diff --git a/esphome/components/image/__init__.py b/esphome/components/image/__init__.py
index 801b05e160..a503e8f471 100644
--- a/esphome/components/image/__init__.py
+++ b/esphome/components/image/__init__.py
@@ -82,11 +82,13 @@ class ImageEncoder:
         self.dither = dither
         self.index = 0
         self.invert_alpha = invert_alpha
+        self.path = ""
 
-    def convert(self, image):
+    def convert(self, image, path):
         """
         Convert the image format
         :param image:  Input image
+        :param path:  Path to the image file
         :return: converted image
         """
         return image
@@ -103,6 +105,16 @@ class ImageEncoder:
         """
 
 
+def is_alpha_only(image: Image):
+    """
+    Check if an image (assumed to be RGBA) is only alpha
+    """
+    # Any alpha data?
+    if image.split()[-1].getextrema()[0] == 0xFF:
+        return False
+    return all(b.getextrema()[1] == 0 for b in image.split()[:-1])
+
+
 class ImageBinary(ImageEncoder):
     allow_config = {CONF_OPAQUE, CONF_INVERT_ALPHA, CONF_CHROMA_KEY}
 
@@ -111,7 +123,9 @@ class ImageBinary(ImageEncoder):
         super().__init__(self.width8, height, transparency, dither, invert_alpha)
         self.bitno = 0
 
-    def convert(self, image):
+    def convert(self, image, path):
+        if is_alpha_only(image):
+            image = image.split()[-1]
         return image.convert("1", dither=self.dither)
 
     def encode(self, pixel):
@@ -136,7 +150,16 @@ class ImageBinary(ImageEncoder):
 class ImageGrayscale(ImageEncoder):
     allow_config = {CONF_ALPHA_CHANNEL, CONF_CHROMA_KEY, CONF_INVERT_ALPHA, CONF_OPAQUE}
 
-    def convert(self, image):
+    def convert(self, image, path):
+        if is_alpha_only(image):
+            if self.transparency != CONF_ALPHA_CHANNEL:
+                _LOGGER.warning(
+                    "Grayscale image %s is alpha only, but transparency is set to %s",
+                    path,
+                    self.transparency,
+                )
+                self.transparency = CONF_ALPHA_CHANNEL
+            image = image.split()[-1]
         return image.convert("LA")
 
     def encode(self, pixel):
@@ -166,7 +189,7 @@ class ImageRGB565(ImageEncoder):
             invert_alpha,
         )
 
-    def convert(self, image):
+    def convert(self, image, path):
         return image.convert("RGBA")
 
     def encode(self, pixel):
@@ -204,7 +227,7 @@ class ImageRGB(ImageEncoder):
             invert_alpha,
         )
 
-    def convert(self, image):
+    def convert(self, image, path):
         return image.convert("RGBA")
 
     def encode(self, pixel):
@@ -308,7 +331,7 @@ def is_svg_file(file):
     if not file:
         return False
     with open(file, "rb") as f:
-        return "<svg " in str(f.read(1024))
+        return "<svg" in str(f.read(1024))
 
 
 def validate_cairosvg_installed():
@@ -548,7 +571,7 @@ async def write_image(config, all_frames=False):
     encoder = IMAGE_TYPE[type](width, total_rows, transparency, dither, invert_alpha)
     for frame_index in range(frame_count):
         image.seek(frame_index)
-        pixels = encoder.convert(image.resize((width, height))).getdata()
+        pixels = encoder.convert(image.resize((width, height)), path).getdata()
         for row in range(height):
             for col in range(width):
                 encoder.encode(pixels[row * width + col])
@@ -557,7 +580,7 @@ async def write_image(config, all_frames=False):
     rhs = [HexInt(x) for x in encoder.data]
     prog_arr = cg.progmem_array(config[CONF_RAW_DATA_ID], rhs)
     image_type = get_image_type_enum(type)
-    trans_value = get_transparency_enum(transparency)
+    trans_value = get_transparency_enum(encoder.transparency)
 
     return prog_arr, width, height, image_type, trans_value, frame_count
 
diff --git a/esphome/components/image/image.cpp b/esphome/components/image/image.cpp
index e380112050..f05f4af711 100644
--- a/esphome/components/image/image.cpp
+++ b/esphome/components/image/image.cpp
@@ -22,10 +22,27 @@ void Image::draw(int x, int y, display::Display *display, Color color_on, Color
     case IMAGE_TYPE_GRAYSCALE:
       for (int img_x = 0; img_x < width_; img_x++) {
         for (int img_y = 0; img_y < height_; img_y++) {
-          auto color = this->get_grayscale_pixel_(img_x, img_y);
-          if (color.w >= 0x80) {
-            display->draw_pixel_at(x + img_x, y + img_y, color);
+          const uint32_t pos = (img_x + img_y * this->width_);
+          const uint8_t gray = progmem_read_byte(this->data_start_ + pos);
+          Color color = Color(gray, gray, gray, 0xFF);
+          switch (this->transparency_) {
+            case TRANSPARENCY_CHROMA_KEY:
+              if (gray == 1) {
+                continue;  // skip drawing
+              }
+              break;
+            case TRANSPARENCY_ALPHA_CHANNEL: {
+              auto on = (float) gray / 255.0f;
+              auto off = 1.0f - on;
+              // blend color_on and color_off
+              color = Color(color_on.r * on + color_off.r * off, color_on.g * on + color_off.g * off,
+                            color_on.b * on + color_off.b * off, 0xFF);
+              break;
+            }
+            default:
+              break;
           }
+          display->draw_pixel_at(x + img_x, y + img_y, color);
         }
       }
       break;
@@ -179,8 +196,16 @@ Color Image::get_rgb565_pixel_(int x, int y) const {
 Color Image::get_grayscale_pixel_(int x, int y) const {
   const uint32_t pos = (x + y * this->width_);
   const uint8_t gray = progmem_read_byte(this->data_start_ + pos);
-  uint8_t alpha = (gray == 1 && this->transparency_ == TRANSPARENCY_CHROMA_KEY) ? 0 : 0xFF;
-  return Color(gray, gray, gray, alpha);
+  switch (this->transparency_) {
+    case TRANSPARENCY_CHROMA_KEY:
+      if (gray == 1)
+        return Color(0, 0, 0, 0);
+      return Color(gray, gray, gray, 0xFF);
+    case TRANSPARENCY_ALPHA_CHANNEL:
+      return Color(0, 0, 0, gray);
+    default:
+      return Color(gray, gray, gray, 0xFF);
+  }
 }
 int Image::get_width() const { return this->width_; }
 int Image::get_height() const { return this->height_; }