Is data centre development outpacing the grid?

A report from Wood Mackenzie has identified a concerning disparity between data centre collocation plans and the necessity for a reliable grid.

The UK-based research group’s analysis is focused on US data centre development, but its findings have implications for countries like Australia that are facing a potential boom in data centre construction.

In the US, the race to power artificial intelligence is pushing data centre development to outpace grid development, creating significant risk for projects, markets and consumers, Wood Mackenzie said. Its report, ‘Breaking the speed limit: Can US data centre development outpace grid development?’, warns that such projects will face far greater technical, regulatory and economic hurdles than the industry understands.

“The power sector is fixated on data centre flexibility, but that is not the end-game for grid operators or data centre operators,” said Ben Hertz-Shargel, Global Head of Grid Transformation and Large Loads, Wood Mackenzie.

“Firm grid service is the goal, backed by new transmission superhighways. But there is a lack of awareness throughout the power sector about the technical and regulatory risk confronting collocation projects, and the business risk of conditional interconnections.”

Data centre facility in Vernon, California, USA. Image credit: iStock.com/MattGush

For deregulated markets, the challenge is existential. Wood Mackenzie brings up the example of Mid-Atlantic grid operator PJM, which has 78 gigawatts of committed data centre load against only 36 gigawatts of accredited generation capacity in its pipeline. In Texas, current market prices of US$30–$40 per megawatt-hour fall far below the US$78–$100 needed to attract new gas generation. Wood Mackenzie’s ‘Accelerated case for data centre load growth’ found that 16.4 GW of gas capacity additions will be required per year through to 2035 to meet projected demand, despite there having been only 4 GW per year from 2023 to 2025.

“Load growth and affordability are in direct opposition in the deregulated markets,” said Chris Seiple, Vice Chairman, Energy Transition and Power and Renewables, Wood Mackenzie. “If prices rise to the level necessary to incentivise new generation, it will raise prices for all customers, prompting a political outcry.”

To manage this issue, PJM is bifurcating its generation market — creating one elevated price tier for new resources contracted by large loads, and a lower tier for existing resources. The unintended consequence, according to Wood Mackenzie, is that existing gas and coal plants receiving lower capacity prices may retire, threatening reliability even as PJM struggles to bring new supply online. Texas, meanwhile, has no comparable plan to incentivise new grid-connected generation, and is trusting that competitive power markets will deliver the new supply. That typically happens by prices rising to levels that attract new investment.

Further regulatory intervention in deregulated markets is likely as affordability pressures mount, with potential knock-on consequences for existing asset valuations. The report warns that developers and investors should be prepared for market rule changes driven not by grid planning, but by political pressure.

Collocation: a possible fix?

Collocation, or a bring-your-own-generation (BYOG) approach, has been widely touted as a solution to grid constraints. With more than 90 GW of collocated generation now in US interconnection pipelines, it is clear the industry is relying on this model. However, the report finds that collocation is only achievable for the most sophisticated and well-capitalised hyperscalers, and that for many developers these projects will not materialise, making the model unscalable.

“Even for developers that see collocation as a viable bridging solution to grid power, the costs and technical challenges are formidable,” Hertz-Shargel said. “Technology providers are only beginning to come to terms with this challenge, the mitigation of which is site-specific, making solutions hard to scale.”

Collocation comes with technical challenges, such as the near-instantaneous changes in AI power demand potentially damaging reciprocating engines and gas turbines. While lithium-ion batteries can be used as a shock-absorber to prevent this, they risk running through their useful lifespan rapidly; also, battery response time must be extremely short, relying on technology that has not been widely commercialised.

Additionally, the irregular manner in which AI cooling and GPU loads consume power introduces power harmonics, which if unfiltered cause equipment to overheat and degrade. These loads can also cause sub-synchronous oscillations, posing fundamental stability risk to local generators and to distant ones on the transmission system.

Minimising downtime vs protecting the grid

The need to minimise downtime exposes data centre companies to significant regulatory risk, Wood Mackenzie said. US grid operators are fast-tracking rules for conditional interconnections to meet data centre companies’ demand for speed-to-power, but their ultimate priority is grid reliability — and some recent decisions risk severely undercutting data centre business models.

“PJM’s and [transmission operator Southwest Power Pool] SPP’s rules are understood to give the regional grid priority rights over collocated generation,” Hertz-Shargel said. “During shortages, data centres would be forced to reduce demand to their firm service level, even as their onsite generation was instructed to supply the grid. For some companies, this model is unworkable.”

Meanwhile, the Electric Reliability Council of Texas (ERCOT) has been working with stakeholders to update its voltage and frequency ride-through requirements — rules designed to prevent data centres from reverting to back-up power prematurely during minor grid disturbances. The risk is not hypothetical: in 2024, 60 data centres in Virginia dropped off the grid simultaneously following a minor disturbance, nearly causing a grid collapse.

However, data centres in late-stage development are unlikely to be able to comply with these proposed changes, which would potentially require a site redesign and the purchase of new uninterruptible power supplies and other electrical equipment.

With rules still being written and late-stage changes already threatening project viability, regulatory risk remains one of the most significant — and underappreciated — challenges facing the industry.

Wood Mackenzie also highlights the fundamental question of cost allocation. Grid operators are planning close to $100 billion in transmission investments, in part to support data centre load growth. Without modification of traditional cost allocation rules, a significant portion of these regional investments could be spread across all existing ratepayers, rather than being assigned specifically to the data centres driving their urgency.

“Grid operators are positioning flexible interconnections as a stopgap, not a long-term solution,” Seiple said. “The expectation — and often the requirement — is that transmission will eventually provide complete, firm service to large loads. That could cause costs to rise for existing customers if cost allocation methodologies aren’t changed and if the data centre demand doesn’t materialise as forecast.”

The report can be found here.

Top image credit: iStock.com/nadla