Data Centers Are Becoming More Like Utilities, And It's Changing The Development Equation
While data centers are among the world’s largest power consumers, they are increasingly becoming mini utilities themselves, capable of generating power and acting as participants in regional energy markets. This is beginning to change the math on where and how data centers are built.
Power accounts for the majority of a data center’s operating costs — around 70% to 80% by most estimates — making power costs one of the top considerations when deciding where to locate a data center.
Traditionally, how a data center acquired that power was fairly straightforward: It was purchased from a local utility, with backup generators located on-site and a battery-power Uninterruptible Power Supply, or UPS, system that bridged the gap in an emergency.
But now the relationship between data centers and utilities is becoming more complex. Data centers are moving from simply being consumers to having an increasingly active role in regional energy markets through on-site power generation, and they are using sophisticated power management equipment to engage in energy arbitrage and even sell power back to the grid.
This trend, accelerated by growing demand for renewable energy, is changing the equation when it comes to which markets are palatable to data center developers. It is also pushing the industry toward on-site power generation and a consolidated campus development model in order to achieve the scale necessary to take advantage of this new energy reality.
“These things are absolutely going to be commonplace,” said Dean Nelson, CEO of data center equipment manufacturer Virtual Power Systems and the head of industry think tank Infrastructure Masons. “They're not commonplace yet, primarily because of the economics of it, but the economics are changing.”
In early 2021, ice storms in Texas and wildfires in California triggered massive power grid failures across the country's two most populous states. The depleted availability of power caused blackouts and led corporate utility rates to spike.
Data centers remained unscathed. Hyperscale data centers were more than happy to turn on their generators and produce their own power, which not only provided significant stress relief for the overburdened power grids but saved money for data center operators by avoiding the inflated rates. In some cases, operators were actually able to sell the power they produced on-site back to the grid.
“Across the Bay Area, we had demand response days where [Pacific Gas and Electric] was worried about fires, and we watched hundreds and hundreds of megawatts across the Bay Area turn off — that was data centers and manufacturing plants,” Infrastructure Masons’ Nelson said. “They gave the go-ahead to turn up the generators.”
While this incident was unusual in its scale, for large data center operators, this kind of energy arbitrage isn’t an aberration so much as a central element of their business model. Although environmental regulations limit diesel and natural gas generator use in California and many other localities, data centers regularly generate their own power or use energy stored in their UPS systems to reduce grid usage when rates are the highest, a practice known as peak shedding.
Peak shedding and other kinds of energy arbitrage have become ubiquitous among data center operators of all sizes over the past five years, experts say. Generator use is often not an option due to cost or regulations, but increasingly sophisticated UPS systems produced by companies like Vertiv and Schneider Electric and largely utilized by hyperscalers use AI integrated with the power grid to instantly raise or lower a data centers grid usage based on rate. Many of these systems can also feed energy back into the grid.
“This is a big part of the business strategy and the energy strategy,” said Robert McFarlane, a principal at consulting firm Shen Milsom & Wilke’s data center practice. “It’s not just that they can peak shave, but they can co-generate and sell energy back to the power company if the conditions are right, although that depends on a whole raft of things."
While it is still relatively uncommon for data centers to sell energy back to the grid at any significant scale, the increasingly active role that data centers are able to take in local power markets is starting to open up areas to development that would have previously been overlooked due to cost, insiders say. The equation is no longer as simple as looking at the price of energy in a given location. Now, those who understand the complexities of the local power market can make power costs palatable partially through this kind of power management.
As an example, insiders pointed to a proposed 300-megawatt campus in western Massachusetts, one of the nation’s most expensive power markets, being developed by a New England energy trading firm.
Industry insiders say that data centers will act even more like utilities in the years ahead, largely due to their need to transition to renewable or lower-carbon sources of energy.
Hyperscalers are already financing the development of renewable energy projects like wind and solar farms through agreements with utilities, while Cumulus Data is opening a data center directly connected to a nuclear power plant. Green energy consultancy Pexapark predicts that hyperscalers will follow in the footsteps of industrials like German chemical producer BASF and take control in equity stakes in offshore wind farms.
On-site generation is also a big part of this picture. Running diesel generators may not be an option in this green energy future, but pressure to reduce emissions is driving investment by major providers in other forms of on-site generation or on-site storage that have higher upfront capital expenses but that will produce energy that is more price-competitive with utility power. This could mean solar arrays feeding fields of lithium batteries, or nonrenewable options like hydrogen fuel cells or a natural gas-powered micro-grid integrated with renewables.
“The first thing you'll see is the standby and backup power replaced with carbon-free or lower-carbon solutions. You might get rid of diesel reciprocating engines and replace it with a fuel cell that can either consume hydrogen or maybe natural gas,” said Mason McPike, principal at Telios Corp.’s mission critical practice. “As people start to make that investment and get more comfortable with the solution, you'll see them move that into a prime solution where they're actually running that when it makes sense financially to turn the grid off.”
Although there is little adoption of on-site generation at the moment, there is consensus among insiders that its broad adoption is right around the corner. JLL points to demand for the batteries used to store this energy as an indicator of what’s to come.
“You can sort of tell the future by what's happening in terms of battery production; right now [there] are incredible volumes of battery production plants now currently being evaluated across the country,” said Christian Beaudoin, JLL’s managing director for research and strategy. “If those are getting started this year, it's in that three-to-five-year horizon where we see real impact on the market.”
The growing role of power, particularly renewable energy, generated on-site or provided directly from a remote facility is pushing data center developers toward consolidated campuses housing multiple data centers.
This is partially just a matter of scale: the size of these campuses split amongst a number of users makes the upfront investment needed for renewable energy infrastructure, whether it’s a wind farm or a natural gas line, more feasible. It also increases the campus power operator’s ability to engage in energy arbitrage with connected local utilities.
But campuses with on-site generation also provide unique opportunities to leverage the volatility inherent in renewable energy, iMasons’ Nelson said, while renewables like solar and wind either produce a ton of energy or no energy at all depending on weather conditions. On a windy day, when a wind farm connected to a data center is producing more energy than colocation data centers can use, that energy would normally go to waste. But campuses allow for creative revenue solutions, such as cryptocurrency mining operations that switch on only when there is excess power availability.
“If I'm generating two times the amount of power and I've got a data center that's consuming half of that, I can now have the crypto side consume all the rest of it, especially the power that can't go back to the grid, because they probably can’t take it then either,” Nelson said. “All of a sudden, you’re able to absorb that energy into this crypto workload, and guess what — at that point that power is free. The economics become very interesting.”