Data center developers turn to distributed behind-the-meter power

Modular, behind-the-meter power generation solutions are gaining traction among data center developers looking to bypass regulatory and interconnection hurdles, posing a growing challenge to independent power producers' contracting models, analysts at Barclays wrote Oct. 21.

While companies such as Vistra Corp., Constellation Energy Corp., Talen Energy Corp. and NRG Energy Inc. have long-term power purchase agreements with hyperscalers that rely on access to the electric grid, "an urgent need for speed to market" is driving a "fundamental shift," Barclays said.

Interconnection delays have long hindered the power sector. But Texas Senate Bill 6, which requires new loads over 75 MW connecting to the Electric Reliability Council of Texas Inc. grid to be flexible and participate in demand response, "has added new restrictions on market participation," the analysts noted.

"We stress that the primary differentiator now is the ability to secure reliable, scalable, and fast to deploy power," Barclays wrote, pointing to VoltaGrid LLC's recent agreement to supply 2.3 GW of behind-the-meter gas generation to Oracle Corp.'s $500 billion Project Stargate in Texas.

VoltaGrid's Qpac modular platform uses reciprocating engine generators that can each produce up to 20 MW of power and "be combined to deliver up to 200 MW of prime power under a minor source air permit," according to the company's website.

In an Oct. 22 note to clients, analysts at Jefferies highlighted small gas turbines are another modular technology gaining market share among data center developers due to their "fast deployment and scalable footprint."

"We estimate a potential [total addressable market] of about 8 GW to 10 GW for gas turbines through 2030 as recent large orders underscore momentum," Jefferies analysts wrote. "As operators face delays in grid interconnection and reliability concerns, on-site turbines provide the ideal 'bridge' to access power."

GE Vernova Inc. is supplying Project Stargate with 29 stackable aeroderivative gas turbines that can provide nearly 1 GW of power, Barclays said.

Behind-the-meter distributed generation poses a material risk to IPPs, the analysts added.

"NRG continues to be our preferred way to gain exposure to the sector in power, though we are increasingly growing cautious," they wrote.

Still, original aeroderivative turbine equipment manufacturers are seeing lead times for new orders rise to 12 to 18 months, according to S&P Global Commodity Insights research.

Larger turbines are "just so much more economically efficient because they consume so much less fuel to produce so much more output," GE Vernova CEO Scott Strazik said during an Oct. 22 conference call, when asked whether modular technologies such as aeroderivative turbines, reciprocating engine generators and fuel cells can compete with heavy-duty gas turbines.

At the same time, "there's a very aggressive surge for near-term power that smaller applications that can provide bridges, even if those bridges are economically less efficient," Strazik said, adding that they are expected to transition into backup power in the medium term.

"We see that with some of our smaller applications, some of our aeroderivatives for the next five years, we'll likely run closer to base load and then heavy-duty will follow over time," Strazik added.

Meanwhile, Brookfield Asset Management Ltd. on Oct. 13 said it plans to invest $5 billion to deploy Bloom Energy Corp.'s fuel cells at AI data centers, helping avoid grid connection delays.

"Behind-the-meter power solutions are essential to closing the grid gap for AI factories," said Sikander Rashid, global head of AI infrastructure at Brookfield.

Bloom Energy stock jumped 27% on the announcement. However, analysts at BofA told clients on Oct. 20 that "the market's reaction looks well ahead of what's been signed."

"We see the announcement as strategically positive but financially modest, a credibility win, not a cash-flow inflection," they wrote.