Wed, Feb 12 2025 12 February, 2025

Boom in AI data centres threatens surge in gas use

Major tech companies are investing billions of dollars in new data centres to power AI, which could result in rising demand for gas. Critics warn this could raise costs for customers and threaten climate targets.

Aerial view of the west campus of Microsoft in Redmond, Washington State, USA (Photo: Wiki Commons/Jelson25)

The tech industry is investing tens of billions of dollars into new data centres as they seek to ramp up their AI capabilities, but in so doing, they could lock in higher levels of gas consumption that could slow the energy transition.

The rapidly expanding arms race amongst top tech companies is expected to continue for the next few years. In October, Bloomberg Intelligence estimated that capex on AI from the top tech companies could top $200 billion this year. But that figure is already outdated and likely too low. In early January, Microsoft announced that it alone would spend $80 billion in 2025 to develop new data centres and train AI models. 

It’s not just the top tier U.S. tech companies. On January 7th, Emirati billionaire Hussain Sajwani said he would invest $20 billion in American data centres, following a meeting with incoming President Donald Trump at his Florida resort. In December, Japan’s SoftBank said it would invest $100 billion in the U.S. over the coming four years, with a focus on AI.

AI requires enormous volumes of energy, and the race to build new data centres is accelerating. Big Tech is not necessarily opposed to renewable energy, but in a race to beat their competitors, they won’t think twice about turning to gas if it is readily available. Some of the largest tech companies are backsliding on their climate commitments — the emissions from Microsoft and Google’s operations, for example, are rising, despite previous climate pledges.

As a result, the rush to build data centres as fast as possible could result in a surge of gas consumption across the U.S. in the coming years. It has already put a premium on existing power plants, including those burning gas.

In a sign of the times, utility Constellation Energy agreed to buy Calpine for $16.4 billion. Calpine owns a fleet of under-utilised gas-fired power plants, concentrated in Texas and California. The deal is a bet on a future of rising gas demand, used to power data centres and AI.

Power demand for data centres could nearly triple over the next three years, potentially accounting for 6.7 to 12 percent of total U.S. electricity consumption, according to a report published in December by the U.S. Department of Energy. That would be up from 4 percent currently.

A separate estimate from Enverus, an energy consultancy, finds that the U.S. could build as many as 80 gas-fired power plants, adding 46 gigawatts of electric capacity, by 2030, as the FT reported.

At the same time, there are some that argue that expectations for soaring electricity demand could be overstated. In a note to clients, investment bank Goldman Sachs said that while aggregate demand for electricity will likely pick up pace later this decade, it has not noticeably increased yet.

“Power demand growth expectations, however, look far more optimistic than what the latest aggregate US power data would suggest,” the investment bank wrote in a December note to clients. Goldman analysts said demand growth would likely be regional, with spikes followed by transmission bottlenecks that may slow further growth.

Data centres in the Mid-Atlantic

The rush for new data centres is well underway, and grid operators are preparing for big changes. PJM, the electric grid operator for 13 states in the U.S. Mid-Atlantic and Midwest, projects that the region will need an additional 67 gigawatts of new power capacity through 2039. After factoring in the closure of old power plants, which will need replacements, the need to build new capacity rises to 100 GW in this outlook.

In other words, after stagnating for more than a decade, PJM sees electricity demand soaring over the next 15 years, in part because of the growth of data centres.

But the rush to build new gas-fired power plants may rest on demand projections that are overhyped, and could saddle electricity customers in the region with higher bills, according to a report from the Ohio River Valley Institute (ORVI), a regional economic development think-tank.

Needing 100 gigawatts of new power capacity is “very doubtful,” Sean O’Leary, a senior researcher at ORVI, told Gas Outlook. The entire capacity for the whole operating area is around 150 GW.

“You’re talking about, effectively, replacing [nearly] two-thirds of all the capacity in PJM.”

He said that grid operators like PJM base their assumptions of electricity demand on forecasts from utilities. But utilities are chronically overoptimistic, in no small part because their profits are tied to building new infrastructure.

“It is in fact often the case that utilities greatly overestimate” rising demand, O’Leary said. “They have very little incentive to underestimate electricity demand, and a great deal of incentive to overestimate it.”

He pointed to forecasts from Enverus, which sees data centre demand growth for the 13-state PJM region at only about one-third of what PJM itself expects.

