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Data Centers: A Problem For The Grid Or An Opportunity?

Picture of SENS SENS : Oct 27, 2025

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Data Centers: A Problem For The Grid Or An Opportunity?

From power consumer to power partner: A new role for data centers

It’s clear that escalating demand from data centers is straining a power grid that’s already on its knees. This presents a critical challenge for grid stability but is also an opportunity for data centers and utilities to collaborate.

Rather than viewing this as a zero-sum trade-off, where grid stability for some comes at the expense of others, data centers, which provide vital services to society, can be part of the solution.

The key lies in working with the power industry to create a reliable system for all users, harnessing the substantial power resources data centers have at their disposal to address the challenges of growing demand and constrained supply.

An equation that doesn’t stack up:

Growing demand …

Demand is exploding due to population growth, expanding electrification, reshored manufacturing, and the increase of AI data centers.

…And constrained supply

Reserve capacity is dropping below safe levels as coal and nuclear plants retire without sufficient firm replacements. While renewables are growing, their intermittency creates reliability challenges.

Furthermore, conventional plants are strained by constant ramping, and new gas-fired plants face multi-year construction and component lead times.

Can the grid handle it?

Our aging grid is struggling to keep pace. Faults and equipment failures are increasing, and replacement lead times for critical components are extending for years.[1]

The grid is already at risk of outages. In fact, the U.S. Department of Energy (DOE) recently warned that without major infrastructure investments, blackouts could increase 100-fold by 2030.[2] A near-blackout in Virginia in 2024, where 60 data centers simultaneously dropped offline due to a grid disturbance, vividly demonstrated the potential impact of data centers on grid stability.

Data centers are at risk too

The situation is not any better for data center operators. Year-long interconnection backlogs result in significant exposure for operators who’ve already invested money in real estate and construction. Meanwhile, profit margins are being squeezed by rocketing energy prices, sometimes jeopardizing the entire business model.[3]

Bottom line? The current system isn’t working for grid operators or data centers.

Proactive solutions for data centers

With increased demand and more frequent ‘scarcity’ conditions, customers are starting to turn to their backup power sources, such as batteries and diesel- or gas-powered standby generators, to avoid downtime or unaffordable operating costs.

But many data centers are starting to go further. They are taking matters into their own hands, ensuring their facilities can get the power they need, when they need it:

Long-term agreements with an existing power plant

A bilateral agreement to buy energy from a specific producer, in a physical (sleeved) Power Purchase Agreement (PPA) offers a degree of certainty. However, it doesn’t guarantee capacity, and the power may be redirected during grid emergencies.

And unless the generator and facility are nearby, congested grids may not have the capacity to carry the energy.

Large-scale, on-site generation

Hyperscalers are leading the way here, installing renewables and microgrids, like the one powered by food waste gas at Microsoft’s San Jose facility.[4]

Google has agreed to purchase power from Kairos Power’s Small Modular Reactors (SMR) to supply its AI data centers.[5] And Entergy received approval to construct three combined-cycle gas turbines to serve Meta’s new 2GW AI facility in Louisiana.[6]

On-site generation has the added benefit to grid operators of reducing congestion.

Substantially increase storage capacity

In a power system prone to outages, large-scale storage capacity can supply data centers for hours or even days.

Charged off-peak from the grid or by on-site generation, data centers can reduce their own energy costs and help to flatten demand spikes across the network.

A powerful partnership for grid reliability

These solutions help data centers take control of their own energy needs. They’re also a potential source of dispatchable power to support the grid when needed.

Large-scale on-site generation, expanded storage, plus existing diesel and gas backup generators, make data centers well-placed to withstand more routine curtailment. But what if they could also offer this as a service to grid operators?

With their large, potentially flexible loads, data centers can provide demand-side response to help stabilize a grid increasingly powered by intermittent renewables. What’s more, curtailment could be an effective way of making space for new loads on the grid, effectively giving “breathing room on the existing system”.[7] This would help alleviate interconnection backlogs while reducing the costs of capacity expansion.

What sort of flexibility could data centers offer?

1. Load shedding

Many grid operators run voluntary Interruptible Service Agreements, such as CAISO’s Base Interruptible Program.

This could work for data centers used for training AI models, where schedules can be a bit more flexible. For example, Google has entered a bilateral agreement to shift or reduce power demand for Machine Learning workloads in its Indiana facility.[8]

2. Peak shaving

In a variable service agreement, data centers benefit from low off-peak tariffs, with prices rising sharply during peak demand. Facilities with expanded BESS or microgrids can switch to their alternative energy source, saving money and reducing strain on the grid.

3. Becoming power suppliers

Once data centers have on-site firm power generation, the next logical step is to buy and sell power to their energy supplier or to other market participants on wholesale energy markets. Meta has recently applied to participate in energy markets through its subsidiary, ‘Atem Energy’.[9]

4. Providing ancillary services to grid operators

These offer a new income stream by giving the grid operator the right to control their generation, storage and load when the grid is under stress.

Texas Bitcoin miner, RIOT, has already demonstrated how large loads like data centers can support the grid. The company earned $7m from ERCOT’s ancillary market when it provided 84,000 MWh of energy to the market during extreme summer temperatures in 2023.[10]

In the near future, backup power systems using bidirectional power electronics may become standard. This paves the way for other services such as frequency regulation, where facilities dynamically adjust their workloads to provide real-time support to the grid.

Data centers have often been reluctant to take part in any programs that constrain their power usage. However, as the sector continues to expand, its energy consumption and impact on the grid are a growing concern for many.

But we believe the benefits of collaborating with grid operators go beyond simply being “good grid citizens.” By working together, data centers may solve their own power problems and help bring about a more stable grid for all users. It’s an opportunity that should be grasped by the industry.