A common mantra for renewable energy developers is follow the offtake and with the explosion of AI spurring growing energy demand, that increasingly means follow the data centers.

“They have a seemingly insatiable appetite for power,” Michael Arndt, president, North America for Recurrent Energy, said this spring at the ACORE Finance Forum. “So, wherever those offtakers want to be, you’ve got to position yourself to be in those markets six years ahead of when they want to be there, maybe longer.”

Spurred by the explosion of artificial intelligence (AI), the interconnect between the increasing demands to power data centers has been perhaps the major story so far in the energy sector in 2024. Much of the focus has been on data centers and their need for power, which has led them to steer away from traditional hubs like Santa Clara, California and instead seek places where power and interconnection are readily available.

But the relationship between data and power goes both ways and is set to define both industries for the decade-plus to come. If the insatiable appetite for the power of these data centers is not well-managed, it threatens to draw political pushback, those in the industry say.

Power and the data

As recently as two to three years ago, the prime concern for developers of data centers was proximity to their end users. Locations like Santa Clara, California – in the heart of Silicon Valley – became hubs of data center development.

Data centers at the time were smaller and fewer, and access to power was, at most, a minor challenge. “Maybe not so easy as plugging into a wall, but not far off,” one fund investor says.

With the sudden rise in AI, the need to store data has exploded. Until a few years ago, power demanded by data centers was roughly flat even as data center workload tripled, as growth was offset by increased power efficiency, according to a recent Goldman Sachs report. But efficiency gains have dwindled, and now data centers are gobbling up more and more power. They used 3% of US power in 2022, Goldman says, but by 2030 that number will be 8%.

Now, access to power has become a paramount concern for data center developers. The sudden surge in demand has vexed utilities, among them Dominion Energy in Virginia, which expects to connect 15 data centers this year alone, the firm’s CEO said on an earnings call this year.

The stress of such a surge in demand on the electrical system has caught the power industry somewhat off guard.“The demand side wasn’t thinking about it until two years ago,” Mac McFarland, president and CEO of Talen Energy, said in June at Evercore ISI Global Clean Energy & Transition Technologies Summit in New York City. “The supply side wasn’t thinking about it until nine months ago.”

Today, it is top of mind across data center firms, renewables developers and utilities.

“As a developer, you really need to be thinking where you are going to develop your capacity and in which grids you’re going to deliver that capacity, and who you can contract with to make sure that your project is viable,” William Smales, chief investment officer of Morrison, said earlier this year on Infralogic’s Crossroads, podcast. “Similarly, the hyperscalers are thinking really hard about where they can get grid capacity and ultimately renewable energy. It’s obvious that those two have to come together.”

This has meant greater planning – and costly upgrades – for utilities in areas with large data center growth.

One advantage data center owners – at least the hyperscalers – have over other power consumers is their near-indifference to electricity costs because, as Brian Janous, co-founder of Cloverleaf Infrastructure, said on the Evercore panel, “Turning electricity into data is one of the most profitable businesses that has ever been created.”

Using renewable energy sources is still a priority for many firms with zero-carbon targets. But, Janous says, everything is secondary to capacity, and in private, companies acknowledge they’re likely to miss their carbon free targets.

The importance of location – whether a data center needs to be near other data centers, a population center, or a particular set of users – depends on the function of the site. In some instances, according to Stephen Dowd, CBRE Investment Management’s chief investment officer for the firm’s private infrastructure strategies, a millisecond can make all the difference. In these cases, the center’s latency, or the time it takes to pass from one system to another, is critical, and location is everything.

But latency is less important for some uses, like AI learning, and developers have more freedom to build where power is available.

“It’s highly dependent on what is in the nature of the data center and the particular service they are providing,” says Dowd.

Northern Virginia is, by far, the nation’s largest data center market, according to 2023 data published by CBRE, followed, with some distance, by Dallas-Ft. Worth and Chicago. But Atlanta and the surrounding suburbs are becoming increasingly popular for data center developers.

“Some workloads for data centers, or at least some types of data centers, really do benefit from being in bigger ecosystems like Northern Virginia,” says the fund executive, whose firm has investments in data centers and energy. “But I think people are realizing that not all workloads at a data center are created equal, and where the opportunity exists to site a data center and to deliver services to your client in a way that isn’t perfectly connected to one of those big ecosystems, people are taking that opportunity.”

He adds, “If in Northern Virginia the utility says it’s going to be 36 months, and down in Texas Oncor says it’s going to be 12 months, even irrespective of costs you’re going to go somewhere you can set up your data center quicker.”

Growing problems

Discussion of this challenge has exploded over the course of 2024, in earnings calls, published reports, and industry publications and white papers.

