Data center explosion challenges sustainability goals, provides investor opportunities (original) (raw)

(Source: Baxtel.)

Meeting the more than 50 gigawatts (GW) of power demands from AI and data centers in the U.S. by 2030 would require over $500 billion in investment, according to new findings from McKinsey & Company. The situation is likely to challenge technology companies on their sustainability goals but provide a slew of opportunities for investors, the consultant says.

According to McKinsey analysis, the United States is expected to be the fastest-growing market for
data centers, growing from 25 GW of demand in 2024 to more than 80 GW of demand in 2030. By the end of the decade, data centers are projected to consume 11-12% of U.S. power, up from the current 3-4%, according to the company’s report, How data centers and the energy sector can sate AI’s hunger for power.

McKinsey projects that data center load may make up between 30 and 40 percent of all net new demand added until 2030, even considering growth from domestic manufacturing, electric vehicles and broader electrification efforts.

Market challenges and sustainability goals

It is well-known that access to power has become a critical factor in driving data center builds, but McKinsey says the power sector is “rapidly becoming a protagonist in the AI story.”

McKinsey research shows that time to power is the biggest consideration for data center operators when
building new sites, yet constraints across the value chain when building data centers are hindering progress.

The industry is “approaching its physical limits on node sizes and transistor densities,” the McKinsey report says. Long lead times are delaying new power connections for data centers in key hubs like Northern Virginia; Santa Clara, California; and Phoenix.

Even in areas with access to grid power, the report notes there are further constraints on power equipment, such as transformers, on-site backup generators and power distribution units (PDUs), with historically high lead times of nearly two years in certain cases.

Growing AI workloads are exacerbating shortages in compute capacity, McKinsey also says, with vacancy rates for data centers in some regions like Northern Virginia falling below 1%.

These issues, in conjunction with with larger grid constraints and wait times for interconnection, are causing sustainability commitments to clash with operational realities.

While hyperscalers and utilities work to build out the renewable fleet to support sustainability
commitments, there is a continuing need to support new load not only from data centers but from widespread electrification. This is driving new additions from natural gas-fired generation, while older fossil-fired plants retire.

As a result, decarbonizing the power grid to achieve 24/7 carbon-free energy usage by 2030 is proving difficult. Sustainability commitments are, in some instances, taking a back seat to maintaining operations, McKinsey says.

According to McKinsey, much of data center growth by 2030 —about 70 percent — is expected to be fulfilled directly or indirectly (via cloud services, for instance) by the hyperscalers: Amazon Web Services (AWS), Microsoft, Google, etc.

These companies have sustainability goals, but as McKinsey notes, there is no accepted standard for achieving clean power across the industry. These companies may use different instruments and approaches to manage their carbon accounting, including unbundled renewable-energy certificates, renewable power purchase agreements (PPAs), time-matched renewable-energy certifications, carbon matching, offsets, and accreditation activities.

However, tracking local and time-matched generation and consumption across synchronized grids becomes a complex accounting activity, making these goals difficult to measure and achieve, McKinsey says.

The company says in its report that “for now, many stakeholders are left to define their own motivations, ambitions and directions for the future.”

Investor opportunities

The data center ecosystem presents significant opportunities for investors, and McKinsey’s report notes several areas where investors can make a substantial impact:

Investors can support utility companies building Transmission and Distribution (T&D) infrastructure, particularly in emerging locations with reliable and cheaper power. Hyperscalers are focusing on these secondary markets – like Wyoming, Indiana and Ohio – due to their faster speed to market and lower costs.

Source: McKinsey & Company.

Investors can also support behind-the-meter solutions, like generation that can be fully islanded outside the grid or retrofits of existing sites or facilities to densify and bring additional capacity.

Investment in critical power equipment and addressing shortages of skilled labor are also key growth areas.

The demand for data center growth drives a need for critical power equipment, such as generators and power distribution units (PDUs). There are investment opportunities in smaller companies innovating in this space. Rapid increases in rack power densities (up to 100 kW per rack) are also driving equipment innovation, creating potential for new entrants.

The shortage of trained electrical and mechanical workers is also widening, especially in fast-growing regions. McKinsey says investors can consolidate and scale smaller contractors that lack the resources to handle large projects but have access to labor.