AI is driving up computing power density, making liquid cooling an essential requirement, while water usage rights have emerged as a new bottleneck.
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AI is driving up computing power density, making liquid cooling an essential requirement, while water usage rights have emerged as a new bottleneck.
Barclays provides an in-depth analysis of the evolution of data center cooling technologies, highlighting that evaporative cooling—not liquid cooling—is the primary driver of water consumption. Meanwhile, Microsoft and Meta have shifted toward zero‑water cooling, while Google and Amazon continue to balance energy efficiency with water usage, which bodes well for leading players in liquid‑cooling equipment and water‑treatment solutions.
- Direct-to-chip liquid cooling (D2C) has become the standard for hyperscale data centers, and immersion cooling is not necessarily the ultimate solution.
- Evaporative cooling is the primary driver of water consumption, whereas liquid-cooling closed-loop systems help reduce on-site water usage.
- Strategic divergence among tech giants: Microsoft and Meta are pursuing dry cooling, while Google and Amazon are retaining evaporative cooling in low-risk scenarios to optimize energy efficiency.
- Cooling systems account for 10–15% of non-IT capital expenditures in data centers, a share that is expected to rise as liquid cooling becomes more widespread.
- A shortage of skilled workers is driving inflation in cooling‑system deployment costs and increasing the risk of project delays, making modular prefabrication an emerging trend.
- We are optimistic about core players in the industry chain, including nVent (NVT), Vertiv (VRT), Belimo (BEAN), and Ecolab (ECL).
Report interpretation
Overview
This report provides an in-depth analysis of the evolution of AI‑driven data center cooling technologies and their complex relationship with water resource usage. As server rack power densities continue to surge, conventional air cooling is increasingly unable to meet demand, while liquid cooling is rapidly emerging as the dominant solution. The report dispels the common misconception among investors that “liquid cooling leads to high water consumption,” highlighting that evaporative cooling—rather than liquid cooling—is the primary driver of direct water use. In addition, the report examines the varying trade-offs adopted by major cloud service providers between energy efficiency (PUE) and water efficiency (WUE), and maps out the end-to-end supply chain ecosystem, spanning cold plates, CDUs, and water‑treatment equipment, while identifying both investment opportunities and potential risks.
Core views
Cooling Technology Evolution and Misconceptions Clarified: As GPU architectures such as NVIDIA’s Blackwell push rack-level power densities to 120–150 kW or even higher, air cooling is approaching its physical limits. Direct-to-chip liquid cooling (D2C), with its superior thermal conductivity, has become the standard configuration for hyperscale data centers. The report underscores a widespread misconception that liquid cooling is a major water consumer. In reality, single-loop liquid‑cooling systems operate in closed loops and do not consume water; the real water‑intensive component is evaporative cooling, which relies on water evaporation to remove heat. By raising supply‑water temperatures, liquid cooling can reduce or eliminate reliance on evaporative cooling, thereby lowering on-site water usage. Strategic Divergence Among Tech Giants: Faced with the trade-off between energy efficiency (PUE) and water efficiency (WUE), leading cloud providers have adopted distinct approaches. Microsoft and Meta prioritize minimizing direct on-site water use, accepting slightly higher electricity consumption—for instance, Microsoft is promoting zero‑water‑cooling designs that employ air‑cooled chillers. By contrast, Google and Amazon take a more holistic optimization stance: in regions with lower water‑risk, they continue to rely on evaporative cooling to cut electricity use and the associated upstream water consumption and carbon emissions. Data show that Google’s direct water intensity remains significantly higher than its peers, while Microsoft and Meta have seen substantial reductions in their water intensity. Supply Chain Dynamics and Investment Opportunities: Cooling systems account for 10–15% of a data center’s capital expenditure—and this share is rising. The report highlights several promising segments: 1. Liquid‑Cooling Components and Integrators: Companies like nVent (NVT), leveraging internally developed liquid‑cooling technologies, hold a leading position; Vertiv (VRT) offers system‑level solutions; Eaton (ETN), through its acquisition of Boyd Thermal, has entered this space. 2. European Industrial Goods: Belimo (BEAN), with its strong exposure to flow‑control valves and actuators, stands out as one of the most beneficiary‑focused European capital‑goods stocks, with significant growth expected in its data‑center revenue. 3. Water Treatment and Services: Ecolab (ECL), having transformed from a chemical supplier into an end‑to‑end thermal‑management partner via its acquisition of CoolIT Systems, generates recurring revenue through a “razor‑and‑blade” business model. Xylem (XYL) and Veralto (VLTO) also stand to benefit in water‑treatment and monitoring. 4. Construction and Materials: Evolving construction requirements—such as higher load capacities and enhanced fire‑resistance—favor contractors like Hochtief and ACS, as well as Heidelberg Materials (low‑carbon cement) and Rockwool (fire‑resistant insulation).
Analysis framework
Institutional analysts have adopted an analytical framework that integrates “technological principles, operational trade-offs, and supply-chain mapping.” First, from a physics perspective, the cooling mechanisms are elucidated by distinguishing between “heat removal” at the chip level and “heat dissipation” into the ambient atmosphere, thereby clarifying the fundamental differences in water consumption between liquid cooling and evaporative cooling. Second, two key metrics—PUE (Power Usage Effectiveness) and WUE (Water Usage Effectiveness)—are introduced to analyze the trade-off between them, and their strategic choices are validated against publicly disclosed data from major cloud service providers. Finally, technological trends are mapped onto specific listed companies. By assessing each firm’s position along the value chain—whether as pure hardware suppliers, system integrators, or providers of consumables and services—and evaluating its market penetration, the analysis identifies investment targets with the greatest earnings elasticity.
