AI Boom Siphons Billions From Crucial Energy Innovation Funding
- Venture capital funding for energy research and development has shrunk for three straight years, with a significant portion of the decline attributed to large non-specialist VC funds shifting their focus to AI startups.
- Government spending on energy R&D also dropped globally in 2024 and 2025 due to budget cuts and policy pivots, adding to the financial squeeze on energy innovation.
- Despite the overall decline, seven key areas—including next-generation geothermal, nuclear fusion, and carbon dioxide removal—are seeing continued growth in VC funding, indicating a shift in investment priorities toward energy security and competitiveness.
AI is a double-edged sword for the energy sector. The rapid integration of large language models into everything from your email account to your toothbrush – no, really – has driven the energy demand of data centers through the roof. Public and private interests are scrambling to plan enough energy production additions to keep up with skyrocketing projections, often at the expense of climate goals. But AI could also provide critical solutions to making all kinds of processes and industries more energy efficient, as well as become a cornerstone of next-gen clean energy tech, thereby potentially becoming a net-positive for energy use in the future.
At the same time, the AI boom has also driven an explosion of interest in advanced and often low-carbon energy technologies like geothermal and nuclear fusion. But a new report from the International Energy Agency (IEA) finds that AI startups may actually be siphoning money away from energy tech startups, at the likely expense of energy innovation, energy security, and both short- and long-term climate goals.
“After years of growth, energy innovation funding appears to be entering a phase marked by slower growth and shifting priorities,” states the IEA’s The State of Energy Innovation 2026 report. After peaking in 2023, government spending on energy research and development dropped on a global level in 2024 and reduced another 2 percent in 2025 to reach 55 billion worldwide. This is at least partially due to policy pivots and budget cuts, particularly in the European Union and the United States.
Venture capital has also dropped off for energy research and development, shrinking for three years straight according to the IEA. While there is “no single reason for the decline in energy VC funding since 2022,” the report highlights the fact that energy startups had to compete fiercely with AI startups over the course of last year. “The share of VC funding for AI rose to almost 30% in 2025, while the share of energy shrank, and large non-specialist VC funds shifted focus from energy to AI,” the IEA reports.
This is shockingly bad news in an era when energy innovation is needed more than ever as energy security concerns balloon and the threat of climate change grows ever more urgent. “There's an irony here,” writes Axios. “The AI boom's biggest need — energy — may be getting financially undercut by the boom itself.”
In the fourth quarter of 2025 alone, reported $8 billion in clean energy projects were scrapped in the United States, and just $3 billion worth of new projects announced. “That means the pipeline of new investment is shrinking,” Hannah Hess, associate director of climate and energy at the Rhodium group, told nonpartisan news outlet Semafor last month. “Usually, even when we see quarterly fluctuations, from a zoomed-out view we continue to see sustained momentum. That’s no longer true.”
Related: The U.S. Just Took a Giant Step in The Rare Earth Race With China
This drop in both public and private spending in energy sector R&D is also hugely impacted by the sorry state of the electric vehicles market. The Trump administration’s war on Biden- and Obama-era climate and energy legislation has slashed the electric vehicle market to the bone. Since the countrywide $7,500 federal tax credit was rolled back in September, EV markets have bled out $65 billion on a global scale.
However, the market may already be in the process of correcting itself. Last month, Bloomberg reported that there are early signs of a potential upturn in private equity dealmaking in the clean energy sector after a year of inaction as firms waited out high levels of policy uncertainty. Last year saw a bottoming out of clean energy acquisitions, with a year-on-year contraction of over 50 percent, bringing numbers down to 2013 levels.
But the landscape for investment is changing, reflecting shifting priorities toward energy security and competitiveness and away from climate efforts. The IEA reports that we can expect continued growth in seven key areas, which may offset some of the decline in EV funding: carbon dioxide removal, critical minerals, next-generation geothermal, low-emissions industrial production, aerospace, nuclear fission and fusion energy. In 2025, these seven areas represented one-third of energy VC funding, a massive surge from 2019, when they represented less than 5 percent.
By Haley Zaremba for Oilprice.com
No comments:
Post a Comment