Prepare the Grits: In a medium saucepan, bring the water to a boil. Slowly whisk in the grits and reduce the heat to low. Cook, stirring occasionally, until the grits are thick and creamy, about 20-25 minutes. Stir in the milk, shredded cheese, butter, salt, and pepper. Keep warm over low heat, stirring occasionally.
Cook the Bacon: In a large skillet over medium heat, cook the chopped bacon until crispy. Remove the bacon with a slotted spoon and drain on paper towels. Leave about 2 tablespoons of bacon grease in the skillet.
Cook the Shrimp: In the same skillet, add the diced onion and bell pepper. Cook until softened, about 3-4 minutes. Add the minced garlic and cook for another minute until fragrant. Add the shrimp to the skillet, cooking until they turn pink, about 2-3 minutes per side. Remove the shrimp and set aside.
Make the Sauce: Add the chicken broth to the skillet, scraping up any browned bits from the bottom. Stir in the hot sauce, smoked paprika, cayenne pepper, salt, and pepper. Let the sauce simmer for 5 minutes until slightly thickened.
Combine and Serve: Return the shrimp and bacon to the skillet, stirring to combine with the sauce. Cook for another 2-3 minutes until everything is heated through. Spoon the cheesy grits onto plates and top with the shrimp mixture. Garnish with chopped fresh parsley and serve with lemon wedges.