'Unprecedented Times': A Power Shortage In Data Center Alley Has Developers Scrambling
An unexpected power shortage in the heart of Data Center Alley has thrown the critical industry into turmoil.
The revelations could reshape the data center industry’s physical footprint and change the way developers and their tenants approach deals in high-demand markets, because experts said this kind of incident will likely happen again.
Dominion Energy, the primary power utility serving data centers in the industry’s global hub of Loudoun County, Virginia, revealed in July that the utility wouldn't be able to deliver power to as many data center projects as developers had expected.
The surprise delays, the result of insufficient transmission infrastructure, could stretch until 2026, impacting hundreds of millions in real estate investments clustered near Ashburn and Sterling, where a majority of internet traffic passes through in the nation's leading data center market.
Developers may have little recourse to recoup losses they incur. These unexpected constraints — with a utility backtracking on previous assurances to developers — represent uncharted water for the sector, insiders told Bisnow. As a result, both developers and tenants are re-examining how deals are structured and redirecting investments away from the heart of Data Center Alley to other submarkets.
“It’s kind of unprecedented times,” said Ali Greenwood, executive director of Cushman & Wakefield’s global data center advisory practice. “We just haven’t seen, until now, where a utility provider said, 'We’ll be able to provide your power, and here are the tranches in which we'll be able to do it,' and then delivery times are just being failed. This is new territory in the data center industry, where you're having huge misses.”
Given the general veil of secrecy that generally accompanies data center development, it has been difficult for even seasoned industry veterans to get a detailed picture when it comes to the full scope of the companies impacted by these constraints. But according to data provided by Cushman & Wakefield, the power shortage will impact about 10 future developments representing a total of more than 1.5 gigawatts of data center capacity. By comparison, the entirety of Northern Virginia currently supports 1.9 GW of capacity.
Power constraints are nothing new to the data center world. A lack of available power, whether due to a lack of electricity being generated by utilities or due to insufficient transmission infrastructure, is one of the primary reasons the supply of data centers trails demand, particularly in dense data center hubs like Northern Virginia; Santa Clara, California; Dallas; or Chicago.
What makes the situation in Loudoun County different is developers were moving forward with projects under the impression that power would be available.
Dominion has been a major promoter of data center development throughout Northern Virginia, with the industry accounting for around 20% of the utility's business in its home state. Among the range of experts who spoke with Bisnow, opinions were mixed over whether Dominion should have anticipated that the area’s transmission infrastructure — operated by a separate entity known as PJM — was insufficient to support the amount of power developers were being led to believe was available. The problem was discovered by PJM just last month.
While more than one energy industry insider suggested that Dominion “kind of asked for it” through “overenthusiasm” from its business development group, there was also broad acknowledgment that a number of external factors made the current power crunch hard to predict. Chief among them is an increase in demand for power from data center development that experts say few in the industry saw coming. Dominion's load in the impacted area is expected to jump 3% annually from 2022 to 2027, all of it from data centers, according to data from PJM.
This surge in demand has been compounded by unexpected supply chain issues for specific electrical equipment that have dramatically extended timelines for improving transmission infrastructure. Cushman & Wakefield researchers said one particular piece of equipment saw lead times from manufacturers increase by a year, from 12 months to 106 weeks, almost overnight.
“Did somebody get out over their skis promising power and wanting to get all the logos and continue all this crazy development? I'm sure they did,” Greenwood said. “But in Dominion’s defense, the lead times on some of this gear doubled in about a month — that really turned the industry on its head, and no one had heads up on that."
While Dominion didn't respond to requests for comment, some industry insiders actively involved with developments affected by the power shortage told Bisnow it is highly unlikely that Dominion violated any contractual agreements or can be held liable in any way for losses experienced by developers.
It remains unclear what Dominion’s so-called commitments of power to various developers entailed — whether they were signed agreements or informal conversations.
But multiple sources said that at least some developers obtained specific documents that, while not legally binding, have been effectively viewed as assurance for both themselves and investors that projects can proceed without fear of being left without the power needed to monetize the property. They said this is the first time a utility has had to backtrack on these nonbinding commitments to data centers.
