Building the infrastructure to power Europe's artificial intelligence ambitions will require more than chips, money or construction crews. It will require electricity.
In June, the European Commission unveiled its Cloud and AI Development Act, aiming to triple the European Union’s data center capacity within five to seven years.
Data centers underpin core parts of the digital economy, including online banking and streaming services. They have been around since the early days of the internet, but demand has surged alongside the growth of digital services. Now, the AI boom is driving a new wave of expansion. Training and running advanced AI models requires enormous computing power, making data centers a crucial asset in the AI race.
“AI will likely transform our economies to a large extent,” said Tillman Schenk, a research assistant at Bruegel who specializes in AI and digital policy. “For now, I think the EU just has very little stake within the AI value chain.”
Expanding the EU’s computing capacity, however, is about more than building new facilities. While staffing, supply chains and construction can be managed, “the key problem is access to clean, sustainable energy,” said Michael Winterson, secretary general of the European Data Centre Association.
The Commission set a sustainability goal in 2021, when industry committed to reaching climate neutrality by 2030 through the voluntarily agreed Climate Neutral Data Centre Pact.
But meeting that goal is getting harder as AI-driven demand pushes data centers’ energy use higher. The challenge is increasingly turning the bloc’s attention north. Almost entirely powered by geothermal and hydroelectric power, Iceland has become an attractive location for datacenters, already hosting both European and American operations. While renewables offer cheaper energy than carbon-based alternatives, Iceland’s northern climate also reduces the need for energy-intensive cooling.
Whether the country can help meet Europe's growing demand for computing power, however, depends on more than abundant energy. The island's geography, infrastructure and relationship with the EU all shape how far it can support the bloc's AI ambitions.
Iceland’s edge
Iceland’s appeal as a data center hub begins with its electricity. The country generates power almost entirely from renewables: roughly 70% from hydro power and 30% from geothermal energy. Unlike solar and wind power, both can generate a relatively constant supply of electricity, which is “the kind of generation profile that data centers are looking for,” said Samuel Warren Scott, research specialist in geothermal systems at the University of Iceland.
The country’s low temperatures throughout the year also lower energy consumption. While data centers in warmer regions rely on energy-intense water-based cooling, Iceland’s cold climate allows outside air to cool the systems for much of the year, said Hlynur Stefánsson, engineering professor at Reykjavík University.
Currently, Iceland only uses 20% of the energy it produces for homes and local industries. The rest is sold to international energy-intensive industries operating within the country. These are mostly aluminum and ferrosilicon producers, but increasingly data centers. In 2022, Iceland’s data centers consumed roughly as much electricity as households, accounting for an estimated 5-6% of national power demand between 2022 and 2023.
The industry has evolved in tandem with shifts in the digital economy. Many of Iceland’s first data centers, established from 2012 onwards, catered to cryptocurrency mining. But as demand for AI and high-performance computing accelerated, operators gradually repurposed their facilities.
A report published in April 2026 by consultancy Arizton forecast that the Icelandic data center market will expand from $449 million in 2025 to $769 million by 2031, an average annual growth rate of 9.38%.
Today, the country’s three biggest data center providers — Verne, Borealis and atNorth — are all foreign-owned. Verne was acquired by French private equity firm Ardian in 2024, Borealis by France’s Vauban Infrastructure Partners in 2021, and atNorth agreed to be acquired by the Canada Pension Plan Investment Board and U.S.-based Equinix in February 2026. Its current owner, Partners Group, is headquartered in Switzerland. The Icelandic facilities are connected to the rest of Europe and North America through a network of submarine fiber-optic cables.
Business Iceland, the public-private partnership responsible for promoting investments, said that international interest is only increasing. In an email to The Parliament, the organization said it is experiencing “extensive interest in data centers from European and American companies.”
Technical limits, environmental concerns
Europe's challenge is not only generating enough clean electricity but building the centers fast enough to meet growing demand.
The region simply takes longer to get new data centers up and running, according to Schenk. “One big reason why there are so many [data centers] built in the U.S. right now and so few in Europe is essentially that speed to operation … is much longer in the EU,” he said.
In an impact assessment report accompanying the Cloud and AI Development Act, the European Commission similarly identified lengthy permitting as a main bottleneck, alongside a lack of suitable land and difficulties in accessing energy and capital.
To ease some of those constraints, the Commission plans to reduce pressure on the grid through the digitalization of Europe’s energy system, as well as softening environmental requirements for data centers. It has also committed €20 billion to support the private-led creation of AI facilities in the EU.
Even so, there’s a limit to how much of Europe’s data center capacity can be hosted by Iceland. Winterson argues that the latency caused by the country’s distance from the continent makes it viable for applications like cloud hosting and AI training, but not for services that require constant interactions between multiple systems, such as those underpinning critical urban infrastructure.
Nor are Iceland’s resources unlimited.
While data centers have brought investment and jobs to Iceland, greater electricity demand could drive up prices, which could affect other local industries, Stefánsson said.
Meanwhile, for a country whose identity and tourism is tied to its natural landscapes, the infrastructure needed to support new data centers — from geothermal wells to pipelines and power plants — could prove contentious, Scott said.
Then there’s the technical constraints. “When you drill wells, the pressure declines in the reservoir as you extract the fluid,” Scott said. Additional wells are often drilled to maintain generation rather than to increase it, while developing new geothermal fields is a long process. “It can take anywhere from 10 to 15 years or even longer for a project to go from conception to completion,” Scott said.
Despite those constraints, investments to expand hydro, wind and geothermal capacity are already in the pipeline. Ultimately, however, the sector’s growth may hinge as much on public support as investments.
Stefánsson underscored the importance of Icelanders feeling that there is a value in hosting data centers. Previously, when data centers were primarily used for bitcoin mining, they were consuming energy while “not creating any real value,” he said, adding that it was an “environmental disaster.”
Priority should be given to “mature projects with credible customers, realistic construction schedules and clear societal value,” Magnús Kristinsson, CEO of data center company atNorth, told The Parliament in an email.
The legislation problem
Iceland is part of the European Free Trade Association (EFTA), alongside Norway, Switzerland and Liechtenstein, and participates in the European Economic Area (EEA), but it is not an EU member. On Aug. 29, Icelanders will vote on whether to resume EU accession talks, frozen since 2015. Even if the referendum were to pass, however, membership would depend on the outcome of the negotiations and would still take years.
That distinction matters for Europe's AI ambitions. While the EU’s General Data Protection Regulation applies to Iceland through the EEA, the Cloud and AI development Act won’t automatically apply to all EEA countries. It requires negotiation, a process that could favor competitors.
“During the process of determining this, I can see the EEA countries receiving better offers to host U.S. company compute,” Robert Praas, data scientist at the Centre for European Policy Studies, told The Parliament in an email.
In addition, legal alignment is only part of the picture.
AtNorth CEO Kristinsson said that hosting data in Iceland does not guarantee compliance with EU rules, as responsibility ultimately lies with the organizations that control the data and must adhere to national regulation. As a result, he said, “hosting in Iceland can support European data-residency and sovereignty objectives, but compliance must cover the entire service chain.”
For Praas, the bigger picture is strategic. While he believes Iceland can play an important role in Europe’s AI infrastructure, relying on non-EU countries for critical technologies still carries geopolitical risks. If political relationships were to change, Europe could lose access to essential services. “It's much better if we have some capacity to build it ourselves,” he said.
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