Climate minded investors who want to bet on the data center boom and accelerate the energy transition have a new tool to evaluate the potential impact of their capital.
The Rhodium Group collaborated with the California pension fund CalSTRS and Generate Capital, a clean energy investor, on a framework that measures the impact of a specific investment on the pace of grid and industrial decarbonization. A high score indicates that an investment catalyzes large greenhouse gas emissions reductions relative to the capital required.
The tool can be applied to investments beyond the power sector, including agriculture and heavy industry. But researchers decided to focus on data centers first because those projects are attracting a lot of capital and some investors — including pension and sovereign wealth funds — want to make sure their money is still driving the biggest climate impact, according to Michael Delgado, a partner at the Rhodium Group.
“We’re increasingly seeing climate-dedicated capital looking at data centers as an opportunity to play in the clean energy space and generate returns for their stakeholders,” Delgado told Latitude Media.
He added that the new framework is forward-looking, in that it identifies investments needed to fully decarbonize the economy years from now. As the grid or other industries get cleaner, the climate impact of capital is graded on a harder curve because some technologies — like utility-scale solar — already attract traditional infrastructure investors.
Clean, firm power investing
When it comes to data centers, the Rhodium Group’s analysis found that a grid-connected project paired with a power purchase agreement or direct investment in new nuclear or enhanced geothermal scored the highest. Those forms of clean, baseload power might not otherwise get financed because the technologies are still considered risky or at an early stage.
“[One] of the challenges those technologies are facing is that there’s a huge amount of progress off in the distance, but it’s hard to build projects now,” Delgado said. “Companies like Fervo have been getting a lot of attention around their IPO and the potential of the technology, but it’s still expensive to build facilities.”
A grid-connected data center powered by a 100% variable renewable energy PPA also scored high under Rhodium Group’s framework, followed by an islanded off-grid facility that relies on overbuilt clean generation and battery storage that uses gas for backup power.
The off-grid option is more expensive than a grid connection and PPA — meaning less capital efficient — which is partly why it scored lower.
‘We’re not gonna call that climate progress’
It’s no surprise that off-grid gas got a negative score, meaning it would hinder progress toward an energy transition. The same is true of a data center project that eventually plans to connect to the grid, but is bridged by seven years of gas, or an investment equally split between gas and variable renewable energy. A default grid connection ranked business as usual, meaning it neither contributed to nor impeded decarbonization efforts.
Many developers are looking at standalone gas turbines as a solution to the long wait times to hook up to the grid, Delgado said. While they might consider that “climate neutral” in regions where the grid still has a lot of coal generation — because gas generates fewer emissions — the Rhodium Group’s framework aims to raise climate ambition.
“If that’s what you need to do to build a data center, that’s your choice,” Delgado said. “But we’re not going to call that climate progress. We’re in a temporary disruption right now in grid interconnection, but in order to continue to make progress, we need elevated ambition.”
Delgado acknowledged that hyperscalers are all focused on speed to power right now, but argued it’s important to shed some light on the climate impact of various energy configurations being built today.
Hyperscalers including Amazon, Google, Microsoft, and Meta are investing in a range of energy solutions for their data center expansion, including new gas plants — some entirely off-grid — restarting nuclear plants, pairing renewable energy with battery storage, enhanced geothermal and advanced nuclear reactors.
But so far, the tech giants’ emissions show no signs of slowing down.
