AI Demand Swings Could Jeopardize Both Co-located Energy Facilities and the Grid: Wood Mackenzie Reports
Thinking of colocating a microgrid or other energy facility with an AI data center in a “bring your own power” model designed to skip long utility interconnection queues?
Two reports from Wood Mackenzie, a research firm and consultant, argue you should think twice.
AI demand poses a number of regulatory and technical risks to both colocated facilities and the grid, according to “Out of Sync: The Technical Risks that will Limit Colocation as a Speed-to-Power Solution,” and “The Big Bet on Around-the-Meter Generation: How Risky is this Growing Path for Bringing Data Centres Online?”
Developers don’t understand the technical risks
“On the technical side, there are far more formidable challenges than people are aware of,” said Ben Hertz-Shargel, global head of grid transformation and large loads at Wood Mackenzie.
An uninterruptible power supply, inverter or other equipment on the site of an AI data center can lose track of the alternating current signal, then oscillate at a low frequency, posing a stability risk to the grid, he said.
In addition, reciprocating engines and gas turbines can’t always handlehen the AI data center workload goes up and down in tens of megawatts within milliseconds, creating ”hammer blows of load steps,” he said.
The oscillations are able to travel transmission networks and impact even distant power plants.
Danger of a number of large loads going offline simultaneously
What’s more, if one or more large-load microgrids or other energy facilities are grid-connected but go offline, the very fast load loss can risk the stability of the grid and even cause a blackout, he said.
This happened in the summer 2025 in northern Virginia, said Elham Akhaven, senior research analyst focusing on microgrids and behind-the-meter generation at Wood McKenzie.
At Data Center Alley–the location of more than 200 data centers–60 data centers suddenly went off-grid and switched to on-site generators, triggered by a safety mechanism in the transfer switch of the data centers.
This created a huge uptick in excess electricity, and in response, grid operator PJM and utility Dominion Energy decreased the output of power plants to avoid power outages across the region.
“AI data centers are so much more challenging in terms of their way of consuming load and the incredible volatility in which they consume power. They are a far greater risk factor than what we have seen in the past,” Akhaven said.
In 2023, most of the “bring your own power” arrangements created by data centers were “around the meter” options, including onsite generation, flexible generation, base load generation onsite, or off-grid generation, she said.
Needed: utility-scale equipment to cope with AI data center ramping
To avoid technical challenges, these onsite facilities need the capability of utility- scale operations on site. They need equipment to buffer the impact of AI ramping, Hertz-Shargel said. Lithium-ion batteries can be used to address this, but they could potentially run through their useful lifespan quickly.
“The solution is a long, laborious, complex and expensive sort of energy solution that many companies are not going to have, may not be sophisticated to come up with in their first try, or they may not have the balance sheet in order to fund all that equipment,” he said.
Microgrid operators could face these challenges. Some data center operators are deploying off-grid microgrids while they wait to interconnect to the grid, which can take many years.
“The challenge is there's tremendous technical risk of being able to manage a microgrid-like setup, whether or not you're truly disconnected from the grid because of the volatility of the AI load,” Hertz-Shargel said.
In addition to technical risks, colocated energy facilities face regulatory risks.
Regulatory risks could be deal breakers
“They include ride-through requirements, which is how the utility tells you when you can and cannot disconnect from the grid following a disturbance,” he said. “There are also market-specific risks, which are tied to how grid operators tell a data center connected to the grid what happens when there is an energy shortage.”
In PJM and Southwest Power Pool markets, some regional transmission organization models imply that data center companies would be interrupted and could not even rely on their backup power or their on-site generation, which could be a deal breaker, he said.
“There are big business-model risks of doing this,” Hertz-Shargel said. “A lot of companies are moving ahead with this. A lot of investors are attempting to pour enormous amounts of money into these setups. There are likely to be a lot of failures. We believe it's not a model that will scale.”
Developers trying this model hope to develop the land and the power to skip the utility interconnection queue. Not everyone will succeed.
Grid interruptions, regulatory obstacles–which are developing in real time– and other risks could be the outcome of the Bring Your Own Power model.
A warning from Wood Mackenzie
“Companies are attempting to do this at gigawatt scale, despite the technical risks, when these regulatory and market risks are developing on the fly in real time, jeopardizing projects that may be well underway,” Hertz-Shargel said.
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About the Author
Lisa Cohn
Contributing Editor
I focus on the West Coast and Midwest. Email me at [email protected]
I’ve been writing about energy for more than 20 years, and my stories have appeared in EnergyBiz, SNL Financial, Mother Earth News, Natural Home Magazine, Horizon Air Magazine, Oregon Business, Open Spaces, the Portland Tribune, The Oregonian, Renewable Energy World, Windpower Monthly and other publications. I’m also a former stringer for the Platts/McGraw-Hill energy publications. I began my career covering energy and environment for The Cape Cod Times, where Elisa Wood also was a reporter. I’ve received numerous writing awards from national, regional and local organizations, including Pacific Northwest Writers Association, Willamette Writers, Associated Oregon Industries, and the Voice of Youth Advocates. I first became interested in energy as a student at Wesleyan University, Middletown, Connecticut, where I helped design and build a solar house.
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