Did Dominion hang developers out to dry? That’s a matter of perspective. But a general sentiment persists that any losses incurred are part and parcel of the risk developers take entering famously power-constrained markets and starting construction before they have a signed guarantee that they will be connected to power.
“Just because it's always been done a certain way and you come to expect it doesn’t mean that's how it’s always going to be,” said Rob Faktorow, a vice chairman at CBRE who co-founded the firm’s data center advisory practice. “Developers took a risk moving forward on that basis just because that's kind of how it's always been done. Whose fault is that?”
Faktorow said the situation in Loudoun County isn’t stopping companies from moving forward without a binding assurance of power. He points to well over $1B of deals underway without firm power commitments across Northern Virginia, including those his firm is engaged on.
“I think the development community, at this time, is willing to take risks,” he said. “But there’s a high degree of confidence the power will be there.”
Yet developers and tenants are both considering other changes in how they approach deals in power-constrained markets based on the assumption that a similar situation is due to spring up elsewhere.
Ashburn may be the heart of the data center universe, but markets from elsewhere in Virginia to Dallas and Phoenix are also experiencing unprecedented growth. Dominion had a strong reputation within the data center industry, regarded as a longtime industry booster that understands the needs of data center developers. If this situation can happen to Dominion, and in the world’s largest data center market with strong governmental support, industry figures said it can happen anywhere.
“I very strongly suspect this won't be an isolated situation,” said Jeffrey Moerdler, who heads Mintz’s real estate and communications practice. “It may not be quite as blunt as this event — it may be just delaying by 12 months or maybe longer — but I think other power companies will have similar issues.”
This expectation that connections to power will become less reliable has players across the data center space looking at how to minimize their risk in markets with power scarcity, experts say. When it comes to site selection, developers may look for locations that have what is termed a bridge utility to provide some sort of power to the site that would allow it to operate at a reduced level if the worst-case scenario came to fruition. More providers may also look to build near power plants to reduce the need for transmission infrastructure.
When it comes to structuring deals, Cushman & Wakefield's Greenwood said developers may try to mandate more frequent communication from utilities on power availability and may look to have the occupiers of large, single-tenant facilities buy power directly from utilities to minimize their risk. Tenants are also examining how to protect themselves if they have planned IT deployments around pre-leased space that they discover won't receive power on schedule.
“This is a new situation for tenants — being somewhat at the mercy of a public utility,” Greenwood said. “It's going to be really hard for users to get written into an agreement where they would be able to tear up the lease if this kind of thing happened. We’re seeing these stories out there, and these are the tough conversations their legal folks are having.”
Perhaps most significantly, there is nearly a consensus that the power shortfall in Data Center Alley is going to boost development in other markets. While developers may look to other regions to diversify their geographic risk, power limitations in Loudoun County are expected to tangibly drive data center demand in surrounding submarkets, like Prince William County, Fauquier County and the massive Quantum Loophole campus development in Frederick, Maryland, across the Potomac River.
"I think that's the biggest impact people are going to see with the current Dominion Energy issue is that Data Center Alley is finally going to grow in a legitimate way to the outskirts, and you’re going to see exponential growth in neighboring counties,” Greenwood said. “You're going to see people push out into territories where there isn't as much demand where they can get power in a 24-month time frame and not a 48-plus-month time frame.”
This may already be happening. New data from CBRE shows a data center development explosion in some of Loudoun’s neighboring communities, particularly Prince William County. While Prince William's data center inventory totals 211 megawatts, the county saw around 500 MW of pre-leasing in the first half of this year alone, with the facilities expected to be built in the coming three years. It is a trend that CBRE’s Faktorow attributes, at least in part, to growing power constraints in Loudoun.
“Dominion’s having no problem providing power [in Prince William],” he said. “It’s business as usual, so we’re going to see more activity and more execution in places like Prince William County than historically. We’re already seeing it in the first six months of this year.”