'That Train Is Coming': Power Shortages May Be Closing In On Phoenix Data Centers

Low-cost power has been a driving force behind the booming data center market in Phoenix, but experts worry a looming power shortage could stunt its growth. 

The Phoenix area has emerged as one of the world’s fastest-growing data center hubs, its expansion driven in large part by its proximity to Southern California and an abundance of cheap power. But as more — and larger — data centers flood the market, power supplies are showing signs of strain.

Rates are going up, and the time needed for utilities to connect new data center projects to power has more than tripled. Industry insiders warn that data center operators and developers in Arizona need to start planning for a new reality in which Phoenix sees the kind of power shortage that is stalling development in markets like Silicon Valley and Northern Virginia. 

“It's not at the doorstep of Arizona, but I can tell you right now that train is coming to this market,” Layer 9 Datacenters CEO Michael Ortiz said earlier this month at Bisnow’s DICE Southwest 2023 at The Camby Hotel in Phoenix.

“If we don't get smart about it, this market is going to face a Jake Brake the same as in Virginia where Dominion Energy is saying there’s no new power for the next three and a half years," he added. 

The past three years have seen a data center building boom in Arizona, particularly in Phoenix and surrounding communities like Goodyear and Mesa. With around 587 megawatts of capacity and 267 MW under construction, Phoenix is now the world’s fifth-largest data center market, according to JLL. According to CBRE, Phoenix was in the top three fastest-growing data center hubs in 2021 and 2022. 

This explosion of growth has been driven primarily by demand from so-called hyperscalers — tech giants like Google, Microsoft, Amazon Web Services and Meta — that continue to build and lease increasingly large facilities and campuses throughout the Phoenix area. 

While the region ticks most of the boxes data center developers look for, from robust fiber to tax incentives, Arizona’s most significant draw has been a combination of easily accessed low-cost power and proximity to Los Angeles and other SoCal population hubs. 

Hyperscale tech giants increasingly need data centers close to major population centers for fast performance, but California is a notoriously difficult and expensive place to build and operate these facilities. California’s power rates, the main cost for a data center operator, are among the highest in the nation, while wait times for both utility connections and permitting make building facilities quickly all but impossible.

In an industry where speed to market is everything, Phoenix offered inexpensive power and fast delivery times, making it an easy place to quickly build large-scale data center campuses to serve one of the largest concentrations of end users in the world.

“The day we discovered that we were only five milliseconds to [downtown LA] was eye-opening,” Anthony Wanger, a Phoenix-based digital infrastructure developer and adviser at KKR & Co., said at DICE Southwest. “This data center market can very effectively transship California, which is not just a gigantic market for people, commerce and eyeballs but is also disproportionately tech-centric compared to the rest of the country.”

While demand from California isn’t going anywhere, experts said the ample energy supply and fast utility connections that made the Phoenix area so appealing may soon be a thing of the past. Panelists at DICE Southwest pointed to a sharp increase in Arizona’s power rates, with further hikes a near certainty. 

At the same time, utilities are taking longer to connect new data centers to power. What once typically took less than 12 months can now take more than three years, according to Mark Bauer, managing director of JLL’s data center group.

Bauer said he expects these emerging power constraints to contribute to lower leasing activity in Arizona in the coming year, with absorption down around 30% from 2022.  

“It's all about power and when we can deliver that power,” Bauer said. “It used to be 12 to 18 months, then it was 18 to 24, then 24 to 36 months. [Local utilities] are doing the best they can, but it’s all about power generation and when it can be put onto the grid.” 

The concerns over power constraints in Phoenix mirror what is already occurring in many of the world’s largest data center markets as the industry’s growth and energy usage outpace what most utilities projected.

In the industry capital of Loudoun County, Virginia, utility Dominion Energy announced last summer that it would not be able to connect a number of data center projects as promised due to unexpectedly high demand and insufficient transmission infrastructure, with delays lasting until 2026. Silicon Valley Power informed stakeholders that wait times for new connections could last five years, Layer 9's Ortiz said. In Europe, governments in Ireland and Holland have placed moratoriums on new data centers due to power shortages. 

“If you look at all of the markets that have said, 'Hey, let's take a pause on data centers,' they’re the fastest-growing, biggest data center markets in the world,” KKR’s Wanger said. “It would be naive to think that we're immune from that.”

There are factors specific to the Phoenix market that could make looming power constraints particularly problematic.

Industry insiders pointed to growing competition for limited power resources with other industries — most significantly semiconductor manufacturing, which requires the same scale of power as a data center. Intel and Taiwan Semiconductor Manufacturing Co. are building massive “chip fab” developments near Phoenix, with further build-out expected following last summer’s passage of the $280B federal CHIPS and Science Act, intended to boost domestic chip production. 

Adding to the challenge is the fact that municipalities generally prefer that limited power resources be allocated to chip fabrication or similar industries rather than data centers, as the former provides far more jobs, said DCX CEO George Slessman.  

“Jobs are like the core thing that they want to see, and the reality is data centers don't really drive jobs,” Slessman said. “When you have an alternate use for the power that is a large employer, that's probably going to win every time.”

Slessman also worries about how power constraints driven by Big Tech campuses will impact the rest of Arizona’s robust data center landscape.

If hyperscalers continue to drive up rates and lengthen delivery times, they will eventually look for greener pastures elsewhere — perhaps in emerging California-focused markets like Las Vegas and Reno. But in their wake, they would leave a far more challenging landscape for smaller operators and tenants trying to meet the digital infrastructure needs of Phoenix itself. 

“Around 70% of net new power generation is going to just four users, so we're probably going to run into a bit of a wall if we don't start to really proactively think about how we're going to distribute power in the state," Slessman said.

“The Microsofts, the Googles, the Amazons, the Facebooks of the world, they’ll just pick up and go somewhere else to build where they can find cheap power again, so we need to start thinking proactively about how we allocate power resources so that we can maintain a healthy ecosystem of data center users in this market."