Methodology notes
Supply-and-demand dynamics in the data center cooling market
On the demand side, growth is driven by rising AI computing power density, while on the supply side, constraints stem from a shortage of skilled technicians and water‑resource permitting. This supply–demand mismatch has given rise to cost inflation and rapid technological‑route iteration, such as the shift from air cooling to liquid cooling.
Ecolab’s “razor-and-blades” business model
By analyzing Ecolab’s post‑acquisition business structure following its acquisition of CoolIT, we observe that hardware (CDUs) serves as an entry point to lock in customers, while subsequent chemical treatments and maintenance services generate high gross margins and recurring cash flows, thereby enhancing the company’s valuation certainty.
Technological Barriers and Ecosystem Lock-in
The liquid cooling market is not fully commoditized; companies that possess proprietary technologies—such as nVent’s in-house R&D—or offer full-stack service capabilities—like Ecolab—are able to establish higher switching costs and stronger competitive barriers.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- nVent Electric (NVT)Benefits: Focused on liquid-cooling technology, free from the legacy constraints of traditional air cooling, and enjoys strong customer traction.
- Strengths
- Internal R&D expertise is regarded as a trusted advisory resource.
- Comparison
- Compared with other multi-industry giants, NVT has the highest proportion of revenue from liquid cooling.
- Risks
- Intensified market competition may put pressure on profit margins.
- Vertiv Holdings (VRT)Benefits: Offers system-level liquid cooling solutions and boasts extensive large-scale deployment experience.
- Strengths
- Strong system integration capabilities; acquisition of CoolTera further strengthens its position.
- Comparison
- Alongside NVT, it is a frontrunner in the liquid-cooling sector.
- Ecolab (ECL)Benefit: By acquiring CoolIT, the company has entered the hardware sector, establishing a closed-loop model of “hardware + consumables.”
- Strengths
- End-to-end thermal management capabilities, recurring revenue model
- Comparison
- Unlike pure hardware vendors, it possesses advantages in chemical processing and services.
- Risks
- Integrated Risk
- Belimo Holding (BEAN.S)Benefit: Liquid cooling has the highest exposure among European capital goods.
- Strengths
- A supplier of critical flow-control components, with high gross margins.
- Comparison
- Among its European peers, the company boasts the strongest projected growth in data center sales, with a CAGR of approximately 60%.
- United Utilities (UU.L)Benefit: The northwestern region of the UK is rich in water resources, making it an ideal location for data center deployment.
- Strengths
- Structural water resource advantages and substantial growth potential in the regulated asset base.
- Comparison
- Valuation below that of UK electricity peers.
- Risks
- Regulatory Policy Changes
Key data
- Data center cooling capital expenditure ratio10-15%It accounts for the cost of data center power‑cabinet enclosures (excluding IT equipment) and is expected to rise as liquid cooling becomes more widespread.
- The growth rate of direct water consumption in U.S. data centers~12-13% CAGRFrom 2014 to 2023, it increased from 21 billion liters to 66 billion liters.
- NVIDIA Blackwell Rack Power Density120-150 kW/rackFar exceeding the 30–40 kW per rack limit of conventional air-cooling systems.
- Microsoft FY2024 WUE0.30 L/kWhAn 18% improvement over the 2022 baseline, with a target of 40% by 2030.
- Google Implied WUE (2024)>1.3 L/kWhSignificantly higher than its peers, reflecting its strategy of retaining evaporative cooling to optimize energy efficiency.
- Contribution to the growth of the liquid cooling market~50%By 2030, liquid cooling is expected to account for half of the incremental share in the data center cooling market.
Impact & implications
For investors, this means that focusing solely on “electricity” is no longer sufficient; “water” has become a critical constraint in data center site selection and operations. The widespread adoption of liquid‑cooling technology not only transforms cooling methodologies but also reshapes the supply chain: traditional HVAC giants face mounting pressure to pivot, while companies specializing in precision fluid control, water treatment, and modular integration are poised for outsized growth. Moreover, amid a shortage of skilled technicians, suppliers with prefabrication capabilities enjoy a distinct delivery advantage. For utilities, the ability to deliver reliable power and water‑management solutions will emerge as a core differentiator in attracting data centers.
Risks
- A shortage of skilled tradespeople—such as electricians and plumbers—has resulted in project delays and cost overruns.
- Tightening local water-resource regulations could constrain data-center site selection or force operators to adopt more costly cooling solutions.
- The standardization process for liquid cooling technology is progressing slowly, which may give rise to interoperability challenges and a fragmented market.
- Macroeconomic slowdown is affecting the pace of capital expenditures in the data center sector.
What to watch
- Commercialization Progress of Two-Phase Direct-to-Chip (D2C) Cooling Technology and Refrigerant Regulatory Policies
- The specific implementation of state and EU legislation on data center water-use disclosure and permitting
- Actual data on the penetration rate of liquid cooling in new data center designs among major cloud service providers for 2026–2027
- The order conversion rate and profit margins of liquid-cooling-related businesses at companies such as Ecolab