Growth in cloud services, AI, IoT, 5G, and other digital technologies is straining traditional data center development approaches. Selecting an optimal location to build a data center now entails a more complex set of factors that include a far more sophisticated understanding of power availability and cost as well as other factors like connectivity, scalability and environmental considerations.

When it comes to evaluating power availability, every energy and power market across the country has its own unique set of advantages and challenges. Navigating this varied landscape successfully and sustainably means the data center industry has to start working with the energy and power sector in new ways.

Opportunity Driving Growth, Challenges, and Complexity

Data centers are energy intensive, and they are only getting more so given the explosive growth of AI applications. According to Goldman Sachs, by 2028 AI will comprise about 19% of data center power demand, representing a substantial increase from the low single digits today. Goldman Sachs further estimates that data centers will use 8% of U.S. power by 2030, compared with 3% in 2022, requiring $50 billion worth of new generation capacity just to support data centers alone. Other estimates go as high as 9%. With analyst estimates upwards of 15% CAGR in data center power demand between 2023 and 2030, there is a tremendous opportunity in this sector.

But the U.S. power market is extremely diverse, with discrete power markets across the country, posing a range of challenges for cloud, hyperscalers and other providers looking to optimize their location. As an industry, we have to dramatically modify our views on power to account for the range of complexities across a nationwide portfolio.

For example, Washington State (and much of the Pacific Northwest) has significant low-cost hydropower, generated via dams which were constructed decades in the past with subsequent turbine improvements. Hydropower offers low-carbon power which is usually less intermittent than solar and wind.

The key drivers when it comes to power remain the same: capacity, carbon, and cost. Achieving the balance across different markets means considering the full range of options and approaches.

Many markets with significant data center penetration are running into transmission constraints, notably Ashburn, Virginia. As AI-driven data center growth continues, along with electrification of transportation and heating, utilities will increasingly struggle to keep up with transmission and generation demand. The scale we are seeing is not easily supported by utilities, certainly not to the extent that it was in the past.

When it comes to sustainability, the pressures are real to reach net zero but the fuel mix on the grid will not change overnight. Efficiency continues to be of vital importance, but efficiency by itself will not solve for the load growth we anticipate. Long-term, the societal benefits of AI and transportation electrification will outweigh the short-term stress on the grid. In the near-term, we will need to be creative and consider many different low-carbon solutions.

New Locations Driving New Conversations

Twenty years ago, the conversations with utilities focused on ‘when can I get a feeder line or a part of one to support my data center build?’ A large project back then may have been 10 megawatts. Some utilities may have been surprised at that kind of demand from a commercial customer, but they were happy to meet the power requirements where they could. That is not the kind of conversation we are having anymore.

Today, data center companies are looking carefully at transmission plans, integrated resource plans, and plans to add generation. The requirements are just so much larger than they used to be. We have graduated from one-off, individual requirements to who else is coming to the utility and asking for the same thing?

The power industry is learning and adapting. We need to understand, from a utility perspective, how quickly they can realistically move, what the process looks like, and what the obstacles are in our new collective path. It takes time to add transmission capacity and substations, let alone new generation. So we need deeper conversations among all parties involved, and we need to start early.

We talk to utilities in detail about transmission capacity, what is available and what other requests are they seeing. What we hear is that utilities are challenged when multiple data centers want to build in the same area. They then have to determine how to get large blocks of power to specific spots on their grid and may direct customers to areas where transmission is less constrained.

Leveraging the Energy Ecosystem

The energy industry has a similar ecosystem to digital infrastructure. We are seeing a lot of innovation to meet the increasing demand. Vendors are responding to data center demand with offerings of energy as a service, where the vendor owns the power generation. There's a lot of opportunity there and suppliers are recognizing that. More players in the power ecosystem are interfacing with data centers that are looking at self-generation.

