“AI-powered electricity trading” is booming, and equipment manufacturers are soaring.
The urgent demand for AI electricity from tech companies is reshaping the landscape of the power equipment market. Manufacturers of small turbines and fuel cells have emerged as unexpected winners in this race to supply electricity, with their stock prices surging much more than traditional equipment giants.
According to media reports on Thursday, data centers are facing a severe power shortage. Morgan Stanley estimates that by 2028, U.S. data centers will face a shortfall of 45 gigawatts, equivalent to the total electricity generation of the state of Illinois. While large natural gas turbines are the ideal choice, order wait times last years and construction periods are lengthy; at least one listed developer, Fermi, has turned to buying used turbines from General Electric.
This supply-demand imbalance is driving data centers to opt for more expensive but faster-to-deliver off-grid solutions. Bloom Energy’s share price has surged over 500% this year. Manufacturers of turbines and reciprocating engines, such as Caterpillar and Rolls-Royce, have also seen significant increases. Although these smaller devices have higher unit costs and emit more pollutants, their modular nature and speed of delivery give them a competitive edge in the current market environment.
Small-Scale Devices Fill Supply Gap
Data centers are purchasing solid oxide fuel cells from Bloom Energy in large volumes; these devices use natural gas as fuel. Meanwhile, small natural gas turbines and reciprocating engines—piston-cylinder type devices used in cars—produced by Caterpillar, Wartsila, Cummins, Rolls-Royce, and Generac are also gaining favor. These devices are typically used as backup power sources or in mobile applications like oilfield services.
Bloom Energy’s stock trajectory is the most representative. The company’s share price remained flat until the end of 2024, but surged after announcing data center agreements with American Electric Power, Brookfield Asset Management, and Equinix. Following last week’s earnings call, its share price jumped 18% in one day, and its current forward P/E ratio has reached about 140 times.
Caterpillar, famed for engineering equipment, is experiencing a surge in demand from data centers. In the third quarter, sales to power generation clients (mainly data centers) rose 33% year-over-year. Caterpillar’s turbines power xAI’s Memphis, Tennessee data center, and the company has announced plans to supply data centers in Utah and Texas. Backup generator maker Generac said last week it is seeing strong demand from hyperscale tech giants, but this positive trend has been largely offset by weak sales among residential customers.
Valuation Divergence Reveals Investment Opportunities
By comparison, turbine and reciprocating engine manufacturers seem like more reasonable entry points, although buying their shares also means exposure to other business lines—Caterpillar’s construction business, Cummins’ automotive clients, or Rolls-Royce’s aviation business. Caterpillar, Rolls-Royce, and Cummins have all seen gains this year, but remain significantly discounted relative to large turbine maker GE Vernova, whose forward price-to-earnings ratio is 47 times.
The power generation cost of these small devices is much higher than the large combined-cycle natural gas turbines produced by GE Vernova, and they often emit more pollutants (except for fuel cells). However, their modular nature makes them cost-competitive when providing off-grid electricity to data centers that require nearly 100% uptime. When a data center uses a single 500 MW turbine, it needs another of equal size for backup. In contrast, a data center operating 100 5 MW turbines only needs a few additional small turbines as backups.
In modular solutions, technology selection becomes complex. According to research consultancy Thunder Said Energy, Bloom Energy’s solid oxide fuel cells have higher upfront and maintenance costs, but they offer higher fuel efficiency and do not rely on combustion, resulting in less air pollution. This might give them an advantage in permitting.
Production Expansion vs. Market Sustainability
Given supply bottlenecks, data centers may care more about speed than cost details. Juan Macias, CEO of AlphaStruxure, which operates on-site energy systems for data center clients, said customers are willing to pay a premium for power delivered in 2027 or 2028.
Demand is so strong that equipment makers are having to consider production expansion. Caterpillar said last Wednesday that delivery times for some large turbines are getting longer and the company is "ready to take action" to increase capacity if necessary. Bloom Energy has announced it will add 1 GW of manufacturing capacity by December 2026, doubling its existing capacity.
Large turbine makers are more cautious, having been burned by overbuilding in the early 2000s techno-boom. For instance, GE Vernova said in its latest earnings call that its capital spending for gas power and grid businesses may peak in 2026. Bulls might see this as an opportunity for small equipment makers, but the restraint shown by large device manufacturers serves as a reminder to investors that a sizzling market doesn’t always last.
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