America Is 10x Behind China in AI Infrastructure — The CEO Building the Solution

0:02China adds 540 gigawatts of power to the group per year, so more than 10 times our capacity. So that means that China, if we consider China to be our rival in this AI dominance race, has 10 to 11 times more capability and capacity than we do to build infrastructure and bring that online.

0:30That was Hanan Happy, co-founder and CEO of Exalot, on why the AI race is less about algorithms and more about electricity, and why the U.S. is dramatically behind where it needs to be. I'm Motley Fool analyst Rachel Warren. The conversation about AI almost always focuses on chips and models, but Hanan argues that the real bottleneck is something far more physical. He joined me to discuss why a single year of grid delays could cost a hyperscaler$12 billion in missed revenue, why communities across the country are pushing back hard on data center development, and what investors watching the AI build out should actually be tracking as the capital flows in.

1:07We hope you enjoy. Hello, everyone, and welcome back to Motley Fool Conversations. I'm Motley Fool analyst Rachel Warren. Today, I'm joined by Hanan Happy, the co-founder and CEO of Exowatt. Hanan brings an incredible deep tech background to the table. He studied mechanical engineering at the Technical University of Munich, later attended the Stanford Graduate School of Business. And prior to launching Exowatt, he held key engineering and leadership roles at industrial and tech powerhouses like General Electric, Accenture, Tesla. He also co-founded Valanci, an autonomous hardware and logistics company.

1:39But now he's tackling one of the biggest challenges facing the tech sector right now. Its company, Exowatt, which has captured the backing of elite investors like Sam Altman and Driesen Horowitz, is purpose-built to power AI, delivering dedicated renewable energy to the engines of modern intelligence. Exowatt calls its new energy generation category on-site firm solar. It's designed to bypass the years-long utility grid delays that are stalling the modern AI build-out. Hanan, welcome to the show. Thanks for having me, Rachel. Absolutely. You know, the last few years when I think a lot of investors talk about AI, the conversation is very much focused on, you know, semiconductors, networking capabilities.

2:19But you've argued that the next massive phase of AI investment isn't actually happening in software. It's happening in that physical infrastructure. So walk us through that. Why has the biggest bottleneck in the AI boom suddenly shifted from the silicon to the raw physical infrastructure? Yeah, absolutely. So if you think about just a couple of years ago, the largest data center that we had in the United States was about 100 megawatts in capacity. And that was considered very large. And, you know, the rack density was, you know, in the tens of kilowatts. And a building block of a data center was maybe 10 to 20 megawatts.

3:00And fast forward just in the last couple of years, the building blocks for data centers have scaled up to in the order of 300 to 500 to even 700 megawatts, the building block. So you could argue the building block of a data center is now five times larger than the largest data center we had in the country a couple of years ago. And the data centers themselves are now on average about a gigawatt and there are some that are in the order of 10 gigawatts. And to put that into context, a gigawatt data center essentially is consuming the equivalent of 1 million U.S. households worth of energy. So you're basically saying, I am building a city from scratch for a million people, and I'm trying to do that as fast as possible because I want to stay in the AI race.

3:49I want to have the best model. I want to be competitive. And this is where we're past the idea of like, how do I write the best LLM algorithms or models? How can we overcome the chip shortage? Because the chips have become better too and more powerful, even if they have become more energy efficient. But they're still consuming a lot more energy as a total. And now we have to build power infrastructure. And as a country, we haven't had to build massive amounts of power infrastructure for the last couple of decades. We haven't had much of a load growth in the U.S., and now we do. And data centers are eventually going to contribute or be taking about 9 % to 10 % of total energy produced in the U.S., the grid capacity.

4:34So we are in a mad rush to build power infrastructure. Building power infrastructure is not trivial. It's not like software that you can write code and it just scales infinitely. You have to move metal. You have to move concrete. You have to move earth. You have to do all sorts of permitting and construction and move workers. And we just don't have those capabilities at scale in the country. And what we're trying to do at ExoWatt is come up with a formula that allows us to do something in a factory setting with tight control over cost, tight control over the speed of execution and try to scale that as fast as possible to address this power gap.

5:13But there's a massive, massive power gap. And I think everyone's scrambling to figure out how to cover it. And yeah, that's kind of the reality that we're facing today. Well, I think, as you noted, it's become increasingly obvious that the primary constraint is about delivering reliable power where AI infrastructure is actually being built. So what are the solutions to that look like? I mean, obviously, I know that's what Exowatt's all about, but I'd love to hear your thoughts as well broadly on how you're able to get past this bottleneck in the next 5, 10, 15 years if you're building out all these data centers as a tech company.

