Data centers are integral to the digital economy, powering the operations of everything from cloud computing and artificial intelligence to software defined networking. As businesses and individuals increasingly rely on digital solutions, data centers will need to expand. Despite that rapid growth, a good deal of confusion remains regarding the infrastructure and technological shifts that will define the future of these facilities. Beyond the sheer scale and processing power needed, two critical issues dominate the landscape: cooling and power consumption. These aspects are driving operational costs and constraining the growth of the data center industry, thus highlighting the investment opportunities available.
Data centers consume vast amounts of electricity — currently accounting for about 5% of U.S. energy use — and the numbers are rising as data centers expand and become more complex (see Figure 1). Cooling and power technologies are rapidly evolving to meet these challenges, and understanding these innovations is crucial for investors aiming to capitalize on the future of data centers.
Cooling: The shift from air to liquid
One of the key areas of change in data center infrastructure is cooling technology. Historically, data centers relied heavily on air-cooling systems — computer room air handlers and computer room air conditioners — that use air to dissipate heat generated by servers. These systems have been effective, but they are incredibly energy intensive (see Figure 2). The typical air-cooled system can handle a rack density of only 1-20 kilowatts (kW); even with precision air distribution systems, many modern data centers find this method steadily more inadequate as servers increasingly use AI chips to handle more complex workloads.
Liquid cooling, such as more the established direct-to-chip cooling and more nascent technologies such as immersion cooling, is emerging as a transformative solution that offers far-more-efficient heat transfer by circulating coolant directly to the server’s heat-generating components. Direct-to-chip cooling systems can handle up to 75 kW per rack, and immersion cooling can manage even higher densities, up to 200 kW. These systems reduce the amount of air cooling required in a facility and result in lower energy consumption, making them more sustainable and cost-effective over time.
Liquid cooling also addresses another pressing issue: water use. Traditional cooling systems rely on significant volumes of water to manage heat, which poses a problem in regions facing water scarcity; by contrast, immersion cooling and closed-loop liquid systems use minimal water, making them ideal for data centers looking to reduce their environmental footprint. As sustainability becomes an increasing priority, particularly in the face of regulatory pressures, liquid cooling stands out as a vital technology in the industry’s evolution.
Power technologies: The force behind data centers
Cooling is just one side of the equation. The other challenge facing data centers is power consumption. As facilities grow in scale and density, their energy demands soar. Power use is not just a matter of keeping servers running; it also involves the electricity needed to maintain optimal environmental conditions, provide backup power and ensure system reliability (see Figure 3).
Data centers typically draw electricity from two independent utility feeds to ensure reliability. From these feeds, the power is distributed across substations and load centers that allocate electricity to servers, cooling equipment, lighting and more. Maintaining consistent power flow (including during grid failures) requires a range of equipment such as transformers, switchgear and uninterruptible power supplies.
One of the major opportunities in the data center space is energy optimization to manage power consumption. Over the next decade, capital expenditures on power-related infrastructure — ranging from energy efficiency equipment to backup power systems — are expected to exceed $100 billion. The evolution of energy efficiency technologies — such as microgrids, battery storage systems and advanced power conversion equipment — provides multiple avenues for investment. Data centers are increasingly turning to renewable energy solutions (e.g., solar) to power their operations.
Additionally, innovations like energy management software enable data centers to monitor their energy usage in real time, optimize load capacity and even track carbon emissions. These tools help facilities better manage their energy consumption while aligning with broader sustainability goals. Given the immense power demands of data centers, solutions that enhance energy efficiency and resiliency are essential to supporting long-term growth.
Investment opportunities
For investors, the opportunity to initiate engagement in the data center space is clear and inviting as this large market continues to see robust grow. The industry is experiencing a secular trend of double-digit growth, driven by hyperscalers such as Amazon, Google, Meta and Microsoft that have ultra-large-scale data processing needs. However, their growth is also constrained by cooling and power needs, the two areas that dominate both the operational costs and environmental impact of data centers.
Investors looking to capitalize on these trends should focus on technologies that will enable data centers to grow more sustainably and efficiently, and there is an opportunity to consider a wide range of potentially attractive areas, including:
- Energy efficiency equipment: Solutions that help improve the energy efficiency of facilities across solutions such as cooling systems as well as building automation and controls. For example, companies offering liquid cooling systems or components are well positioned for growth as more data centers transition from air to liquid cooling to meet their energy and environmental goals.
- Energy management services: Services that help data centers with their energy needs throughout the lifecycle of the facility, ranging from the buildout of energy infrastructure to helping to optimize power consumption. These services can help drive operational efficiency, reduce costs, and help minimize carbon footprint.
- Electrical power solutions: The fundamental equipment used to power a data center, including power distribution, power conversation, testing and monitoring, and balance of equipment systems. As data centers continue to be built, this equipment will be required to power all of the technology and supporting equipment within the facility.
- Power generation, including some clean power technologies: There continues to be need for reliable traditional back up power generators (e.g., diesel, natural gas) and associated tools like noise control solutions. Additionally, more nascent technologies are also emerging, including micro turbines, fuel cells, battery energy storage and renewable energy sources such as solar power. Demand for these new technologies us expected to grow as data centers face increasing scrutiny over energy consumption and emissions.
- Software and monitoring tools: Energy management software that offers real-time data insights, load optimization and carbon tracking will be invaluable as data centers focus on improving operational efficiency and meeting regulatory requirements.
The key to success in the data center industry lies in understanding these underlying trends and investing in the technologies that will shape the industry’s future. As data centers continue to evolve, power and cooling will continue to be important factors driving both operational costs and growth constraints.
Conclusion
The future of data centers is one of both immense potential and challenges. Cooling and power technologies will be critical in determining how this industry grows, and investors who successfully focus on these key areas will position themselves to lead in the digital infrastructure revolution. With the outlook for data centers demystified and the role of these technologies understood, investors can unlock significant opportunities in shaping the next phase of this vital industry.
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