While the promise of technologies like artificial intelligence, machine learning, cloud computing, and cryptocurrency are groundbreaking, powering the data centers to support them has become increasingly energy intensive. For years, data centers could chug along with a pretty stable appetite for power. However, thanks to the increased processing demands of applications like AI’s large language models (LMMs) and cloud hyperscalers, efficiency gains have dwindled.
Goldman Sachs now expects a 160% increase in demand for electricty from data centers as soon as 2030. Currently, data centers represent 1-2% of global power consumption. Goldman expects that range to grow to 3-4% over the same period, requiring record levels of energy production.
Given these rising energy demands, what is the best way to power these data centers?
Grid Infrastructure Investment
One answer is to invest in electric grid infrastructure. Goldman Sachs projects that domestic utility companies will have to invest approximately $50 billion in growing their capacity to generate energy just to keep up with the needs of data centers. Meanwhile, Europe’s power grid is one of the oldest in the world. Goldman estimates the continent will have to spend €860 (or $861) billion on electric transmission and distribution in the next ten years. That amount doesn’t even include a needed additional €850 billion investment in renewable energy technologies.
Going Nuclear
Given these staggering energy and spending requirements, and with so much on the line, it is no wonder that some megacap tech companies are taking matters into their own hands. Amazon, Microsoft, Alphabet, and Oracle are all ensuring they’ll be able to meet their own power needs by investing in nuclear power generation deals.
Amazon announced three deals involving small modular reactors (SMRs) to power its data centers. The company is partnering in Washington with Energy Northwest and investing in SMR firm X-energy. Meanwhile, Amazon Web Services is partnering with Dominion on SMRs in Virginia. And in Pennsylvania, AWS bought a data center campus adjacent to the Susquehanna Steam Electric Station nuclear power plant from Talen Energy.
Alphabet, Google’s parent, announced a 500-megawatt deal with SMR provider Kairos Power. Microsoft signed a deal with Constellation to bring the Three Mile Island facility back online to power an 835-megawatt AI data center. All power produced by the facility will cover the electricity used by Microsoft’s data centers in Pennsylvania, Chicago, Virginia, and Ohio. And Oracle founder Larry Ellison stated on its earnings call that his company has plans to build a 1-gigawatt data center powered by three SMRs.
The tide of sentiment for nuclear power has definitely shifted, as 56% of Americans, according to Pew Research, now support expanding usage of nuclear power in the U.S. Nuclear power is cleaner than fossil fuels and generated nearly half of domestic carbon-free electricity in 2023. The Department of Energy even designated it the most reliable source of energy in 2022, with nuclear power plants operating at full capacity for 93% of last year.
Opportunities for Midstream
However, while nuclear power is gaining favor, don’t expect it to replace fossil fuels in the near future. Even as data center operators seek out cleaner, renewable sources of energy to meet their accelerating power demands, natural gas will remain a key energy source powering the electric grid.
Midstream expansion remains the most expeditious near-term solution for data centers, and such companies are well-positioned to benefit from this trend. Natural gas also has reduced emission output relative to coal and oil, making it the best interim energy transition solution.
Goldman Sachs projects that natural gas account for 60% of the incremental power demands of data centers for the next six years. The investment bank also foresees the increased demand will require the addition of of 6.1 billion cubic feet per day in pipeline capacity.
ETF Plays on Growing Data Center Power Needs
Given the need for investment in the energy grid, grid infrastructure ETFs such as the First Trust NASDAQ Clean Energy Smart Grid Infrastructure ETF (GRID ) should benefit from increased spending. That group includes companies that are primarily involved in every area associated with the electric grid, from meters and devices to energy storage and software.
Nuclear power-themed ETFs are another way for investors to benefit from the rising use and acceptance of nuclear power and SMRs. The VanEck Uranium and Nuclear ETF (NLR ) and the Range Nuclear Renaissance ETF (NUKZ ) are two ETFs that provide exposure to the trend.
Uranium mining stock ETFs also provide tangential exposure, as more nuclear reactors will spur increased uranium demand. The category includes the Sprott Uranium Miners ETF (URNM ), which provides exposure to both uranium miners and physical uranium; the Global X Uranium ETF (URA ); and the Sprott Junior Uranium MIners ETF (URNJ ), which offers pure-play exposure to smaller uranium mining companies.
Beyond nuclear power, midstream energy companies should also continue to benefit from rising demand for data center power. The Alerian Energy Infrastructure ETF (ENFR ) provides targeted exposure to energy infrastructure companies. The ETF is up 33% YTD and also pays a net indicated dividend yield of 4.65%. As investors wait for the nuclear theme to ramp up over the next few years, midstream may be a less volatile way to get exposure to rising data center energy demands.
VettaFi LLC (“VettaFi”) is the index provider for ENFR for which it receives an index licensing fee. However, ENFR is not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of ENFR.
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