Data center power considerations: Host community perspectives

Understanding host community readiness

For host communities, data centers create both opportunities and challenges. Understanding the type of data center, the suitability of existing infrastructure, the project’s financial viability, and the project’s timeline are all crucial to screening offers and negotiating cost sharing, incentives, and long term commitments. Several key questions include:

1. Is the proposed project financially viable?
2. Is there a plan for power?
3. Is there a plan for water?
4. How do we accommodate the transient construction labor in our community?
5. How do we balance long term jobs and tax incentives?
6. Can data centers be attracted while maintaining energy affordability?

We address each of these in detail below.

Project financial and technical viability

Data center projects are fundamentally real estate projects with unique construction and operational characteristics. They can be unique in their resource intensity, specifically water and power, and their success is very dependent on supply chains for key internal and energy components that can demand extensive upfront payments.

Determining viability requires an evaluation of the developer’s history, the commitments they have for occupancy and offtake, the credit quality of the developer and the offtaker, and the supply chain reservations and financial investments they’ve made.

Host communities should be prepared to support a disciplined diligence process that includes infrastructure and construction issues as well as financial modeling that reflects their obligations for investment and bonding, the implications of tax abatements and other incentives, and the risk adjusted revenue impact of the proposed project.

The power plan

Power is the key constraint on data centers of all sizes. AI workloads may be specialized today, but AI is being built into every platform application from email to video editing and travel reservations—and the future is more intense.

These types of power loads are different than those for which the power grid was designed , and their impact on connected grids can be enormously expensive to accommodate and actually decrease overall grid reliability.

A large data center can exceed the load of an aluminum smelter or steel mill, require very clean power, meaning consistent voltage, and are not amenable to curtailment or other service interruption without extensive on-site storage or backup generation. Their power demand can also swing widely, with drops and spikes of 15% in milliseconds.

For these reasons, as well as multi-year delays and tremendous costs associated with getting large scale power, state and local regulations on CO2 and concerns around affordability and cost transfer to consumers many data center projects want to or are being forced to bring their own power. General reindustrialization is having the same struggle.

These solutions generally use natural gas combined with fast response turbines and batteries in standalone microgrids. They are expensive and complicated to build and operate, essentially becoming standalone power islands  with a single customer, but, when done correctly, can be built with no additional costs to local power ratepayers.

For data center projects that assume they can access the local power grid for all or part of their needs, careful study is required of their power plan with a focus on their natural gas supply in both quantity and contractual security, their ability to be curtailed, the number of on-site hours of fuel for backup generators, and the power conditioning and stabilization system being used.

A detailed interconnection study should be conducted and reviewed by the host diligence team that reflects the totality of their impact including substations and switchgear, line rating under stress nodal congestion, circuit looping, and any N+1 power requirements needed to meet uptime expectations.

Finally, host communities need to carefully evaluate any assumptions for natural gas supply, including assumptions of municipal gas supply availability, city-gate expansion, new pipelines, and new or expanded rights of way. Projects should evaluate emissions from both primary power and secondary backup, including diesels, based on expected annual run hours.

Financial models should be evaluated for assumed power curtailment and related indemnifications that can be a burden on supporting utilities or on the facilities’ operating economics.

Host communities, working with local distribution utilities, may be able to negotiate access to some of the facility power under certain circumstances to improve local grid reliability and resilience and generally will want to provide design input into the use of the facility waste heat, whether to operate chillers or generate clean power and reduce the impact of creating large local heat islands.

The water plan

Data center water consumption varies extensively based on the project’s cooling design. Edge data centers are still generally built using an air cooled model, circulating chilled air through the facility. Next generation edge AI systems are adopting liquid cooling to reduce energy costs and increase energy density per square foot, which improves economic performance.

For true water cooled chilled water plant designs, initial fill can average approximately 6,000 gallons per MW, with annual replacement running <1% of fill volume, while on-chip cooling solutions can require roughly 3,000 gallons per MW and immersive cooling using synthetic oils can require none.

While not small, these are generally manageable resource burdens for communities. So where is the water challenge? Power.

Data center power can consume tremendous amounts of water depending design and size, with a 100 MW combined cycle gas turbine (CCGT) using as much water as a town of 8,000–10,000 people per day.

