Less Dumb Investing

Data centers have several constraints when it comes to siting. For the LLM data centers that support the latest AI tools, they need access to (1) power and (2) low latency. Within the electricity space, there is mounting concern about the ability of RTOs and generation providers to supply the rapidly scaling AI data center growth. Transmission lines take almost a literal lifetime to come online. One well-known case study of a line based out of New Mexico to Arizona has taken 17 years from the permitting stage to the completion stage.

Some of these data centers have load profiles in the hundreds of megawatts. What that means is that one of the requirements for getting approval for a data center siting is the need for backup generation on-site. That generation should be available to provide power to the data center in the event of a terminal failure, but it should also be able to dispatch to the broader grid during other periods.

The low-effort assumption is that data centers will use battery storage in conjunction with renewables to achieve this goal. The reality, as with most things, is more nuanced. Natural gas remains one of the most dependable sources of power, as it is not reliant on intermittent sources. As a result, many of the data centers coming online are using natural gas generation as their backup power source.

The “shovels” of electricity generation are the gas generators. So, who produces them? One of the firms that may be among the biggest beneficiaries is GE, which has an order book for its gas generators extending several years—Boeing would be jealous. There are other producers as well; I believe Caterpillar, Hyundai, and possibly Honeywell (though I’m less certain on Honeywell) also manufacture these gas generators, and they likely have similar order book timelines.