“I don’t see that the customer is the constraining factor. I see that power is really the constraining factor,” DigitalBridge CEO Marc Ganzi said during his firm’s 1Q24 earnings call on 30 April. “We started talking about this over two years ago at the Berlin Infrastructure Conference when I told the investor world, we’re running out of power in five years. Well, I was wrong about that. We’re kind of running out of power in the next 18 to 24 months.”

If the mismatch between available and needed power does materialize, it will be a threat to data center growth as well as grid stability, industry professionals say. Regulators and political actors will not allow an explosion of data center development.

“When those communities and the states realize, oh wait I can’t get the next Hyundai factory because we put in 500 MW of data centers?” said Janous. “Nope. [There will be a] data center moratorium.”

The fund executive says that, when possible, renewable power will be built at the site of the data center.

“Increasingly, you’re going to see that physical colocation that you haven’t really seen in the past,” he says.

One solution to the power problem is repurposing stranded industrial sites, TD Cowen’s digital infrastructure equity analyst team wrote in a report in May.

“As the U.S. outsourced the manufacturing of goods to international markets to capture gains driven by labor cost differentials, the manufacturing assets in the heart of the U.S. began to lie dormant. These assets are now seeing revitalization driven by the boom in incremental data center demand coupled with the less latency sensitivity nature of Generative AI training,” the report states. “As we consider the nature of manufacturing assets, they are typically set on large campuses similar to data centers, while skewing towards high power consumption per sq. ft., also similar to data centers. These characteristics make them ideal for conversion into data center campuses.”

One of the biggest data center projects in the world, Quantum Loophole is refashioning a former site of an Alcoa Eastalco Works aluminum smelter. The 1,800 MW project could attract upward of USD 15bn to USD 20bn in investment over the next several years. A substation resides on the property that will one day soon pump power into the data center facilities.

Align Data Centers has employed a similar tactic. Last year it bought the site of a former automotive equipment manufacturing facility originally built by GM in the late 40s. The property offers potentially up to 200 MW of capacity.

And energy investors have become active in the data sector space as well. New Fortress Energy, a New York City-based LNG investor, launched a power and data center business called Klondike Digital Infrastructure this summer. And many of the major infrastructure investors – Stonepeak, Partners Group, Blackstone, IFM among them – have invested both in data centers and in power, energy and renewables.

Despite these concerns, infrastructure investors continue to plow money into the rapidly growing data center sector. A dozen data center M&A deals have closed already this year, according to Infralogic data. And in one of the largest transactions of 2024, an investor group led by DigitalBridge and Silver Lake paid USD 9.2bn for an equity stake in Vantage Data Centers.

But that doesn’t mean this investment has peaked. Moody’s expects global data center investment to total some USD 2trn over the next five years.

From drain to resource?

Data center campuses, combining data centers and power sources in one location, have become abundant. And there’s also talk of using hydrogen or other sources to power the data centers of the future.

Still, Jonathan Winer, co-founder and co-CEO of Alphabet-backed Sidewalk Infrastructure Partners, thinks many in the sector are missing the core issue.

“Data centers historically have not been very good stewards of the grid,” Winer tells Infralogic. “They demand a tremendous amount of energy, and the profile of how and when that energy is consumed and how it spikes can be very, very challenging for a system operator to operate.”

A key question, Winer says, is whether the data centers are spurring an energy shortage or a “peak” energy shortage for any given system. If it is the latter – high demands during peak hours stretching the system but plenty of power during downtimes – a data center could be a resource for the grid rather than a liability.

“The answer is not merely, ‘Can I create more generation?’ but rather, ‘Can I make the data center itself be more responsive such that in moments of peak demand on the grid it can be a resource to the grid and not cause greater challenges,” Winer says.

Earlier this year, Sidewalk launched the data center developer Verrus, which plans to develop data center microgrids that support the mission of utilities instead of adding challenges.

Like the questions surrounding location, this ability largely depends on what type of function a data center performs. Some data centers need constant power, but others that serve functions like AI learning can perform high-energy tasks when energy is abundant. A data center with a battery can potentially send power back to the grid during peak demand.

A shifting paradigm

The growth of AI has upended decades-long norms of slow energy demand growth, and the implications go beyond what it means for data centers and their power sources.

While power demand has traditionally grown just half a percent or so in recent years, the need to power AI and data centers could increase that number 10-fold, Bank of America Managing Director Ray Wood said at the ACORE conference earlier this year.

If the content of that clean energy and transition conference is any indicator, the renewables industry is still making sense of what this means for both clean power and the energy sector in general. Will the enormous predicted growth of data centers be a boon, due to the added need for power, or will the threat of power shortages convince consumers and lawmakers that prioritizing their electricity needs to power the applications of the future is a luxury they can’t afford?