But PJM said that it must plan for new electric capacity, both from expected increases in demand and the retirement of older plants.

“The need is real,” Jeff Shields, a spokesperson for PJM, told Gas Outlook in an email. “For the first time in recent history, we are faced with a real threat to maintaining a reliable grid as we move toward the end of this decade. The PJM system could see a capacity shortage as soon as the 2026/27 delivery year.”

“By 2039 in PJM, data centers are projected to make up 16% of load and EVs 11%, for a combined 27%. Today, those two combined are less than 5% of load. Demand in the PJM region is predicted to increase 40% over the next 15 years.”

The region saw a high-profile example of interest in new sources of power last fall. In September, Microsoft announced plans with Constellation Energy to reopen Three Mile Island, a large nuclear power plant that shutdown in 2019 because of poor economics, in order to use the electricity to power data centres.

O’Leary said that another problem with PJM’s forecast is that it does not account for the upward pressure on electricity rates that would occur if the region’s utilities started building a massive amount of new gas-fired power plant capacity. If that were to occur, then higher rates would force electricity customers — households, businesses and heavy industry — to use less.

He said that oversight is not unique to PJM. “The failure to account for improved energy efficiency is at the core of what are by now dozens of exaggerated load growth projections across many regions of the country.”

Competing gas supply

Electricity customers could get squeezed by a separate trend in the gas industry that is occurring alongside the data centre boom. In a few short years, the U.S. has emerged as the largest exporter of LNG in the world, and LNG export capacity could double by 2028. The push to export ever greater quantities of gas while also using vastly more for data centres are two trends that are at odds with each other. Both sectors are vying for the same supply of gas. The growth of both will put significant upward pressure on U.S. natural gas prices. 

Meanwhile, there is also the possibility that data centres could be powered by electricity that is not connected to the grid at all. Connecting new power to the grid takes years, a big problem for AI companies hoping to scale up quickly. Interest is growing in building power on-site, adjacent to the data centre itself, so that the electricity is “behind the meter,” not requiring a connection to the broader electricity grid.

This power source could take many forms. There is some talk of building small modular reactors, which are mini nuclear power plants. However, despite the hype, so far there is little evidence that SMRs can be economically competitive.

Meanwhile, ExxonMobil has suggested it is designing an off-grid gas plant that would also have CCS. But the company admits it is still in its early stages.

Instead, a new report from a group of tech and energy researchers concluded that AI data centres could be powered in large part by off-grid renewable energy, with energy storage and gas as backup. Such renewable energy micro-grids could be built in 2-4 years, faster than the 5+ years it takes for new power plants to connect to the grid.

The researchers said one of the big obstacles is simply inertia in the data centre industry, which has long preferred grid connections due to the perceived 24/7 reliability.

O’Leary from the Ohio River Valley Institute said that the PJM region would be better served by building out renewables, which are the cheapest option. There are 90 GW of wind and solar sitting in the PJM interconnection queue, awaiting action.

But renewables face financing obstacles, local opposition, and the challenge of integrating into a grid designed for base-load power.

PJM itself is also laying out a strategy that favours gas, O’Leary warned.

For instance, in the name of enhancing grid reliability, gas-fired power plants that operate 24/7 would be able to “jump the queue,” receiving faster consideration from regulators compared to renewable energy projects, even those that have been waiting for years.

PJM’s Jeff Shields said that the grid operator’s Reliability Resource Initiative, as it is known, “is not designed to give priority to new natural gas plants…though thermal generators like natural gas generally have greater reliability value because they are more easily dispatchable and tend to be larger in scale.”

O’Leary said there is a big risk that the region pays twice – it overbuilds gas-fired power plants, imposing costs on the public, only to have to eventually pay again to decarbonise the electricity sector.

“You’ve created a situation where you’re, almost by definition, going to double the cost of electricity,” O’Leary said.

It is highly likely that at some point, despite the incoming Trump administration’s promises to gut climate policy, that federal and state regulation will force utilities to slash their emissions from gas-fired power, which will require very costly carbon capture technology, or a buildout of renewable energy. Better to just build renewable energy now, O’Leary said.

“You’re assuming one hell of a lot of risk, if you choose to respond to the perceived increase in demand with natural gas because it always carries with it the sword Damocles that could come down at any time.”

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