Data centers going off-grid does not make them good neighbors

Becoming a good member of society does not begin with retreating from it

• By Liam Denning / Bloomberg Opinion

• • Add TT as Preferred Source

  • 

  • 

  • 

As a forest of pitchforks approaches the US’ data centers, “big tech” can turn to a time-tested strategy: hiding. As in, behind the meter. That phrase refers to onsite power generation that can offer backup for data centers or, at the extreme, let them bypass the electricity grid completely.

The latter seems increasingly attractive because of yearslong wait times for a grid hookup, now compounded by growing general opposition to data centers. When Texas Governor Greg Abbott unexpectedly paused grid connections for data centers in the state earlier this month, shares of traditional power plant operators took a hit, but stocks bounced for companies that make the engines and turbines for generating power separately. As if to punctuate this, it emerged that Amazon.com Inc has begun work on a giant data-center campus in West Texas hosting up to 7.65 gigawatts of gas-fueled power, more than the entire generating capacity of some states.

However, going off-grid comes at a steep cost and could actually make the hyperscalers bigger targets, not smaller ones.

Just like hospitals or even houses, data centers routinely install some backup power to keep running if the grid falters. That is different from going off-grid altogether. Amazon’s GW Ranch project, for example, is described as a “private grid,” albeit one that is the size of a city.

The benefit of going it alone is that companies avoid waiting perhaps four years or more for the local utility to connect them, with onsite generation up and running in something more like 18 months — a significant advantage in the accelerating AI arms race. Self-powering also offers a rebuttal to criticism that data centers are raising utility bills for their neighbors.

It is a beguiling argument, but half-baked.

Maddening as the power grid can be, it has three advantages: It is the cheapest source of electricity; it is not perfect, but still remarkably reliable; and it already exists. There is a reason hyperscalers previously tried to cut deals to hive off some of that valuable grid for themselves (thereby helping to fuel the backlash against data centers).

Going off-grid means building your own; that means obtaining not just the generators, but all the associated equipment, too, much of which is also backlogged. You also have to install more than you need to replicate the grid’s big selling point — redundancy — because your turbines can also go down. That reduces utilization, raising unit costs further, which can then be compounded if your data center eventually does hook up to the regular grid.

Hyperscalers are not known for their sensitivity to energy costs, so maybe none of these inefficiencies matter to them. If the US is truly engaged in the opening stages of a battle for artificial intelligence (AI) supremacy with existential consequences, why not reach for the quickest, if imperfect, solutions? If there was a war on, you would not complain if an ammo plant was running on diesel engines.

Therein lies part of the wider problem. Most Americans do not view data centers as essential defense assets, but rather as unsightly, resource-hogging nuisances that enrich the super wealthy and make a “product” that could possibly put them out of a job. Despite AI’s potential, and real tax windfalls for some localities that host data centers, they have an image problem that has festered and inevitably jumped from opinion polls to statehouses. Pennsylvania Governor Josh Shapiro is the latest of his peers to reverse course and impose strict constraints on data centers.

Hyperscalers fumbled the important selling point that, done right, the extra load that data centers put on the grid could actually reduce bills by spreading the network’s fixed costs across more kilowatt-hours. Withdrawing from the grid would kick away that pitch completely as well as magnify the disconnect between these AI factories and the local communities in which they land.

The pollution aspect is also important. There is already a legal battle over gas turbines installed without an air permit to power a Memphis, Tennessee, data center — with the warm and fuzzy name of Colossus — owned by xAI, a unit of SpaceX. The Sierra Club and Public Citizen contend that another data center project, in San Antonio, Texas, is bypassing regulatory obligations for significant sources of pollution and have signaled their intent to file suit. Given the sheer scale of the mostly gas-fired onsite capacity now being planned, such as for Amazon’s project, data centers run the risk of becoming the next Keystone XL.

There are other routes to solving AI’s power quandary, which involve a mixture of demand response, batteries and, yes, behind-the-meter generation — but in the context of also being active participants on the grid. Retreating to islands, and letting everyone around cope with the consequences, is not going to fly. Rather, developers must work harder to demonstrate benefits they can offer to the communities in which they land and must integrate somehow. Becoming a good member of society does not begin with retreating from it.

Liam Denning is a Bloomberg Opinion columnist covering energy. A former banker, he edited the Wall Street Journal’s “Heard on the Street” column and wrote the Financial Times’ “Lex” column. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.