Marcus Emadi | Director at Turning Point Capital
CONTENTS
Grid Capacity Demands vs How Renewable Developers are Rushing to Meet Data Center Energy Needs
In recent years, power has become the most critical factor for data center developers, a shift from earlier years when it was one of the more straightforward elements. As the demand for energy surges due to the AI boom and the growing urgency of net-zero goals, data centers are under increasing pressure to secure not only enough power, but to ensure that it comes from clean, renewable sources. While the immediate priority for operators may be securing power, the push for sustainability means that, long-term, power sources will need to align with corporate decarbonization commitments.
Energy Demands Surge Amid Data Center Growth
The energy consumption of data centers (excluding cryptocurrency mining) accounted for around 1-1.3% of global electricity demand in 2022, with projections suggesting it could rise to 1.5-3% by 2026, according to the International Energy Agency (IEA). In the United States, data center energy use in 2022 ranged between 1.3% and 4.5% of the country’s total consumption, and it has likely increased due to the massive expansion of AI-driven data centers. Over the past four years, U.S. commercial electricity usage saw a 1% rise, largely driven by this data center boom.
Utility companies are grappling with dramatic spikes in energy demand from data centers. For example, Xcel Energy has a 6.7GW pipeline of new data center projects, while Oncor has reported a staggering 59GW in connection requests. Other companies, like AEP and NextEra, expect significant increases in data center loads in the coming years. This rising demand, however, is occurring as the grid itself is transitioning to renewable energy sources, which complicates matters for data centers aiming for long-term sustainability.
A Changing Grid Mix and Looming Capacity Shortfalls
Grid infrastructure is in flux, with the rapid shift from fossil fuel power plants to renewables like solar and wind. Solar is expected to contribute nearly half of the growth in global electricity demand by 2025, with wind power helping to cover another 25%. However, this transition isn’t happening at the pace or scale required to meet surging data center energy needs.
The North American Electric Reliability Corporation (NERC) recently highlighted potential capacity shortfalls, especially as 83GW of fossil fuel and nuclear generation capacity is slated for retirement over the next decade. In areas like the Midcontinent Independent System Operator (MISO) region, which includes major data center hubs, capacity shortfalls could reach 4.7GW despite efforts to add new resources.
Marc Ganzi, CEO of DigitalBridge, warned that data centers may face power shortages in the next two years, adding that power transmission and distribution networks are already at capacity. With grid congestion making new projects difficult, ensuring reliable power supply for new data centers has become a race against time.
The Booming Renewable Sector Faces Growing Pains
The renewable energy market is booming, fueled by the Inflation Reduction Act (IRA) and surging demand from data centers. Solar project operators like Silicon Ranch and Leeward Renewable Energy are seeing explosive growth, with renewable capacity reaching 3GW in operation and another 20+GW in development. However, despite this growth, the renewable sector is beginning to suffer from its own success. The wait times for connecting new solar and wind projects to the grid have surged, sometimes taking years for new facilities to go online.
In 2023, the U.S. saw a 27% increase in power projects seeking to connect to the grid, with more than 2.6TW of projects now in the interconnection queue. This has led to growing concerns that too many speculative projects are delaying real capacity additions, further exacerbating the grid’s struggles to meet demand.
Transmission Challenges and Renewable Integration
A significant hurdle to meeting demand is the inadequacy of the U.S. transmission infrastructure. In 2023, only 55 miles of new high-voltage transmission lines were built despite $25 billion in spending. With transmission systems in many areas already congested, expanding this network is a slow and expensive process. Despite recent efforts to improve transmission lines, including a 100,000-mile upgrade goal set by the U.S. government, the current grid is ill-equipped to handle the growing demand for renewable energy from data centers.
Silicon Ranch’s Matt Kisber compares this to the U.S. interstate system, noting that as more projects are added to an already crowded system, upgrading infrastructure becomes increasingly difficult. However, renewable energy companies are looking for opportunities in areas with less congestion, hoping to bypass the grid’s bottlenecks.
Coordination Between Data Centers and Renewables: The Need for Transparency
One major issue is the lack of coordination between data center operators and renewable energy developers. Data center companies, often secretive about their location plans, are making it difficult for renewable developers to strategically site their projects. While renewable operators are doing their best to predict where demand will emerge, better communication and collaboration between both sectors are essential to meeting the needs of the future.
Jesse Tippett from Adapture Renewables suggests that both sides must be more transparent to better align supply and demand. By working together earlier in the process, developers can avoid speculative projects and ensure that renewable energy projects are in place when data centers are ready to power up.
The Promise of On-Site Generation and Behind-the-Meter Projects
As grid constraints continue, some data centers are looking at alternative solutions, including on-site renewable generation and behind-the-meter (BtM) projects. In a BtM model, data centers build their own renewable power facilities directly on-site, bypassing grid congestion and ensuring a reliable, clean power supply.
While BtM projects are still relatively rare, several large-scale initiatives are in the works. Amazon, for example, has acquired a data center with a nuclear power station behind the meter in Pennsylvania, while Tencent has built a 10MW solar plant at its Tianjin data center. Behind-the-meter solutions may offer data centers more control over their power supply, but they also come with challenges, such as higher upfront costs and the complexity of building large-scale power plants.
However, industry experts, including Kerr from Aurora Energy Research, believe that as demand continues to outstrip supply, on-site generation will become more common. While this approach may not entirely replace the need for grid connections, it could reduce the pressure on the grid and provide more flexibility for data centers.
The Road Ahead
As data centers continue to expand, particularly in the wake of the AI boom, securing reliable, renewable energy will be critical to meeting sustainability targets. The grid is transitioning to renewables, but the infrastructure is not yet fully equipped to handle the increasing demand from data centers. Both sectors will need to find common ground, with better coordination and transparency between data centers and renewable energy developers to ensure that the grid transition can meet the needs of both industries. The rise of behind-the-meter projects may offer a temporary solution, but the real challenge will be finding ways to scale renewable energy and improve transmission capacity in the years to come.