5:50Yeah, good question. Again, going back to the history of data center build out, right? Three, four years ago, when you built a data center, again, whether it was 25 megawatts or even 100 megawatts, you really didn't think of power as a constraint. You basically put the data center where the location was favorable from a real estate perspective, maybe from a fiber perspective, typically close to urban and suburban areas. And power was not really necessarily a key factor. You just plugged it into the grid, and the grid was able to give you power. But fast forward today where we have these massive data centers, the grid has no capacity.

6:25They have to come up and scramble with solutions to build their own power. And, you know, this started out with the mad rush to go build gas, right? So over the last couple of years, especially the last two years, every data center that has been announced is saying, well, I'm going to build some version of gas generation behind the meter gas. And eventually there'll be some grid. And gas generation has its own challenges. We have, yes, abundant amounts of gas in the country, but we have the lack of supply chain for turning that gas into electricity. So turbines have been backlogged, you know, five to seven years in some cases.

7:03We have also now fuel volatility, right? Given the geopolitical things that are happening around the world, gas prices are also fluctuating. And then just by the simple fact of having a gas line doesn't mean you actually have access to that gas to turn it into electricity. And so a lot of people started saying like, oh, I have a gas pipeline here. I'll build a data center. It's not that simple. And I think the most recent thing that's happened, if you put aside all the supply chain constraints, all the factors that go into building a generation system, is now the communities are saying, I don't want this many gas generators in my backyard, right?

7:41So the nimbyism for gas generation is now really spiking because gas generation by default is not necessarily a clean solution. It might be a fast solution, but it's not a clean solution. And so the pollution that it's creating, the emissions that it's creating, it's really, really hurting the communities. And in even very gas-rich states like Texas, we're seeing a backlash against data center build-out. So our theory and hypothesis has been a couple of things we're doing wrong and we should do differently as a kind of industry and also as a country. Number one, we shouldn't go build these massive data centers in the same locations we used to build the smaller data centers, so in urban and suburban areas, where they can have a massive impact on the communities.

8:25which is to try to take these massive infrastructure projects, these data centers, out to areas where the impact on the community is lower, where you can get abundant cheap energy from solar resources, even if it is gas resources. You want to take it as far out as possible. And solar, in our opinion, is the cheapest, most abundantly available, least supply chain constrained source of energy that we have today, not only in the U.S., but around the world. And the supply chain is very robust. And if we're talking about traditional solar panels, and it's a matter of now making that enormous amount of solar energy that we get that sufficiently covers all of our data center power gaps and making it such that it's dispatchable so that it can serve a baseload application like a data center.

9:13So the argument for solar against solar and wind and other renewable generation sources historically has been these are intermittent resources. So when the sun is not shining, when the wind is not blowing, how can I power my data center that's supposed to run 24-7? That's exactly what we're solving for at Exawatt by taking that intermittent resource and making it dispatchable by storing that energy in what we call a long duration storage technology. and allowing data centers to have access to the solar energy that we capture throughout the day around the clock 24-7 to power their base load applications.

9:51And I think that's the shift that we're going to see in the data center market. There are already hyperscalers that are starting to do that at scale. And I think more and more of that is going to come online hopefully very soon because it is the fastest path to electrons, the fastest path to electricity essentially, and the lowest impact on communities. And also it creates a ton of jobs, right? Because you have to manufacture these panels. You have to manufacture all the supply chain for the batteries and the components that go into that. So that's where I think hopefully the sustainable kind of data center build-out is going to move towards away from urban and suburban areas, away from very polluting generation solutions like gas and diesel to more sustainable solutions, not because data centers want to be sustainable, but because that is the cheapest, fastest path for them to get access to power and without hurting any of the communities where they're building that power infrastructure.

10:47Yeah, and I mean, the factors that we've seen like deployment speed and permitting energy availability, which, of course, you've just touched on execution risk. This is a much bigger part of the picture as we're watching the AI build out. Demand seems to be just one very, very small piece of the pie. We hear a lot about grid interconnection delays stretching for years. Can you paint a picture of how devastating a three to five year grid wait time can be for a hyperscaler or a tech company that's trying to build out these data centers to train their next gen models? Yeah. I mean, just think about over the last, what is it now, July, right?

11:23Over the last seven to eight months this year, how many model releases we've had between just OpenAI and Anthropic and then also Meta and Grok and Google and also all the Chinese open source models. I can't keep count of it anymore, but I'm sure it's in the order of dozens now of models that have been released over just the last seven months. So the pace of these models being developed and released is extremely high. The competition is really high. And if you look at the revenue profiles of OpenAI and Anthropic. So it's very obvious that this is a very profitable business, right? Every day counts.

