Data Centers: A Surprising Nest for Burgeoning Energy Plays


Despite making a host of things more efficient — from banking to entertainment to news — it turns out the Internet itself isn’t very efficient when it comes to energy use.

It’s actually an energy hog.

While the modern data center is a technological marvel, housing all those server computers, communications equipment and connection protocols for the world’s websites sucks up a lot of energy. Just how much? According to a recent New York Times article, worldwide data center use consumes a whopping 30 billion watts worth of electricity each year. That’s roughly equivalent to the output of 30 nuclear power plants, with the U.S. accounting for about one-third of that number.

Google’s (NASDAQ:GOOG) and Facebook’s (NASDAQ:FB) data centers alone consume nearly 360 million watts each year. More importantly, up to 90% of that energy consumed by data centers is simply wasted as heat.

With the Internet, cloud computing and mobile solutions becoming more prevalent across the planet, it seems a potential energy crisis could be a-brewin’. As we demand 24/7 access to data, friends lists and bank accounts, data centers — and their energy requirements — will be an ever-more prominent piece of our future.

For portfolios, that leads to investment potential on both sides of the fence — via the firms that help create efficiency measures, as well as those that supply the critical power.

Today’s Data Center

Running the backbone of the Internet takes some serious hardware and equipment.

Sending a YouTube clip or email to a neighbor across the street could involve a trip through hundreds or thousands of miles of Internet conduits and multiple data centers before arriving at its end destination. The number of data centers supporting the Internet and the world’s websites has grown from just 432 back in 1998 to more than 2,094 in 2010.

What’s more striking is the amount of energy these complex systems require to run.

A 2007 report by the Environmental Protection Agency estimated that data centers consumed 61 billion kilowatt-hours (kWh) worth of electricity, or roughly for 1.5% of total U.S. electricity consumption. These energy requirements have only grown — minus the recent downturn thanks to the recession — as end users demand more access to their data and digital lives. The New York Times‘ piece showed that data centers used about 76 billion kilowatt-hours in 2010. That’s now roughly 2% of all electricity used in the country that year.

But where does all of this energy go?

As for the servers themselves, the bulk of energy spending of goes toward cooling the rooms that house the computers. The heat produced by rows and rows of server computers is intense, and industrial cooling systems are required to keep them from overheating and crashing. Some firms have begun using seawater cooling systems as well as other open-air technologies, but the bulk of the industry still relies on good old-fashioned AC to cool their racks. About 65% of the energy used in a data center or server room goes to space cooling.

Massive cooling systems aren’t the only components in data centers that consume plenty of power. Energy is lost because of inefficient power supplies, idling “comatose” servers, unnecessary processes and bloatware — which are pre-installed programs that aren’t needed or wanted running in the background of a computer.

Then there is the energy demand for backup systems.

At this stage in the game, no company running a data center wants their site to go down because of a power failure. That could lead to a loss of customer confidence and — perhaps more importantly — revenue for the site operators.

Most large data centers contain banks of huge, spinning flywheels or thousands of lead-acid batteries to power the computers in case of a grid failure. A quick power blip — even as brief as a few hundredths of a second — could crash the servers. All of these backup systems require massive amounts of energy to keep their charge.

The Two-Way Portfolio Play

Given the growth of our digital lives, the growth in the number of data centers is almost a sure thing, as is the growth in their energy future requirements. That poses an interesting conundrum for investors: Do I play the energy suppliers or those firms working toward using less overall energy?

The answer is “both” — and there are plenty of ways to do just that.

According to a new report by Pike Research, tons of money — $45 billion, to be exact — will be spent worldwide to make data centers greener by 2016. I wrote about the potential of energy efficiency back in July and how the PowerShares Cleantech ETF (NYSE:PZD) was one of the best broad ways to play the theme. Data center power demands highlight the ETF’s appeal. Additionally, software solutions that improve energy efficiency — such as server virtualization and centralized power management, as well as energy-efficient hardware — are quickly becoming the standard. That will benefit many of the stalwarts of tech, including VMware (NYSE:VMW), Dell (NASDAQ:DELL) and IBM (NYSE:IBM).

For investors wanting to play the flip side, one of the most coming occurrences in large-scale data centers is the proliferation of diesel back-up generators. On average, large data centers hold six of these engines that could provide enough power for a community of 7,000 homes.

When it comes to utility-scale generators, both Caterpillar (NYSE:CAT) and Cummins (NYSE:CMI) are still the king of the hill. While these operations are still a small piece of their overall business, the growth potential is huge.

Another interesting bet could be backup flywheel system manufacturer Active Power (NASDAQ:ACPW), but note that it’s a relatively thinly traded stock, doing only about 200,000 shares per day.

Overall, the long-term potential is huge for investors as the modern-day data center continues to evolve.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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