'The Exception, Not The Rule': Despite Hype, Off-Grid Data Centers Fueled By Natural Gas May Be Rare

Data center campuses fueled by their own on-site power plants may end up being far less common than their backers anticipate.

As data center developers struggle to find sites where electrical utilities can provide massive amounts of power on short timelines, the industry has rapidly embraced the idea of data center campuses that eschew grid connections in favor of their own on-site natural gas power plants. 

But some data center executives, speaking Feb. 20 at Bisnow’s DICE Data Center Construction, Design and Development East event in Virginia, voiced skepticism that this wave of proposed gas-powered campuses will ever come to fruition.

They say few data center firms have the expertise and track record to operate their own power plants with the reliability tenants demand, and the economics of on-site gas generation only make sense in exceptional cases.

While more projects with “behind-the-meter” power lie ahead, they say the total market for these power solutions is far smaller than most anticipate. 

“I do think this is going to happen, but I think the likelihood of it happening for any specific project is actually pretty low,” Daniel Golding, chief technology officer at data center advisory ASG, said at the event, held at the Hyatt Regency Reston.

“It's really going to be the exception, not the rule, and it's only going to be for extremely desirable properties,” he added.

With the booming data center industry’s electricity consumption straining regional power grids, developers and utilities are increasingly looking to new natural gas generation as the fastest path to securing power. Data center growth could add 50 gigawatts of new gas generation to U.S. grids by 2030, according to S&P Global, single-handedly raising power sector gas demand in the U.S. by almost 17%.

Much of this trend is driven by utilities and independent power producers building new gas plants to add capacity to regional grids. But developers of large-scale data center campuses are increasingly exploring projects with on-site natural gas plants to provide power behind the meter.

Bullish predictions about the prevalence of self-powered data centers have abounded since the beginning of the year, with one study projecting that 30% of all data centers in the U.S. will generate most of their electricity on-site by 2030.  

Over the past three months, a flood of proposed data center projects has been announced that intend to use on-site gas generation, either as their permanent power source or as a bridge until electricity from a utility can be acquired. Tech behemoths like Meta and OpenAI are building campuses alongside gas plants capable of providing the hundreds of megawatts they need.

Some of the most prominent third-party data center operators are also pursuing behind-the-meter power solutions. EdgeConneX launched an energy development subsidiary, PowerConneX, that in February proposed a 120 MW gas power plant in Licking County, Ohio, to provide behind-the-meter power to the firm’s planned data center in nearby New Albany. Meanwhile, Denver-based Vantage Data Centers is partnering with energy firm VoltaGrid to deploy more than 1 GW of on-site gas generation across the developer's North American portfolio. 

Leaders from VoltaGrid and EdgeConneX said at Bisnow’s DICE event that with transmission systems in key markets pushed to the brink, these behind-the-meter deals are critical to bringing new capacity to market as fast as their top tenants demand. 

“If you're able to do a behind-the-meter solution … you're able to do it much quicker: in 12 to 18 months as opposed to waiting 10 years,” said Jason Long, a member of the data center team at VoltaGrid.  

But other panelists expressed doubt about whether the number of self-powered projects that come to fruition will be anywhere near what many in the industry imagine. 

Even if building a colocated gas turbine is the fastest way to get power to a given data center site, Big Tech data center customers still overwhelmingly prefer utility power, even if it means a longer wait, PointOne Data Centers Vice President Dan Ephraim said.

While there is a lot of buzz around behind-the-meter gas, he said criteria like proximity to natural gas infrastructure are nowhere near supplanting access to utility power as the top consideration in data center site selection. 

“When we go to [Silicon Valley] or Seattle and we talk to folks, no one's doing it at scale right now,” Ephraim said. “Everyone's talking about it and there's long lead-time items for some of the turbines and everyone is running around asking where the gas lines are … but the customers aren't doing it. They are waiting for utility [power].”

Customers’ preference for utility power was echoed by Raj Uparkar, director of power utilization at Amazon Web Services, the world's largest data center user.

AWS is examining natural gas and other off-grid generation as potentially viable options in its energy procurement toolkit, Uparkar said. But reliability and cost challenges with on-site power mean utilities are still the top choice, at least for now.

“We are exploring the kind of solution off-grid. … But working through the reliability challenges and the cost challenges of those kinds of solutions, grid connected is the most cost-efficient one,” Uparkar said. “Today, we're still at the beginning of that curve in terms of making it part of our standard solution. We’re not there yet, but it is part of the portfolio that we're looking at.”

One of the primary concerns around off-grid generation is reliability.

For all but a handful of artificial intelligence training and bitcoin mining applications, data center customers like AWS and Microsoft demand close to 100% uptime, with almost no tolerance for risk when it comes to power supply. But making on-site generation as reliable as power from a utility is challenging, as it drastically reduces system redundancy and the number of failure points needed to cause a power disruption compared to the grid.

Gas pipelines create a single point of failure that could be catastrophic if the supply of fuel is interrupted. 

Gas power plants are far from modular, plug-and-play solutions. They are highly complex facilities that are difficult and expensive to operate and maintain reliably, executives said at the DICE event. They require not only an experienced workforce but also robust supply chains to ensure that parts and equipment are always available when they need to be replaced. 

This sort of institutional expertise isn't something most data center firms possess — they’re experts at running data centers, not power plants, ASG’s Golding said. This is why, in many cases, plans for campuses with off-grid power are pursued as partnerships with energy firms or independent power producers.

But opportunities for such partnerships are limited, and Golding said many of the plans for self-powered data centers assume a level of expertise that the developers just don’t have. 

“The technology exists to do this, although it's way more complex than folks are supposing,” Golding said. “I find that when folks say that this is part of their business plan, they tend to lack a lot of the elements necessary to properly execute against it.”

The economics of on-site generation can also be prohibitive. While the cost of natural gas generation is complex and varies significantly from site to site, utilities are generally able to produce power at a lower cost than at a single colocated power plant, Golding said. Add to that the huge capital expense of building a new power plant, particularly one that can be operated with the highest levels of reliability. 

Because of these cost issues, on-site power — whether a permanent or bridging solution — will often only make sense for the most desirable data center sites where end users are willing to pay a premium to get capacity quickly. The pricing is also typically prohibitive for all but the largest data center projects, PointOne’s Ephraim said.  

“It's just not worth it unless your campus can get to 700 MW or 800 MW,” Ephraim said. “It just doesn't pen.”

Ultimately, Golding and Ephraim said, most data center projects just don’t check the long list of boxes necessary for on-site generation to be viable. They said developers need to be clear-eyed about the many challenges and site criteria — from organizational expertise to on-site infrastructure — that must be addressed for off-grid power plans to have any chance of success.

At least some of the developers pursuing these projects need that reality check, Golding said. 

“If you've got a really, really desirable piece of land and you have experience running natural gas turbines and you have a microgrid and you actually know to deliver this and you have the money to put down to buy this stuff and you've got a lot of fiber, then it's a maybe,” Golding said. “For most, it's going to be tough.”