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Rising datacenter demand forces reckoning with US utility decarbonization goals

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Rising datacenter demand forces reckoning with US utility decarbonization goals

A massive ramp-up of US electricity demand over the next decade, driven by factors including the electrification of the economy, datacenters and AI, is putting power providers on a collision course with commitments to produce cleaner energy.

"The utilities are in a tough spot with datacenters because on the one hand, they don't want to lose business," Scotia Capital (USA) Inc. analyst Andrew Weisel told S&P Global Commodity Insights. "But at the same time, they have a responsibility to their customer base and their regulators not to overbuild and to only make investments that are prudent."

Several investor-owned utilities have updated long-term resource plans to add new capacity in the face of increased load forecasts, and more are expected to follow.

While utilities could try to "build a whole bunch of gas plants" to satisfy the energy needs of datacenter customers, "that is really not going to help the decarbonization strategy," according to Weisel.

"On the other hand, if they had five or 10 years to plan, they could probably be very thoughtful about how to add enough renewables and storage to do it in a low- or zero-carbon way, but the tech companies won't wait that long," Weisel said. Some coal plant retirements could be postponed, or "at a minimum, you might see gas and coal plants being dispatched more than they otherwise would have if demand is higher than expected."

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'Rapid planning'

Upward revisions to load growth forecasts are clear.

The International Energy Agency projects US datacenter electricity consumption to grow from 200 TWh in 2022 to about 260 TWh in 2026 and account for 6% of total power demand. Datacenters represent 2.5% of US electricity consumption, according to Boston Consulting Group, and this could triple to 7.5% by 2030.

Grid planners have almost doubled the five-year load growth forecast, consulting firm Grid Strategies LLC wrote in a recent analysis based on filings with the Federal Energy Regulatory Commission.

"Grid planners forecast peak demand growth of 38 [GW] through 2028, requiring rapid planning and construction of new generation and transmission," Grid Strategies wrote. "Next year's forecast is likely to show an even higher nationwide growth rate."

Datacenter load is moving north and west from its core of Northern Virginia, particularly in Loudoun County, Va., west of Washington, DC, to parts of western Maryland, Pennsylvania and West Virginia, said Steve Piper, director of energy research at Commodity Insights.

Datacenters want to be near the supply, according to Piper, which likely explains a recent deal by Amazon Web Services Inc. to purchase Talen Energy Corp.'s datacenter campus adjacent to the 2,494-MW Susquehanna Nuclear plant in Pennsylvania.

CreditSights analysts wrote March 19 that the fourth iteration of their fuel mix model "shows the combination of new datacenter demand with weaker electric vehicle sales means wind and solar combined now won't surpass natural gas generation until 2029."

"From a decarbonization viewpoint, datacenters are a minor negative for the environment," CreditSights analysts wrote, "but from an investing viewpoint, datacenters are a major positive for all owners of generation but especially nuclear plants (19% of 2023 generation) and natural gas plants (43%)."

CO2 reduction implications

Duke Energy Corp.'s utilities in the Carolinas filed amended resource plans in January with state regulators to add more than 3 GW of gas capacity, 460 MW of new solar and 2,400 MW of offshore wind generation.

Duke Energy Carolinas LLC and Duke Energy Progress LLC said their load forecast through 2030 increased by 2 GW since the spring 2023 forecast and is eight times the growth projected two years ago, driven largely by manufacturing and technology development, including datacenters, in North Carolina and South Carolina.

"This load growth is an industrywide challenge, and the states that move decisively to build new generation will be best-positioned to take advantage of the positive trend in economic development opportunities while protecting affordability and reliability," Duke spokesperson Bill Norton told Commodity Insights.

As part of this updated plan, Duke proposes building two combined-cycle gas-fired power plants, each with 1,360 MW of capacity, by 2033. In March, Duke Energy Carolinas proposed replacing two coal-fired units with 850 MW of gas capacity by 2031.

While North Carolina regulators ordered Duke to include a resource plan that meets the state's mandate of a 70% reduction in carbon emissions by 2030, the company's preferred portfolio targets a 70% reduction by 2035 or 2037. Duke plans to fully exit coal by 2035 and targets net-zero carbon emissions from electricity generation by 2050.

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Loudoun County, Va., the largest datacenter market, is served by Dominion Energy Inc. through subsidiary Dominion Energy Virginia.