11:56Every minute counts. And whether you're essentially an AI application company or an AI model company, or you're the company that's providing infrastructure, if you look at the recent transactions that SpaceX did with Anthropic and with Google, like they're talking about a billion dollars a month. So a year delay, if you just take that as a number, is about$12 billion of missed revenue opportunity. So obviously everyone is a mad rush to get any access to any power they can get as fast as possible. It used to be that when we talked to customers, they said, oh, unless you can give me 300, 500 megawatts a gigawatt, I'm not going to be interested.

12:33Now it's come to a point where like any power you can give me, I'm going to take it, even if it's in small quantities, because the equation is very simple. If I have 10 megawatts or 100 megawatts, I can monetize that to the tunes of hundreds of millions of dollars, if not billions of dollars. And that's kind of why everyone's in a mad rush, putting aside the fact that we're also competing with China for AI dominance. Just internally, the economics of AI right now are so, so lucrative that everyone's willing to spend whatever it takes to get access to power infrastructure, to compute infrastructure as fast as possible.

13:41We'll see you next time. to trade brilliantly. Learn more at schwab.com slash trading. As a podcaster, my voice is heard by thousands of people. And now with Vanguard Investor Choice, I can be heard by the companies I invest in too. Vanguard Investor Choice makes it easy for eligible Vanguard fund investors to have a say in how their funds vote at company shareholder meetings. With just a few clicks, you can set your proxy voting preference and make your voice heard on topics like executive pay, board director elections, and more. Investor participation is the heartbeat of a healthy corporate governance ecosystem.

14:18You have a voice. Let it be heard. Visit vanguard.com slash investor choice to learn more. Vanguard investors own shares of Vanguard index funds, and those funds own shares of the companies they invest in. Available for Vanguard index funds that participate in investor choice. Vanguard Marketing Corporation Distributor. I mean, given all these factors, do you think that the next generation of AI winners will be defined less by their breakthrough technology and more by their ability to build out? Yes, yes. And I think that's definitely the case. And I think that's where, as a country, we have a massive problem.

15:01So if you think about the U.S., in the U.S., we're adding about 50 gigawatts of infrastructure, or sorry, power to the grid per year. And we're talking about the hyperscale is spending hundreds of billions of dollars to trillions of dollars on their computer infrastructure, and they need to cover a gap that's in the order of 70 to 100 gigawatts at a minimum, right? And then you kind of take that as comparison to the fact that China adds 540 gigawatts of power to the grid per year. So more than 10 times our capacity. So that means that China, if we consider China to be our rival in this AI dominance race, has 10 to 11 times more capability and capacity than we do to build infrastructure and bring that online.

15:48Now, we could argue they don't have the most advanced chips that we do, but it seems like even without those chips, They're already outperforming us, given the most recent open source models that Chinese companies have released that are outperforming the closed source models that we have in the U.S. So I think we're at a massive disadvantage there as a country. And I think we have to scramble to figure out what sorts of energy infrastructure we can bring online, how fast, what sorts of partnerships we can kind of establish around the world. because there's massive, massive challenges here in the US, not only like the permitting challenges, the grid backlog, and not only the fact that we have to build so much infrastructure, we have the community backlash, we have the essentially lack of resources, labor to build and construct and electricians and technicians.

16:40All of that combined with the fact that our so-called adversary in this race is 10 to 11 times more powerful than we are. And so I don't really have a solution for it right now, but I think that's a challenge that we have to all acknowledge. Well, you know, we've spent a lot of time talking about some of the infrastructure buildup challenges and the various integrated energy solutions like what Exowatt is providing that could help to stem that tide. But I want to go back to something you mentioned earlier, which is this idea of NIMBYism. Maybe you can define what that means for our audience, and then I'll follow up with my next question.

17:16Yeah. So basically, NIMBYA means that a community or someone that is in the vicinity of the data center is asking not to build that data center in their backyard. And for good reasons. They're saying, look, I'm paying the price of all the pollution that the data center is creating. The real estate is gone for that data center. It's not creating a lot of jobs. there's yeah maybe some marginal tax revenue but for the most part data centers don't have a lot of like ongoing jobs or sustaining jobs you're taking away my water resources you're increasing essentially my energy bills because i have to pay for your infrastructure upgrades and so for all of those reasons um that you know you could see why people communities don't want data centers in their backyards and i think there's been kind of an effort now from the administration and also from the hyperscalers to try to reduce this burden by saying, well, you know, the hyperscaler or whoever's building that data center has to start paying for that infrastructure upgrades themselves.

