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US power struggleHow data centre demand is challenging the electricity market model

US utilities have been caught flat-footed as a surge in the development of power-hungry data centres and manufacturing facilities has packed load interconnection queues. As we wrote in last October’s Horizons, this has left the power sector with a demand growth dilemma. And the challenge has only intensified.

There are substantial hurdles to meeting such gargantuan demand growth: procurement bottlenecks for critical supply-side equipment, the retirement of substantial amounts of coal-fired generation, tariff and energy policy changes that make renewables development more challenging, long lead times on new projects and the need for transmission upgrades.

Since October, the long load queues have grown even longer. Wait times for grid connection have increased. Developers and data centre owners were hoping they could find off-grid solutions to circumvent delays only to come up against technical issues.

It is increasingly clear that some vertically integrated regulated utilities are best placed to supply the new demand. Areas with retail choice that rely on competitive power markets to meet demand growth are finding it harder.

These issues are of paramount importance. The large-load demand being met by regulated utilities is raising a host of new issues for regulators and could leave existing customers picking up the tab for data centre power investments, should demand not materialise as anticipated. In some cases, just a few major customers will soon account for as much utility infrastructure investment as all other customers put together, reshaping utilities’ risk profile. In a competitive power market, if data centres are added faster than new power plants can be brought online, it could threaten grid reliability and lead to power outages.  

A proliferation of data centres

The biggest challenge for the power industry is predicting the future scale of data centre electricity demand. In a fundamental mismatch, the tech companies fuelling the surge only have demand visibility for three to five years, whereas energy-sector investors take a 30-year view. Moreover, the profitability of new investments in artificial intelligence (AI) services, in particular, is unknown. As tech companies gain greater understanding of the AI profit outlook, there could be big upward or downward shifts in their needs.

Wood Mackenzie is now tracking 134 GW of proposed data centres across the US, up from 50 GW a year ago. Grid operators have received interconnection requests far exceeding this, as some developers have bagged spots in multiple queues, hoping one of them will pay off, while others have yet to disclose project details. As the ability to secure interconnection and energy supply becomes the biggest constraint on data centre developers, proposed project locations are extending beyond traditional markets into states such as Pennsylvania, Ohio, Indiana and Iowa, where large-scale data centre construction is a new phenomenon.