There's a major bottleneck in AI data center expansion, analysts say. Here's how to play it

Published Mon, Jul 8 20247:34 PM EDT

One area is causing a major bottleneck in data center expansion and the energy transition, according to several analysts: the power grid. "An inadequate build-out and investment in the power grid would impede the build-out of data centers, slow the Energy Transition, restrain renewables growth, and prolong the use of fossil fuels at higher levels," Citi analysts wrote in a June report. They added that power is a "significant bottleneck" to the global expansion of data centers, which require vast amounts of computing power needed for artificial intelligence workloads. Morningstar said in its third-quarter equity market outlook last week that: "The grid is the biggest bottleneck of the energy transition. All companies operating electricity networks have materially stepped up their investments over the last few months." Power grids are "critical" to the energy transition, as areas that boast the best renewables resources are often far from the densely populated areas of high demand, Citi added. Failure to add grid capacity would then impede solar and wind power that would otherwise have replaced power generated by fossil fuels, the bank said. "Congestion" remains in the United States, however, with Citi noting that several regions have had "persistently high" wholesale electricity prices in the past three to five years. That includes New York, California and the Midwest, it said. Citi said that in Europe, about 180 billion euros ($195 million) in investments into high-voltage electricity grids is required in order to meet the European Union's aim of 45% share of renewables in its energy consumption in 2030. Over in China, there are also targets to accelerate the "intelligent transformation" of grid infrastructure and the construction of smart micro-grids, the bank said. Apart from the need for more financing, Citi said, the delay in building grids is due to slew of other problems, such as challenges from environmental groups, geopolitical risks and a long project lead time. How to play the sector Morningstar said the European utilities sector is undervalued, and named three stocks: U.K. energy company SSE , French firm Veolia and German firm RWE . Over in China, HSBC likes one Chinese stock to play the power grid infrastructure bottleneck. That's Sieyuan, which makes grid equipment. "We believe its early deployment in overseas markets will likely continue to help it gain market share, and it has a larger global addressable market," the bank said, As for the United States, veteran investor Louis Navellier, founder of Navellier & Associates, said in a recent note that he likes the following stocks which are "helping to expand the electric grid and fuel AI data center growth": Eaton , Emcor Group and Quanta Services . There's also one exchange-traded fund that tracks the sector: the First Trust Nasdaq Clean Edge Smart Grid Infrastructure UCITS ETF , which tracks the performance of stocks in the grid and electric energy infrastructure sector.