Even if the local utility is providing power, this can be a burden on regional water resources, especially in markets where water is sourced from aquifers that can take generations to recharge as opposed to surface water.

Some generation assets can run dry, however if a host community requires this, or has an automatic water shut off in drought conditions, this can decrease generation asset power output and efficiency, driving higher emissions per running hour and greater fuel consumption.

Understanding the asset mix proposed for on-site data center generation either stand alone or with grid power is critical to managing the impact on this local resource.

Employment impacts

A typical 100 MW data center can require between 1,200–1,500 construction jobs at peak including a massive number of skilled electricians and pipefitters to handle the complex energy and cooling platforms across a 12–18-month period, with an estimated 150 full time jobs during its operation.

Many regions need to import some or all the construction labor, creating a challenge in the spike of transient residents in the area requiring food, shelter, and medical care—and burdening water and wastewater, power, traffic, and public safety. Large hyperscale projects can also burden the local school system as construction employees relocate their families to the region for the project’s duration.

Host communities need to be proactive in working with data center developers to address these issues, including the identification of project specific burdens and the development of a cost recovery mechanism, for example hiring more police officers, reinforcement or replacement of roads and bridges carrying large construction loads, or creating camps with private buses to and from the job site to alleviate traffic congestion.

It’s critical host communities understand the limits of their infrastructure and creativity in their development to avoid over-building and abandonment. By working collaboratively, many host communities can use the construction period to reprioritize facility rebuild, modernization and extension plans, and even capture in kind funding from project developers to cover some costs.

Host communities need to be careful not to burden projects with shopping lists for deferred maintenance or other municipal agendas by relating each ask to a true impact, for example building a new fire station near a project site or replacing water mains to support the new facilities.

Developers have lots of options when it comes to locations, so host communities that have solid, rational business cases for their needs and fairly recognize the long-term tax benefits generally have a faster path to deal closure, lower transaction costs, and improved benefit realization timelines.

Are data centers and industrial complexes allowed, or even required, to bring their own power or will they be subject to regulatory capture and utility timelines and fees?

West Virginia permitted the 8GW Monarch data center as a separate utility, while Texas and Utah require data centers to self-generate. Other states require data centers to assume 100% of their infrastructure funding costs.

Are natural gas resources and planned pipeline additions sufficient in their diversity, supply security, and capacity to increase regional supply and stabilize or reduce the local $/MMBtu delivered?

Some states are resistant to new natural gas infrastructure, which effectively prevents large scale data center development until new baseload can be built.

Will continuing coal and other fuel retirement programs shift demand to natural gas for baseload, increasing regional demand?

Coal retirement specifically creates a significant demand for natural gas (~50mmDth/year), but utility scale “baseload” solar with long duration storage is often more expensive over a typical 20 year period.

Will state and federal regulators move quickly enough to support expanded nuclear generation, including the deployment of small modular reactors vs. increasing gas reliance?

While the DOE projects having two to four new small modular reactor designs working in 2026, the current projection is that the first new nuclear projects will come no earlier than 2032, and the cost/kWh is highly variable.

Host communities looking to manage the issue of affordability in negotiations with data center developers need to understand what the community is able and willing to do. Working with developers and communities, we notice the following approaches being used:

• Enable to the greatest degree possible self-generation by data centers. In regions that favor natural gas, like Texas, hosts have enabled the use of natural gas without mandates for site sequestration or pipeline disposal. In other states or municipalities, data centers have brought more renewable heavy solutions to balance out gas use.
• Explore the creation of new utilities on single and multi-customer industrial and data center complexes that isolate those loads from the grid.
• Address grid related costs holistically, including interconnection costs as well as generation requirements.
• Facilitate new and expanded rights of way, allowing utilities to deploy new capacity quickly.
• Negotiate overbuild with site energy developers, including access to site energy assets in cases of severe grid stress or failure or providing high reliability power to local critical infrastructure.
• Implement take or pay for power, requiring data centers to pay for some minimum amount of their forecasted use, whether they take it or not if grid reliant.
• Implement pay as you go commitments, where developers pay for any grid-related construction and enhancements as they are built and are on the hook for any stranded costs if the project cancels.
• Require developer prepayment for long lead items, shifting the risk onto data center developers.
• Execute minimum term commitments of 15+ years, during which time the data center operation will fully pay for any build out.