Originally published for customers June 7, 2024.
What’s the issue?
Technology continues to be one of the fastest growing industries in the United States, with associated data centers popping up at an increasing pace. The largest facilities have power demands that exceed those of small cities. There are concerns in many states about how this demand will be met and how to ensure reliability across the board.
Why does it matter?
Annual power demand growth in the U.S. has averaged less than 1% over the last decade. Grid planners recently doubled their expected demand growth to 4.7% over the next five years when compared to 2022 estimates, indicating that certain operators will need to fill the gaps as soon as possible.
What’s our view?
Significant power demand increases are certain to come in the near future. Bloated interconnection queues for new renewables projects and regulatory uncertainty for new natural gas projects limit the amount of new capacity that can be added to the grid in a timely manner. Opportunity exists for small expansions of existing infrastructure in partnership with power providers to help ensure demand is met quickly and reliably.
Technology continues to be one of the fastest growing industries in the United States, with associated data centers popping up at an increasing pace. The largest facilities have power demands that exceed those of small cities. There are concerns in many states about how this demand will be met and how to ensure reliability across the board. Annual power demand growth in the U.S. has averaged less than 1% over the last decade. Grid planners recently doubled their expected demand growth to 4.7% over the next five years when compared to 2022 estimates, indicating that certain operators will need to fill the gaps as soon as possible.
Significant power demand increases are certain to come in the near future. Bloated interconnection queues for new renewables projects and regulatory uncertainty for new natural gas projects limit the amount of new capacity that can be added to the grid in a timely manner. Opportunity exists for small expansions of existing infrastructure in partnership with power providers to help ensure demand is met quickly and reliably.
High Demands from Data Centers
As we discussed in Data Centers: A Rapidly Growing Energy Consumer, data centers are a massive consumer of electric power and have extensive reliability requirements. The demands of an individual data center vary greatly based on the size and type of facility, which are described briefly below:
| Type | Description | Typical Power Demand |
|---|---|---|
| Enterprise | Owned and operated by companies for their own internal use; support business-specific applications and store company data | Medium to High |
| Colocation | Facilities where businesses can rent space for servers and other computing hardware; provide infrastructure such as power, cooling, physical security, and networking, allowing companies to scale without the need for large capital expenditures on their own facilities | Low to Medium |
| Cloud/Internet | Operated by cloud service providers to offer scalable and flexible computing resources over the internet; provide on-demand access to IT resources like servers, storage, and applications | High |
| Hyperscale | Support large-scale, high-density computing environments; have extensive automation and a high level of standardization to handle the needs of cloud and big data applications | High |
| Edge | Located close to the end users they serve, reducing latency and improving performance for time-sensitive applications; support edge computing by processing data locally | Low to Medium |
The facilities with the lowest power requirements typically require one to five megawatts (MW) of power, where data centers with the highest level of demand can require anywhere from 20 to more than 100 MW of electricity to power their operations. Data centers of any size often operate 24/7 and demand constant power supply, much different from other traditional industrial consumers that fluctuate significantly throughout the day.
Limited Supply Options
Data centers have a few options in order to supply their energy needs. Many contract directly with local utility companies and local distribution companies to ensure that they are able to meet their demand. Certain utilities, like Dominion and Tennessee Valley Authority, have set up teams dedicated specifically to working with potential data center customers. In Wisconsin, We Energies is supporting a project with Microsoft, where it will build a new substation directly on the property and has contracted with ANR for the project’s gas supply.
Many developers of these projects are large technology companies that have set significant climate goals, so data centers often utilize power purchase agreements (PPA) with independent power providers (IPP). Onsite PPAs result in renewable energy technologies installed directly on the data center’s property. Offsite PPAs, on the other hand, are not used to power the data center directly, but ensure that the data center’s demand is matched with renewable energy being pushed onto the grid. A physical offsite PPA specifies an amount of capacity from a specific generation facility. A virtual offsite PPA allows for the purchase of renewable energy from an IPP’s portfolio, but the power is not attributed to a particular generation facility.
Regardless of where a data center gets its power from, facilities almost always install some sort of backup generation on site to ensure that operations can continue in the case of power supply interruptions. These backup generators are typically powered by diesel or natural gas, but some facilities do elect to use battery storage instead.
Virginia’s Data Center Alley
Virginia is home to the biggest data center market in the world, with the majority of these facilities being situated in Northern Virginia, an area that has since been coined “Data Center Alley.” As we discussed in Dominion Opens Doors for LNG Facilities Exempt from FERC Jurisdiction, the state has aggressive clean energy goals as part of the Virginia Clean Economy Act. The 2020 law provides that Dominion must have all renewable generation by 2045 and calls for the retirement of all incumbent baseload generation. The state’s more recently issued long-range plan has indicated that new natural gas plants will be needed in order to meet the state’s unprecedented growth in demand.
As seen in the chart above, Virginia has already seen a significant increase in demand since the state’s data center build out picked up pace in 2018. Commercial sales have increased almost 30% when compared to 2018 levels, and the state’s overall sales have increased by close to 10% in the same timeframe, far more than the nationwide average.
Growing Market in Texas
Texas is an attractive state for these facilities for a variety of reasons and currently holds the second-largest market in the country after Virginia. Most of the state’s data centers are concentrated in the Dallas-Fort Worth area, totaling more than 560 MW. There are a number of advantages unique to the state that are contributing to the growing proliferation of these facilities. Texas is known for its favorable business environment, with certain tax exemptions for qualifying data centers, and low cost of power when compared to other states. Land is not only readily available, but also relatively inexpensive. The state’s regulations and current grid structure also make it easier (read: faster) to build new power infrastructure to supply these hungry facilities.
The chart above shows Texas’s diverse generation mix, which is favorable for companies that are prioritizing clean energy generation. Like Virginia, the state has also seen a dramatic increase in annual electricity sales, with an increase of just under 15% when compared to 2018.
Disconnect in Georgia
Georgia initially incentivized data center developers to build in the state with tax incentives put in place in 2018, though there are calls to temporarily pause this policy. Georgia Power recently stated that it would need to build nearly 3,400 MW in generation infrastructure in order to meet the state’s growing power demand, attributing 80% of this need to the growing number of data centers in the state. In April, the utility received necessary regulatory approval to build 1,400 MW of fossil-fuel fired plants to help meet some of this demand. Of course, many of the state’s data centers are calling for more renewable generation, seemingly ignoring the fact that almost 30% of the state’s generation came from nuclear power last year, as seen in the chart below.
Georgia’s power supply concerns are intriguing when examining the state’s recent electricity sales levels. Annual electricity sales were up less than one percent at the end of 2023 when compared to the state’s levels in 2018. It is always possible that the utilities are being overly cautious in terms of ensuring reliability when compared to states like Texas and Virginia.