Optimizing this new power ecosystem is probably going to entail a combination of in-house resources, along with consultants that have experience in this field – whether your interest is in nuclear reactors, gas turbines, or renewables. The Engineering, Procurement and Construction (EPC) contractors and manufacturers of power generation technologies are also in the mix. It takes a combination of all these stakeholders and technology experts to figure out optimized power sources and data center site locations. There will be challenges that even the best planning doesn't anticipate, so every plan will need some level of flexibility to fine-tune and adjust. So, that planning requirement is also something that we need to be mindful of as we look at new ways of securing power that meets the data center requirements into the future.

Strategies for Success

Overall, the location-specific challenges of ensuring adequate, affordable, and sustainable power and energy supplies are driving data center operators to closely evaluate prospective sites across markets based on energy metrics. Novel site selection approaches, innovative cooling designs, understanding community perception and how to engage with the community, local energy partnerships, and transitioning from a commercial to industrial customer mindset are emerging as key strategies.

Compared to today, site selection was pretty straightforward even a few years ago. You had to meet connectivity and latency needs. You had to consider environmental conditions like temperature and humidity along with potential risk of natural disasters. Of course, you needed available land and reasonable construction costs. Regulatory issues and incentives, proximity to customers, security, and water. It was no short list by any means, but as an industry we became good at balancing this set of factors along with power, availability, and cost.

The power landscape has shifted and taken on considerably more importance, spilling over and raising new considerations up and down the chain as well as stimulating new approaches to optimizing data center site locations.

One new approach is spreading the power load beyond data center hub locations to other areas. For example, if you look at Ashburn, Virginia, data center providers and users all tend to pile into this same highly concentrated market. That creates a very difficult situation for a utility to support in the long term. To mitigate the potential stress on the immediate power grid, data center providers should design their infrastructure in a manner that spreads out the load and brings it closer to the generation. To the extent that it’s feasible, this approach helps enable the utilities to get the capacity demanded by the data centers in a timely fashion.

Even with advanced planning and early engagement with the utility, they still may not be able to meet the timelines of their data center customers. This may require a more proactive stance including things like setting aside land on your site for some form of generation. Or it may be a temporary solution where you have some capacity available to get the project started while the utility continues to add capacity. The economics usually look better longer term for these generation projects where you own the generation and use it to support future expansion. Here again, engaging with utilities early and often is so important to getting a better understanding of their priorities while making known the rising power requirements of the data center. In a lot of cases, the priorities of the power utility and data center user will align.

Looking Ahead

We will continue to see increased use of self-generation. In some markets, natural gas, either turbines or fuel cells, will continue to play a role. People will start to transition to green hydrogen as that becomes more readily available. And we will see continued focus on sustainability goals and new ways to get to clean firm power, defined as zero emissions and “always on,” including green hydrogen and gas turbines with carbon capture and storage.

Longer term, we will see continued interest and potentially adoption of nuclear energy in the form of Small Modular Reactors (SMR) directly powering data centers. The nuclear power facilities being built by Terra Power, led by Bill Gates, is an example of innovation in this field of alternative energy sources. For those going down that path, site selection and public engagement will play a huge role. When thinking about nuclear, one must think very long term, as the permitting process has historically been quite lengthy and involved.

No matter what solutions we apply in various markets, data center providers need to understand power generation technologies more deeply than in the past. That includes microgrids and the economic aspects. When you price out generation often there is an assumption that a certain amount of load when you're determining the dollars per kilowatt hours. If that load isn't there and there is no grid connection, those assumptions may fall through and could significantly impact economics.

Data centers are starting to transition from being commercial utility customers to industrial customers, given the scale of our operations. A commercial office building would not typically think of on-site generation. You connect to the utility, you pay your bill, and that's it. Industrial facilities have long generated power on-site, often using waste heat for their industrial processes. There are opportunities to learn from those experiences. To take advantage of this, data centers may need to build new relationships with the industrial side of power providers where that experience lives.

Projected growth for data centers is both exciting and daunting. There is opportunity in virtually every market. Approaches to navigating the power landscape needed to support this growth plays to the data center industry’s strengths: collaboration, partnering, innovation, and digging deep into the details at multiple layers of complexity.