18:19They have to kind of bring this online in a way that it doesn't impact the rate payers and the communities. They have to try to reduce these emissions that are hurting the communities. I mean, one of the things that is really tragic about this is we talk about, how fast the data center is coming online in certain places. The other thing we don't talk about is like, well, everybody around that data center now has cancer and is dying as a result of that. So yes, while one company may be saying like, oh, I put out a slightly better model than this other company, the communities around that data center have been massively, massively impacted.

18:56So I understand and I have sympathy for them why you wouldn't want a data center in your backyard. And I think that's why we're advocating for a model which we call to build on frontier land. So not in urban areas or suburban areas or even rural areas, but to go out in areas where we have massive amounts of land, massive amounts of energy and solar resources and energy resources as a whole. And we're far away from impacting communities. We're not going to take away the energy resources. And I think that's the shift that needs to happen for us to be able to really build data centers. Otherwise, as you probably know, I think there's over$160 billion of data centers that are currently not coming online this year that were supposed to be coming online because of all the community backlash.

19:41Many states have already put moratoriums out. Many are considering them, both Democrat and Republican states. This is a bipartisan kind of hate issue. Nobody wants this data center build out. And I think we need that data center build out. The infrastructure is required, of course, because we want to advance. We want to kind of stay dominant on the AI front. But we need to do it in a sustainable way. And I think what we've been doing so far hasn't been sustainable. It's been just kind of driven by how fast can I get something online and really not take into consideration what the even short-term impacts of this are going to be, let alone the long-term impacts.

20:23Yeah, I want to talk about this frontier land concept that you have been talking about. It really kind of flips the legacy model. You know, historically, data centers were built where networks and talent already existed. So maybe talk through this idea of why we should be looking more at locations where the reliable energy can be built alongside compute power and how that kind of flips the script on what we think of in terms of, you know, real estate and utilities and infrastructure. Yeah, again, going back to the history of data center build out. So in the era where power wasn't a constraint, you just built it at a location where, you know, there was at some point a constraint around fiber connectivity.

21:00So you want to have access to fiber. And I think the other thing was that a lot of data center build out was happening with a real estate lens. So also the developers of these data centers are always thinking about, well, what else could I do with this plot of land if it's not a data center? Or what do I do after the data center? Kind of boom is gone. Is there some other use to this land? And so I think that's why data centers were really concentrated around urban and suburban areas, or especially in places like Virginia, you have this data center alley, high concentration of data centers. By the way, Virginia is not cheap.

21:35Land is not cheap. Power is not cheap. There's nothing cheap in Virginia. So you should ask yourself, why do we build so many data centers there? It just doesn't make sense. And I think our opinion is now that we've really come to a point where data center developers just don't have any more solutions to go build urban and suburban data centers in prime real estate markets, essentially, now there's a shift to let's go build farther out from cities and towns and even rural areas, frankly, and go build in what we call barren land and frontier land. where you have abundant land, 41 % of the country is empty, right?

22:17Literally empty. There's nobody living in 41 % of the country. So, and I'm not saying all of that is flat and all of that is prime for data center development, but more than enough of it is available to power all the data center capacity that we need in the country. And we can do that sustainably because in those areas, you have abundant sunshine, you have abundant wind, you have abundant gas resources even, And then especially think about like Texas and New Mexico and other places like that and Oklahoma. And we have now also kind of started building data centers in a way that they're going to be reliant on having massive amounts of construction workers, right?

22:59This whole hypothesis behind Exowatt is if we can build a modular system in a factory setting where you can have your professional labor, right, in the factory. You don't need to go have them in the middle of the desert. You can then ship out these modules and then install them very easily on site. And the same thing is happening on the data center development as well. You know, companies are developing much more rapid ways and modular ways of building data center infrastructure. So I think that's where the industry needs to go and is somewhat going. But we're still going to be seeing a little bit of this short term impact on the reaction that some states are going to have the data center build out about completely banning them, completely coming to a stop or kind of taking away their incentives.

23:43And I think we could revive that in certain areas where it makes sense by showing that there's a model for sustainable data center development.

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26:25Like, what does that adoption curve look like from your vantage point? I think yes. I mean, in general, I think there are hyperscalers out there. Majority of the hyperscalers out there are right now trying to build some sort of dispatchable renewable capacity, whether it's taking traditional solar panels and combining them with some short-duration batteries, or whether it's to combine them with long-duration storage technologies or whether it's to buy and build a full-stack energy solution like the XORP3. And we have a massive backlog right now for our product, for our solutions, something that we're working really hard to try to serve as we scale up our manufacturing.