Power Shortages Are Turning More Data Centers Into Their Own Utilities (bisnow.com)
As the data center industry’s appetite for energy continues to grow, land with access to the massive amounts of power these facilities need has become scarce in major data center hubs like Northern Virginia and Silicon Valley. It’s a situation that is becoming increasingly dire, with demand for new data centers significantly outpacing the ability of regional utilities to make the infrastructure improvements needed to expand capacity.
With dwindling energy availability threatening to bring data center growth to a screeching halt in multiple markets, companies that develop and operate data centers have begun taking a more proactive approach to the power crisis. Many have begun acting like utilities themselves, collaborating closely with regional energy providers and grid operators and increasingly generating their own power on-site.
“We don’t have capacity and we can’t get it from the utility — that means we’re going to have to come up with alternate answers to that problem,” said Dean Nelson, CEO of Cato Digital, speaking at Bisnow’s DICE East event last week at The Ritz-Carlton in Tysons, Virginia.
“Honestly, I don’t see another answer in the short term or mid-term for us to be able to solve that problem other than local generation,” Nelson added. “It’s suddenly feasible in multiple markets, including Northern Virginia.”
The data center industry’s unprecedented growth over the past three years has come with a massive increase in energy use. Not only are there more data centers, the average size and power requirements for new developments has shot up as well. Experts predict that energy use will accelerate further in the months ahead, driven by the use of more powerful processors needed for technologies like generative AI.
In primary data center markets like Northern Virginia, Silicon Valley, Dallas and Phoenix, the amount of power guaranteed by utilities to data center operators jumped by 17% in 2022, according to CBRE. The construction pipeline in those markets is slated to raise that total by nearly 50%. Experts say these numbers likely underestimate the growth of the industry’s energy demand, as the percentage of allotted power that data centers actually utilize has gone up as well.
Utilities are having trouble keeping up. Even if they are generating more than enough power, inadequate transmission infrastructure is already creating headaches for data center builders in the industry’s key hubs.
In Northern Virginia, utility Dominion Energy last year had to delay power delivery to multiple projects due to transmission problems, while California’s Silicon Valley Power may not be able to energize new data center substations until 2029. Similar constraints are suddenly on the horizon even in newer data center hubs like Phoenix and Atlanta, while a recent CBRE report pointed to looming transmission issues across multiple markets, from Dallas to Central Washington.
Experts say utilities and grid operators are falling even farther behind, with projects to expand capacity advancing far more slowly than the data center industry’s needs. Power providers are accustomed to lengthy development timelines, and they face long permitting and approval processes that can delay projects for years. Even Dominion’s emergency upgrades to existing transmission lines in Loudoun County are expected to take more than four years.
“The normal cycle for a utility to solve a problem is long, because they’ve been around for 100 years and they’ve planned on a certain growth rate,” said John Sheputis, managing director at GI Partners, speaking at DICE East. “It’s a problem that I don’t see any obvious solutions to: How are we going to scale these power solutions in these concentrated areas?”
While experts say there is no single solution to solving the industry’s energy crunch, data center providers are starting to take matters into their own hands. For a growing number of companies, this means generating their own electricity in markets where the power grid is being pushed to the brink.
“There’s a lot of developers developing powered campuses — that’s not necessarily a new thing, but the scale we’re seeing it is what’s new,” James Grice, chair of the data center practice at law firm Akerman LLP, said at DICE East. “Bringing your own power is always a discussion point now, as opposed to before where I had clients that would just say: No, we don’t do power, that’s not our business.”
Few data centers are disconnecting from regional power grids entirely. Rather, campuses are using self-generated electricity to supplement energy from utilities or to pull themselves off the grid when it is being strained by excessive demand. This is a welcomed development for utilities struggling with maxed-out infrastructure, and that can mean better rates and improved connection times for data center developers trying to get to market fast.
“You’re seeing utilities start to lock down on how much capacity they’re going to give you at a campus, and you’re seeing them come to the table and having discussions around what you’re willing to do from an on-site generation standpoint to mitigate peak loads [on power grids],” said Stuart Lawrence, vice president for product innovation and sustainability for Stream Data Centers, speaking at DICE East. “They’re saying what can you guys do to help us out when those kinds of conditions hit?”
Data center operators are generating their own power in a number of different ways.
Since the industry’s inception, data centers have had power generation on-site in the form of backup generators. Regular use of traditional diesel generators often isn’t a viable option, mostly due to a significant emissions footprint that makes diesel unpalatable both for tenants with emission reduction targets and for nearby communities concerned about air quality. Still, some powered data centers do utilize utility-grade diesel generators with lower emissions, while generators powered by natural gas are increasingly common, experts say.
Powered campuses increasingly utilize what are known as microgrids — a system in which the data center effectively operates as its own power grid that incorporates energy from a number of sources. This includes the local utility, but also power generated on-site or nearby from one of a growing number of commercially available sources with lower carbon footprints than traditional diesel. These include fuel cells powered by natural gas or hydrogen, as well as natural gas generators.
Adoption of these cleaner on-site generation technologies is skyrocketing, experts say. The past year has seen the emergence of developers like CleanArc Data Centers — launched in January by energy investment firm 547 Energy — focused exclusively on low-emission powered campuses with microgrids. California-based Bloom Energy, which offers microgrids that incorporate its hydrogen and natural gas fuel cells, now provides more than 65 megawatts of power to data centers in the U.S.
“It’s amazing how many projects they have underway because of the demand problems and the lack-of-capacity problems,” Cato Digital’s Nelson said.
In certain markets, utilities and grid operators have set up programs to encourage on-site generation by data center operators. These agreements, known as demand response programs, provide data center operators with discounted power pricing and other benefits in exchange for agreeing to go off-grid when regional power demand threatens to overwhelm a utility’s transmission or generation capabilities.
“Whenever the grid is strained, they’re going to let you know well in advance to get off the grid and you do self-generation at that point,” said Jim McDonald, co-founder and director of environmental impact at Miratech Corp. “It’s really an effective way to marry what the utility’s needs are with what’s needed on-site.”
Demand response programs or other incentives for on-site generation go a long way toward making self-generation economical for data center operators. Experts say programs like Texas’ Emergency Response Service are seeing greater opt-in from the data center industry. In Ireland, energy regulators have begun requiring new hyperscale data centers to generate their own power for thousands of hours a year, even allowing the use of diesel generators if they want to be able to build data centers at all.
Industry insiders say developers are increasingly working with utilities in other data center markets to implement similar programs, which they expect to emerge in first-tier markets like Northern Virginia in the months ahead.
“We’re probably looking at that sooner than we think here in Northern Virginia with on-site generation,” McDonald said.
On-site generation may be a big piece of the puzzle when it comes to alleviating the data center industry’s power pinch, but in the near term certain operators face significant barriers to adoption. Implementing on-site generation and participating in demand response programs can be more difficult for multitenant colocation providers than at facilities owned or operated by a single user, experts say.
According to Stream Data Centers’ Lawrence, participation in demand response programs often violates lease terms and service agreements with customers mandating certain layers of redundancy for the data center’s power supply. These tenants tend to be extremely risk-averse, meaning that convincing them to restructure contracts to allow the data center to intentionally go off-grid is far from a sure thing.
“If you’re a [colocation provider], you have to be very upfront about that, and those customers or tenants have to be well aware you’re running on generator and why you’re on generator,” Lawrence said. “It’s very tricky.”