Data Center Development Boom Forces Utilities To 'Reinvent Themselves'

Data centers are fundamentally changing how electric utilities do business. 

Across the U.S., electric utilities are contending with a massive, unanticipated surge in electricity consumption, driven primarily by skyrocketing demand from data centers. Data center lease deals signed in 2023 alone had an impact equivalent to adding a second New York City to the power grid, while the industry’s share of U.S. power consumption is expected to leap from 2.3% last year to 6.6% in 2028. 

Utilities have struggled to adjust to this sudden flood of data center demand. These tend to be lumbering organizations, unaccustomed to rapid growth and not designed to respond quickly to market changes. They are now scrambling to figure out how to build billions of dollars of new infrastructure quickly to meet the needs of an industry with which they have little familiarity. 

In the fractured landscape of U.S. energy infrastructure, some utilities have simply shut the door to new data center projects, deciding that the risks and effort involved just aren’t worth the trouble.

Those that are trying to capture their share of the data center demand wave need to fundamentally change core aspects of their operating models, according to a new report from Bain & Co. 

Companies that are positioning themselves to benefit from the boom are restructuring to become more nimble and responsive with shorter development planning timelines. They are becoming more collaborative with data center developers, pursuing creative solutions like co-development of infrastructure projects that would never have been considered just two years ago. 

“After years of navigating flat or shrinking demand, many organizations have forgotten what it takes to grow,” the report’s authors wrote. “What’s more, they’re finding that capitalizing on this new opportunity will require a rapid, unprecedented transformation of their operating and business models.”

The Bain report provides new insight into the scale of data center growth and the infrastructure investments utilities will have to make to accommodate it. Electricity demand in the U.S. is expected to outstrip supply as soon as next year, with data centers accounting for 44% of new energy consumption, by far the largest share. Utilities will need to increase their annual power generation by as much as 26% by 2028, according to Bain. 

To put that in perspective, the largest five-year generation increase achieved by U.S. utilities since 2005 is just 5%. Electricity demand growth has remained virtually flat for decades, and utilities have evolved their corporate structures and business practices accordingly. 

“It took over 100 years of planning and building to create our current system, and a step-change in infrastructure investment on an accelerated timeline will be required to serve even a fraction of this future demand in a reliable manner,” Ben Fowke, interim CEO of utility conglomerate American Electric Power, told the Senate Committee on Energy & Natural Resources in May. 

To fund that infrastructure, utilities will need to generate as much as 19% more revenue annually than is being forecast. Bain estimates $2T of new generation infrastructure alone will be required worldwide to power new data centers. 

The data center demand boom offers utilities an unprecedented opportunity for revenue growth. Power providers — many of which are owned by large, for-profit conglomerates — will potentially be able to sell far more electricity than ever before. The massive size of contracts with data center providers also opens opportunities to finance expensive initiatives like transitions to carbon-free generation sources.  

But as Bisnow reported previously, uncertainty about the accuracy of demand projections means this costly build-out brings with it a degree of financial peril for utilities. 

“Utility executives face a high-wire balancing act,” to walk the line between the massive spending needed to support data center growth without too much risk to balance sheets, the Bain report’s authors wrote.

Finding that balance is driving many firms to “reinvent themselves” in a matter of months, according to Bain, revamping their business models to promote innovation and faster decision-making while creating new systems to limit the financial risk data centers bring with them. 

Among the most significant changes in how utilities in growing data center markets do business is that they are now far more collaborative with developers and other major power users, regarding them not just as customers but as potential partners in developing new energy infrastructure.

There is growing recognition that data center developers and tech giants like Amazon, Microsoft, Google and Meta may be able to bring new generation or transmission infrastructure online faster and at a lower cost than a utility. Power providers are increasingly willing to form consortiums with these companies.

Last week, Amazon Web Services signed an agreement with public utility consortium Energy Northwest to enable the development of four small nuclear reactors. Energy Northwest will own and operate the reactors at its facility in Richland, Washington, but Amazon will fund the first phase of the project.

