Leading the charge: Surge in U.S. data center growth is powering renewable energy investment opportunities

From the meteoric rise in cloud-based computing to the exponential growth of artificial intelligence (AI), technological developments are continuing apace and demanding an ever-increasing amount of electricity to power the data centers behind them.

Data centers – physical sites housing servers, networks, storage infrastructure, and other related hardware – require a huge amount of energy to operate. In 2022 globally, data centers consumed an estimated 460 terawatt hours (TWh) of electricity globally and this is forecasted to reach more than 1,000 TWh in 2026 – roughly equivalent to Japan’s entire annual electricity consumption.¹   By 2034, data centers worldwide are expected to use 1,580 TWh, about the same as India’s entire energy demand.²

Presently there are more than 10,000 data centers located around the globe, with half of them in the U.S. where they are estimated to consume around 4% of all the electricity generated in the world’s largest economy.³

That’s predicted to rise to as much as 9.1% of all U.S. electricity generated by 2030, but the anticipated figure is far more in some areas, such as up to 50% in Virginia, where the largest concentration of data centers is found.⁴

Other states housing numerous data centers – including Texas and California – typically enjoy lower land prices, strong internet connection, as well as the availability of skilled labor and an abundance of energy sources – increasingly, renewable energy such as wind and solar.

Renewable connections

Renewables are both the cheapest, and cleanest, way to meet the growing power requirement for data centers. As a result, many large technology companies are partnering with suppliers and utilities to support the development of renewable energy. For example, Microsoft is teaming up with Brookfield Renewable Partners, a renewable energy developer, to add renewables capacity to power its U.S. and Europe data centers,⁵  while Amazon recently bought a nuclear-powered data center in Pennsylvania from Talen Energy.⁶

However, co-locating data centers with nuclear power facilities is unlikely to be a scalable solution, given few other suitable sites and questions regarding prioritizing data center consumption ahead of local communities and businesses.

Hyperscalers – the term given to large tech companies operating huge global networks of data centers – are likely to want to move quickly and at scale to avoid losing market share in AI or cloud computing; this favors larger renewable energy companies who have already demonstrated development capabilities and have existing project pipelines enabling fast delivery.

Companies are also notably signing agreements to scope out long term partnerships that are mutually beneficial for suppliers and customers, and also provide a degree of forward visibility for investors. Amazon, Microsoft, Meta, and Google are the four largest purchasers of corporate renewable energy power purchase agreements (PPAs)⁷ , essentially a long-term contract that locks in electricity prices, giving visibility and a degree of security to both the buyer and seller. PPA rates for renewables are rising and reflect evolving supply/demand dynamics, as well as potential upside for the suppliers).⁸

Another consideration is the strain on water resources in areas hosting data centers as they need tens or hundreds of thousands of gallons of water to cool their equipment. Data centers are not fully circular – there is leakage from systems as water is re-circulated – but are becoming more sustainable as equipment becomes more efficient. Furthermore, tech companies like Amazon are aiming to be “water positive” – returning more water to communities and the environment than it uses in its data centers – by 2030.⁹

Fortified backdrop

This increasing demand for renewable energy, backed by government policy, underlines what we believe is a potential long-term investment trend. The U.S. remains a supportive environment for renewable energy investment; including, among other policies, the 2022 Inflation Reduction Act (IRA) – a subsidy initiative, which promotes decarbonization – and 2021’s Bipartisan Infrastructure Law, which aims to bolster wastewater infrastructure as well as improve the electricity grid. New investment in clean energy production, as well as carbon dioxide capture, removal, and other forms of industrial decarbonization, increased 34% in the past two years since the IRA was signed into law, compared to the preceding two-year period.¹⁰

There are potential opportunities across the spectrum, from equipment companies that manufacture the cables and transformers that carry wind or solar power to the grid and then on to the data centers, such as Eaton, and renewable energy developers like Brookfield and NextEra.

While Eaton does make transformers, it also provides data center management software, to help hyperscalers improve operational efficiency, prevent power outages, and more. As power demand is rising, companies that help drive energy efficiency are likely to be increasingly on many investors’ radars.

There is also scope for growth in the outsourced engineering and procurement sector, among companies that design, build, and maintain the power network infrastructure, such as Quanta Services.

Quanta is providing infrastructure solutions for the SunZia Southwest Transmission Project, an 885-kilometer-long transmission line expected to be the U.S.’s biggest-ever clean energy infrastructure project.¹¹  In addition, Quanta’s recent acquisition of Cupertino, an electrical infrastructure specialist, increases its exposure to the data center market, giving it scale in what is a relatively fragmented market. This is also a market with high barriers to entry – including skilled labor.

Scale is another barrier to entry, favoring larger players in the industry such as Florida-based NextEra Energy. With a presence in 49 U.S. states, we see it as being able to leverage its scale to possibly secure attractive prices in buying equipment such as solar panels in large quantities, and secure potentially better interest rates on debt.¹²

We believe appetite for renewable energy will only continue to grow, reflecting the continued demand for greater capacity – not only due to its importance in mitigating climate change, but also as it offers the potential for greater energy independence, stable pricing, and cost-effectiveness.

These fundamental pillars support an ongoing structural change, both in the energy transition and increase in digitalization. In turn, this is creating potential long-term opportunities for investors in the renewable energy space and in the wide spectrum of companies that support the sector.

Companies shown are for illustrative purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments.