastructure. The most obvious example here is publicly listed fuel cell company Bloom Energy, currently trading at 30x revenue with a market cap of $30B. Some other interesting examples are fuel agnostic Mainspring Energy in Menlo Park, natural gas and hydrogen fuel cell technology EH Group in Switzerland and LA’s Sapphire Technologies, a turboexpander technology that co-locates with midstream and upstream infrastructure to generate electricity from pressure reduction.

The compelling thing about the gas-to-power onsite value chain is the reliability and speed of gas-enabled power, which has neither the intermittency, energy storage and peaker challenges of renewable energy, nor the technology development cycle of nuclear solutions. As such, I hear from many of those involved in AI data center projects that gas-to-power technologies are their first port of call when looking for new power technologies, especially in the US.

Although nuclear has been around since the 1940s, and gone through numerous hype cycles, it is in the midst of a major renaissance today bolstered by acute demand for clean baseload power and growing government support, such as the US Executive Order to accelerate nuclear power technology.

As a result, we’re seeing a lot of innovation and deal activity across both (comparably) small and large nuclear projects. In the infrastructure side of the market, last week Brookfield, Cameco and the US government announced an $80B partnership to develop nuclear reactors with Westinghouse. Meanwhile, publicly-listed nuclear stocks are on a tear with Oklo trading at 28x price-to-book with an $18B market cap, and Nuscale trading at 100x revenue with an $11B market cap.

We define small modular reactors (SMRs), those generating 100 MWe and below, as a scalable onsite power system, while we define larger nuclear technologies (such as the large reactors developed by Westinghouse) as infrastructure. SMRs break down into four coolant technologies: light water, liquid metal, molten salt and gas-cooled. Light water is the legacy technology, so, with some exception, the SMRs being developed today like Last Energy in DC and Steady Energy in Helsinki primarily offer business model and scaling innovation, rather than technology innovation. There are numerous companies in development using each of the other three technologies, like Oklo in California and Blykalla in Stockholm in liquid metal, Kairos Power in California and Natura Resources in Texas in molten salt, and Radiant Nuclear and Valar in California in gas-cooled.

SMRs have incredible potential to transform the global power market, offering clean baseload power in a (comparably) scalable way.

The third type of onsite energy system is renewable. These systems generally use renewable energy generation technology such as solar or small-scale wind to generate power. In most cases, this needs to be co-located with a battery to balance the intermittency of the generation, and software that controls it. Base Power in Austin is an example of this in the home energy market, as is our investment in Caban Energy in Dallas which combines solar generation and batteries for communications infrastructure in emerging markets. Depending on the scale and criticality of the power needed by a customer, renewable energy onsite systems may be primary or backup power – and more or less appropriate. Battery technology still has limitations on duration, so if there are unexpected weather events (for example many days without sun), systems must rely on gas peakers or other types of power.

A related type of onsite energy (and therefore one we combine in this category) are thermal energy systems (these also can exist as larger infrastructure developments). Thermal energy is generated by using waste heat from industrial processes, renewable energy (and also) non-renewable energy, and then storing thermal energy for later use when needed. Therefore thermal energy systems can match supply and demand, and also offer closed-loop systems for data centers and industry. Some examples of these are Rondo Energy and Antora in California, and Sam Altman-backed Exowatt in Miami which is developing thermal solar energy systems with 24/7 dispatchable solar energy targeting data centers.

We’re bullish on the investment opportunities in energy systems, and believe that onsite power will become a critical part of tomorrow’s energy, infrastructure and AI data center landscape. As investors, the exit opportunities from infrastructure funds and public markets, in particular, also really excite us.

In case you missed it, check out our most popular recent article: How to break down the AI Energy and Infrastructure Market.

Onward,

Brynne

Managing Partner, Smart Society Ventures

• 🇺🇸 💼 JPMorgan Chase launched a $1.5 trillion Security & Resiliency Initiative to accelerate investment across critical industries including supply-chains, defence, energy independence and frontier technologies.

• 🇺🇸 ⚛️ Brookfield Asset Management and Cameco Corporation joined forces with the US government in an $80 billion nuclear-reactor deal to deploy new large-scale reactors via Westinghouse Electric Company.