Bisnow: ‘We’re Not Even Close’: Data Center Power Crunch Gets Worse, With No End In Sight

Data center developers are facing a worsening energy crisis that has escalated as utilities struggle to keep up with the needs of the booming industry. And with its power usage being exponentially increased by the adoption of artificial intelligence, experts say the problem isn’t going away any time soon.

With soaring demand, rising rents and a flood of new investment, data centers are a rare, charmed corner of the commercial real estate landscape. Major tech companies’ massive investments in AI over the past 12 months have added fuel to a sector already experiencing unprecedented growth as firms like Google, Microsoft and Amazon snap up the data center capacity needed to support these new technologies.

The industry is already having trouble building data centers fast enough to meet this growing need, largely due to growing difficulty securing the hundreds of megawatts of electricity these facilities require from utilities. Data centers are already maxing out the capacity of transmission infrastructure in the industry’s key markets, meaning it can take years for new data centers to be connected to power while the utility upgrades transmission lines and substations. These problems are only expected to get worse as data center demand continues to outpace the ability of utilities to make these improvements.

Speaking at Bisnow’s DICE Data Center Management, Operations and Cooling in Virginia last month, industry leaders pointed to mistakes that caused both providers and utilities to be caught off guard by the ongoing power crunch. They also looked at how providers are trying to navigate these constraints to ensure that insufficient data center capacity isn’t what limits innovation and development of AI and other technologies that their largest tenants have bet their futures on.

“It’s great to say that AI is going to change the world and everything else, but we have to look at what it’s going to take to get there, and right now we’re not even close,” said Kevin Dalton, chief data center officer at Cumulus Data.  “All of a sudden there’s all this demand and you have to wonder how this is going to happen. You can’t just go turn on a switch and you get power. “

Power usage by the data center industry is expected to accelerate further in the coming months and years. While U.S. data centers used a total of 17 gigawatts at the end of 2022, a report from Newmark this month projected that the industry’s capacity will more than double to reach 35 gigawatts by 2030.

While much of this growing consumption is due to more data centers being built, the power requirements of a typical facility have also shot up due to AI. The high-performance processors needed for AI can consume 15 times more electricity than traditional computing, meaning that data centers developed today need significantly more power than a facility built on the same site just 18 months ago.

The problem is not the amount of power being generated. Industry leaders say there is plenty to accommodate growing data center demand.

The problem is transmission. The level of demand in a growing number of markets has surpassed the capacity of the grid infrastructure needed to bring electricity from power plants to data center development sites.

“We know that there’s plenty of generation in the United States to support the current load plus probably 20%,” Dalton said. “The problem is, it’s in places that people don’t want to build.”

The power crisis has emerged in part because the majority of data center capacity in the U.S. is clustered close together in just a handful of markets — a system of regional hubs necessitated by the performance needs of major cloud providers and other large tenants. This means that the bulk of the industry’s skyrocketing power demand has been concentrated along a few specific transmission corridors that are now being pushed past their limits.

It has been the country’s two densest data center districts, Data Center Alley in Northern Virginia’s Loudoun County and sections of Silicon Valley, that have been the first to see new development effectively paused while transmission infrastructure is upgraded to improve capacity. But data suggests the crisis is coming for every corner of the data center landscape, from major hubs like Dallas and Atlanta to emerging markets like central Washington.

So how did things get to this point?

Utilities shoulder a share of the responsibility, panelists said. Power providers rely on their ability to predict demand years in advance, allowing them time to build or improve transmission lines or other infrastructure needed to expand capacity. But utilities in major data center markets were taken completely by surprise by the explosion of demand from the sector over the past three years, said Microsoft’s Yue Tu.

“Every utility was the same story: they were projecting very flat demand growth and maybe even some small decreases over the next decade due to energy efficiency,” said Tu, a product innovation manager at the tech firm. “I remember sitting down with a utility executive in 2018 and asking if they were ready for one gigawatt of new demand coming in the next five years. He didn’t think I was serious.”

Utilities are now behind the eight ball and struggling to catch up with demand from data centers that continues to accelerate.

Adding capacity to regional grids is a slow process, requiring major capital projects that take years to complete. Making matters worse, timelines for improving transmission infrastructure are getting longer due to supply chain constraints for key equipment and new regulatory hurdles in certain markets.

The fact that utilities were blindsided by data center demand growth is largely the responsibility of the data center industry itself, Tu said, as neither individual operators nor industry groups adequately communicated anticipated growth trends or the growing scale of new development to utilities. It’s a failure he attributes to both a culture of secrecy regarding development plans within the data center sector and industry leaders incorrectly assuming that utilities had the data they needed for accurate planning.

“There’s a lot of opaqueness in terms of how our industry grows,” Tu said. “We need to have greater transparency in the industry to provide the appropriate signal to utilities and other stakeholders that need to understand our growth trajectories.”

The power crisis is fundamentally changing how data center providers and their tenants operate. As Bisnow has reported previously, power constraints are pushing development into new markets where energy is more readily available. Tenants are increasingly willing to lease outside of the industry’s traditional hubs and sacrifice certain performance standards as long as new capacity can be built quickly.

Cloud providers and other hyperscalers are also looking to build or lease close to power plants in order to reduce the number of potential transmission pinch-points as well as the time and money required for any needed infrastructure improvements, Dalton said.

He also points to transmission constraints as the driving force behind the industry’s trend toward gigawatt-scale, multi-tenant campuses like Maryland’s Quantum Loophole or data center districts like Digital Gateway in Prince William County, Virginia. When there needs to be a massive investment in new transmission infrastructure that will eventually be reflected in the cost of power, economies of scale matter, Dalton said.

“It’s why people are building campuses now,” he said. “Our campuses are at minimum one gigawatt at this point, and you’re going to see more of that because, if you look at the economies of scale, the bigger you build the cheaper it gets.”

Developers looking to build in markets where the grid has been pushed to the brink are also exploring ways to skirt transmission constraints by generating their power on-site with diesel and natural gas generators or emerging technologies like fuel cells, geothermal, and even small nuclear reactors.

While there has been some limited adoption of on-site generation at data centers in the U.S., it has not proven to be an economically viable approach to developing new capacity at scale in tapped-out markets. But it is happening in Ireland, where at least 11 data centers being developed by Microsoft, Amazon and other cloud providers will generate 100% of their own power via gas turbines until the national utility can connect them to the grid.

The power shortages and market dynamics are different than in the U.S., but industry leaders are keeping their eyes on Ireland to see whether a similar approach could work in American markets.

“In Ireland they can’t get the power at all, so they don’t have a choice. On-site generation is the only way they’re going to be able to build,” said Jim McDonald, cofounder and director of environmental impact at Miratech Corp. “Folks are having to do a belt and suspenders approach over there, and hopefully we’ll learn a little bit from what they’re doing so we can bring it stateside.”

Ultimately, the path out of the industry’s power quagmire may not be determined by data center providers or utilities, but by the big tech tenants, who account for the lion’s share of demand, changing where and how they process data. Companies like Google and Microsoft are exploring ways to change their data processing and network architecture that limit the computing tasks handled in capacity-strained markets, ensuring that only workloads with certain latency requirements are processed there.

It is unclear whether these changes are close at hand. But, according to Microsoft’s Tu, this kind of approach may well end up being cheaper and more effective than utilities and data center providers trying to build their way out of the problem.

“Solving this with infrastructure will be very slow, painful and expensive,” Tu said. “There’s other parts of the system that need to be looked at.”