Powering the Data Center Surge: Challenges, Tradeoffs and Opportunities for On-Site Generation

Data center demand is booming. Thanks to AI and cloud computing, U.S. data center power consumption could reach 35 gigawatts by 2030—more than double what it was in 2020—and the Department of Energy estimates that data centers could consume up to 12% of total U.S. electricity production by 2028.

That’s a problem. There is simply not enough generation, as constructed today, to support the demand required for the coming buildout of data centers.

For tech companies and the utility industry, this brings a host of thorny questions: How much additional generation is required? What are the best ways to supply power to data centers? How will the necessary grid infrastructure upgrades and investments be funded?

In response, more and more data centers owners are considering taking power into their own hands with onsite generation, enhancing their ability to control the speed and costs with which they obtain electricity. A recent survey report projects that onsite generation will fully power more than a quarter of data centers by 2030.

Yet even though it offers advantages, onsite generation is far from a one-size-fits-all solution. Here’s what data center operators and energy professionals need to know.

The central importance of location

Location is the most important factor in addressing data center power needs. In some parts of the country, connecting a data center to the local utility could take years, owing to the well-established processes utilities and their regulators have developed for upgrading or adding facilities to their portfolio—a timeframe that doesn’t align with the speed at which data centers are coming online.

Still, before jumping headfirst into onsite generation solutions, data center operators need to consider the permitting requirements of the state or region. Some jurisdictions have requirements that the local utility own generation, but it may be possible for the data center to build the facility and sell it back to the utility to maintain. If that isn’t allowed, operators and energy professionals should consider whether new transmission or distribution facilities would be required to supply the data center’s power needs.

For those jurisdictions that do allow private-owned generation, incentives can vary. Some states have the same permitting requirements for any type of power generation, for example, while others are more friendly toward a specific type of fuel source. States looking to attract data centers may also offer tax incentives—as Ohio does—that include funds for onsite generation, which could save the data center a large amount of money, especially if those incentives include property or other tax breaks that last for years.

Challenges and considerations for onsite generation

While location will ultimately drive many onsite generation decisions, there are other practical considerations and tradeoffs that operators need to incorporate into planning efforts, including:

• Purpose, sizing and price: Data center operators need to determine whether to size the generation facilities to run the center continuously or only when extra capacity is needed. If the operators plan to size for less than full load and procure additional power needs from the local utility, this may come with higher charges during peak loading times.

This decision often comes down to the cost of electricity where the data center is located: for instance, purchasing large quantities of electricity from a utility in California or the Northeast would be significantly more expensive than in the Midwest (e.g., Missouri, Wisconsin).

• Fuel source constraints: A continuous load at a data center is well suited for nuclear or coal power, but permitting these types of facilities may be impossible in certain parts of the country; there’s a reason, after all, that a large coal-fired power plant hasn’t been built in the U.S. since 2013. On the other hand, solar can be easier to build and has a much faster construction schedule, but it requires a considerably larger footprint and would need to be coupled with onsite battery storage. That leaves natural gas as the likely fuel source for onsite generation at data centers, since it will typically be faster to permit and can be sized accordingly. However, if no gas transmission pipelines are close to the data center, building new pipelines could come with additional permitting challenges, infrastructure investments and land acquisition hurdles.
• Storage needs: Operators should make plans for excess power, if applicable, whether by storing it with a battery system or selling it to the local utility.
• Expertise gaps: Data center owners are skilled in data processing, not energy production—meaning onsite generation is likely out of their comfort zones. Operators would want to ensure they have the appropriate expertise to manage their onsite generation facilities. These generation facilities, based on type, may require full time, onsite support to maintain, which would add to the total operations and maintenance cost of the generation.

Going beyond the grid

With data center power demands accelerating, operators may not be able to rely on traditional generation and grid connections alone. Onsite generation offers a path to greater control, but it is far from a universal solution. Each center must evaluate onsite generation against a mix of factors—including permitting rules, fuel options and costs—that are location-dependent. Given the intense energy needs of data centers, these variables should be carefully considered before planning, siting and developing facilities.