Energy Northwest’s leadership indicated the project was only feasible through its partnership with Amazon — not just through the tech giant’s financial support but through the company’s organizational expertise in bringing innovative solutions to market. 

“We've been working for years to develop this project at the urging of our members, and have found that taking this first, bold step is difficult for utilities,” Greg Cullen, vice president for energy services and development at Energy Northwest, said in a written statement announcing the project. “We applaud Amazon for being willing to use their financial strength, need for power and know-how to lead the way to a reliable, carbon-free power future for the region."

Other examples of this kind of collaboration are emerging with growing frequency. Over the past year, multiple nuclear plant operators have executed or explored deals with Amazon and other hyperscale giants to develop data center campuses directly adjacent to existing nuclear facilities. In North Texas, Compass Datacenters helped a local utility secure a right of way for transmission lines to its 200-acre campus in Red Oak and paid for the construction of a substation. 

“It may feel uncomfortable and out of character for many utilities, but the reality is that they can’t handle the data center demand surge on their own,” the Bain report’s authors wrote.

Utilities’ new openness to collaboration also has power providers increasingly leveraging their customers’ expertise to inform their planning and decision-making.

Utilities in emerging data center markets often had little prior experience with the sector and have struggled to understand how to predict the pace of the industry’s growing electricity consumption and make infrastructure investments accordingly. 

Even as the world’s largest tech companies invest billions in new data centers amid an AI-driven arms race, there is broad consensus that the majority of the requests for power will never come to fruition. It’s a phenomenon that has emerged due to developers considering multiple sites within a market for a single project, as well as a flood of speculative power requests from landowners hoping to flip properties to data center firms. 

This presents a risk for utilities, who could potentially spend billions developing the infrastructure to support data center projects that are never built, with significant consequences to the provider’s financial stability and electricity rates for consumers. To avoid this, utilities are increasingly turning to major tech firms and the data center industry to help them separate the wheat from the chaff in their demand pipelines.  

“Utilities are looking at us to help them understand who's real and who’s not,” said Andy Cvengros, a managing director at JLL and the firm’s U.S. data center lead. 

Many utilities are also making internal changes to get a better grasp on projected data center demand. Oncor in Texas is one of a number of providers that have developed an expanded due diligence process for each power application, allowing it to only include requests in its demand projection models that are likely to materialize. Others have begun mandating upfront payments or other capital requirements for data centers to apply for grid connection to cut down on purely speculative asks. 

These new measures reflect a broader transformation of how a number of prominent utilities structure and operate their organizations. 

“In the last six months, we have worked with a consultant to redesign, reorganize our business processes and our organization structure,” David Schleicher, CEO of Virginia power provider NOVEC, said in a podcast appearance. “The processes that NOVEC has today compared to the processes we had even two or three years ago, let alone 10 years ago, are completely different.”

Many of these changes involve making utilities more agile and efficient in their operations, capable of reacting more quickly, innovating and delivering on shorter timelines to match the data center industry’s needs. 

NOVEC restructured with a project management team specifically to help facilitate its data center initiatives across the utility’s various divisions. Schleicher said the move streamlined operations by allowing the firm’s engineering, resource planners and other specialized teams to focus on their areas of expertise and work on innovating. NOVEC also standardized many of its data center contracting design and construction processes that were previously customized on a case-by-case basis. 

Other providers are taking steps, including adding employees with data center expertise to the commercial teams spearheading negotiations with major data center operators. Many utilities are conducting demand projection modeling more frequently and with shorter planning horizons, ensuring they have the data necessary to respond to this newly volatile and uncertain demand landscape.  

NOVEC’s Schleicher said that even in a power sector where major changes are traditionally slow to evolve, utilities are realizing they have to take unprecedented steps to cash in on an unprecedented wave of demand.

“We're not used to this kind of fast growth,” he said. “Our processes have changed, and they continue to change, and in two years from now they may change again.”