Utilities Slowing Development Of Self-Powered Data Centers

Data center developers are pursuing more projects with on-site generation to reduce their reliance on regional power grids. But industry leaders say the utilities that provide that grid power are often standing in the way.

With wait times for connecting to regional power grids nearing a decade in many major data center markets, developers are increasingly exploring whether the fastest path to power is to build their own on-site generation or contract “behind the meter” with firms that develop and operate power plants.

By the end of the decade, more than a quarter of new data centers will produce most of their own power on-site, according to a study released last month by Bloom Energy.

For overwhelmed utilities and grid operators facing an unprecedented surge in demand from data centers and other large electricity users, data center firms’ willingness to bring their own power and collaborate to reduce their grid impact should be embraced as a welcome reprieve, industry leaders said at Bisnow’s National DICE Power Capacity, Energy and Sustainability event.

Instead, utilities are often a primary roadblock limiting the widespread adoption of on-site power solutions. 

“Don't assume that just because you have a technical solution for on-site power that it's going to be workable, because you don't know whether or not the utility is going to allow you to do it,” Steven Shparber, an energy and sustainability attorney at Mintz, said at the event, held June 26 at the Sonesta Columbus Downtown.

While the data center industry has largely focused on natural gas for on-site power, it isn't the only behind-the-meter option being deployed. Developers are pursuing self-powered projects with generation from wind and solar, hydrogen, fuel cells and battery storage systems. Emerging technologies such as geothermal and small modular nuclear reactors are anticipated to become viable in the near future.

Many projects mix behind-the-meter power sources, such as combining intermittent wind and solar power with small-scale natural gas when needed to ensure the data center receives a constant supply of power.  

“I'm a strong believer that all technologies have a place,” Cologix Chief Energy Strategy Officer Shafaq Hedstrom said. “It comes down to the site constraints that you're dealing with and what is the right mix of solutions for that particular jurisdiction based on the regulations.”

Most projects aiming to utilize self-generated power don't seek grid independence. In fact, most incorporate utility power as a crucial component of their energy strategies.

One common approach is to use on-site power to get a certain amount of electricity to a site quickly, then eventually obtain a grid connection that expands the site’s capacity. Other sites rely almost entirely on behind-the-meter power but require grid connections to ensure reliability and redundancy.

Other developers are looking to incorporate grid power alongside on-site generation more dynamically — often in ways designed to minimize the impact on utilities.

Longtime data center attorney and Mintz member Jeffrey Moerdler said a client might use behind-the-meter wind, solar and battery storage by day but incorporate grid power at night, when demand on utilities is lowest. 

Utilities should be eager to be critical partners in making these kinds of power solutions a reality, industry leaders said at the DICE event. They are contending with skyrocketing power demand and the subsequent need to execute billions of dollars in infrastructure improvements, so it would make sense for them to do all they can to facilitate on-site generation and sophisticated power strategies from data centers that can proactively expand grid capacity. 

But the reality is that, with some exceptions, power providers have generally proven ill-suited — and sometimes unwilling — to engage in the kind of unconventional agreements and partnerships needed for many of these on-site generation solutions to be viable, panelists said.

Utilities are slow-moving organizations that have done things the same way for a century, Moerdler said. Now, the data center industry is asking them to innovate and transform core practices, all while being inundated with power requests from a data center industry with which they had little previous familiarity. 

“The utility industry is not made to be nimble,” Moerdler said. “It's had a level operating business for 100 years, and all of a sudden, the hockey stick growth launches, and their staff and their mindset and their bureaucracy just aren't, in most cases, designed for that.”

This cultural and bureaucratic inflexibility from utilities is slowly changing, Hedstrom said.

She said more utilities are recognizing the magnitude of the problem they face alongside the data center sector and are increasingly willing to at least entertain unconventional solutions that would allow on-site and behind-the-meter data centers to absorb some of the demand deluge. Hedstrom said Cologix’s partnership, approved last month, with utility AEP to develop on-site fuel cells is an example. 

“The utility mindset is changing,” she said. “It’s not all utilities, but there is more openness and willingness from the utilities to work on solving this problem for us.”

But industry leaders also said it isn't just utilities’ cultural inflexibility that is preventing them from engaging in creative solutions.

Utilities are regulated at the state and federal levels and sit within transmission organizations that set many of the ground rules around grid interconnections. This balkanized landscape and regulatory framework make it difficult for most utilities to engage in the kind of creative power agreements data center builders want.

From business and grid stability perspectives, few utilities or transmission organizations have standardized processes in place that account for large users like data centers utilizing both on-site generation and grid power. 

This, too, could be changing. Texas this year passed legislation and regulations standardizing how data center interconnection agreements are structured across the Electric Reliability Council of Texas grid, making creative behind-the-meter power solutions easier to execute.

Still, Mintz’s Shparber said that while utilities may be increasingly open-minded about creative deals that work within regulatory structures, they are hardly banging down doors to advocate for the systemic changes that would make on-site and behind-the-meter data centers a more widely viable solution. 

“The utilities, while you can have one-off deals with them, at a macro level, they do not want significant change imposed upon them,” Shparber said.