The PJM Interconnection LLC projects summer peak load growth in the Dominion transmission zone to average 5.5% annually over the next 10 years.

In its 2023 integrated resource plan, Dominion Energy Virginia forecast datacenter peak demand to reach 13.3 GW by 2038. The industry has grown about 500 MW annually in the last three years in its service territory, "achieving a peak metered load of almost 2.8 GW in 2022."

While building the 2.6-GW Coastal Virginia Offshore Wind project, Dominion has proposed delaying fossil fuel retirements and adding gas capacity as it expects demand to "nearly double over the next 15 years."

Most of Dominion's portfolio options include significant new solar and wind generation, including potentially a second massive offshore wind project, but "renewables alone cannot reliably meet all this unprecedented growth," the company said.

A 2020 state law requires Dominion Energy Virginia to procure 100% of its electricity from renewable resources by 2045.

"We remain committed to our 2050 net-zero goal," Dominion Chair, President and CEO Robert Blue said March 1 during an investor day briefing, which "will require supportive public policy and significant advances in technology, particularly to reduce the cost of long-term energy storage and to develop dispatchable zero-carbon generation."

American Electric Power Co. Inc. subsidiary Appalachian Power Co., which serves central and southwestern Virginia, must meet Virginia's clean energy mandate by 2050.

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Atlanta-headquartered Southern Co. expects annual electricity sales growth to average about 6% from 2025 to 2028, with subsidiary Georgia Power Co.'s total retail sales to grow about 9% annually.

"Datacenters represent right now, we think, somewhere around 80% of that emerging load," Southern Chairman, President and CEO Christopher Womack said during the company's fourth-quarter 2023 earnings call.

In April 2021, Southern management said it would achieve net-zero greenhouse gas emissions ahead of its 2050 target and already exceeded an intermediate emissions reduction goal of 50% by 2030.

Seeing the increased growth rate, Georgia Power filed an updated integrated resource plan in October 2023 targeting 10 GW of renewables by 2035, adding 1,000 MW of new battery storage by 2027 and up to 1,400 MW of new oil- or gas-fired capacity.

Also, Georgia Power is on the verge of completing construction on more than 2,000 MW of new nuclear capacity.

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In the western US, Arizona Public Service Co. (APS) serves another of the nation's top datacenter markets, in and around Phoenix, and must manage this growing electricity demand against the backdrop of sweltering summer heat.

"Providing power in the extreme heat is nothing new for APS or utilities in the Southwest, but what is new is the massive amount of electricity needed for one datacenter," APS spokesperson Katie Conner said in an email. "This is impacting states across the country. It's not specific to Arizona."

To accommodate growing around-the-clock demand from datacenters, APS has "developed a queue process to prioritize new projects equitably while maintaining system reliability and affordability for existing APS customers," Conner said.

The Pinnacle West Capital Corp. utility subsidiary unveiled plans in January 2020 to provide 100% carbon-free electric generation by 2050. "Emerging industries do not change that commitment," Conner said.

Company management also recently committed to retire the remaining units at the 387-MW coal-fired Cholla plant within the next year and fully exit coal by 2031.

As part of this transition, APS plans to increase renewables, invest in battery storage, use gas to support reliability and rely on its 29.1% share of the 4,003-MW Palo Verde nuclear plant in Maricopa County, Ariz., according to Conner. The utility will continue analyzing and encouraging new, existing and evolving technologies, such as pumped storage, advanced nuclear reactors and green hydrogen, Conner added.

Long term vs. short term

Meeting datacenter demand while hitting decarbonization targets represents a major challenge for utilities, according to Scotia Capital analyst Weisel, with the so-called "all-of-the-above" strategy as the clearest path toward achieving this balance, at least for now.

"Of course, companies will invest in onshore wind and solar," Weisel said. "Companies will continue to invest in the next-generation technologies like [small modular nuclear reactors], but those are so out of the money, small modular reactors are not going to help one bit for datacenters that want to begin operations in 12 months or 24 months. That is very long term."

"In general, you might see certain southeastern companies, in particular, adding more gas plants than they would have thought 12 or 24 months ago, just based on how fast this growth is erupting," he added. "These tech companies all want renewable power. They all have their own decarbonization goals. But keep in mind, a datacenter runs 24/7. The sun does not shine 24 hours a day and the wind does not blow 24 hours a day."