Data center industry faces ticking power time bomb

Research and consultancy group Wood Mackenzie has warned that the power requirements of AI data centers are growing too fast for national grids to keep up.

With grid transmission build-outs five to ten years away, the firm said, projects, markets, and consumers are all at risk. While data center operators are pursuing colocated generation and flexible interconnection models, these projects face far greater technical, regulatory, and economic hurdles than the industry understands.

"The power sector is fixated on data center flexibility, but that is not the end-game for grid operators or data center operators," said Ben Hertz-Shargel, global head of grid transformation and large loads at Wood Mackenzie.

"Firm grid service is the goal, backed by new transmission superhighways. But there is a lack of awareness throughout the power sector about the technical and regulatory risk confronting colocation projects, and the business risk of conditional interconnections."

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Wood Mackenzie's figures see 16.4GW of gas capacity additions per year through 2035 to meet projected demand, despite only 4GW per year having been added between 2023 and 2025.

"Load growth and affordability are in direct opposition in the deregulated markets," said Chris Seiple, vice chairman, energy transition and power and renewables, Wood Mackenzie. "If prices rise to the level necessary to incentivize new generation, it will raise prices for all customers, prompting a political outcry."

In one example, mid-Atlantic grid operator PJM has 78 gigawatts of committed data center load against only 36 gigawatts of accredited generation capacity in its pipeline. The firm's attempting to deal with this by creating one elevated price tier for new resources contracted by large loads, alongside a lower tier for existing resources.

However, Wood Mackenzie warned, this could mean that existing gas and coal plants receiving lower capacity prices may retire, threatening reliability.

In Texas, meanwhile, current market prices of between $30 and $40 per megawatt-hour fall far below the $78-$100 needed to attract new gas generation.

Many data center operators are attempting to avoid the problem through colocation – there's currently more than 90GW of colocated generation now in US interconnection pipelines, indeed. However, the report finds that this is only achievable for the most sophisticated and well-capitalized hyperscalers.

Technical challenges include near-instantaneous changes in AI power demand, which can damage reciprocating engines and gas turbines. And while lithium-ion batteries can be used as a buffer to prevent this, they have a short useful life.

Battery response times need to be extremely short, relying on technology that has not been widely commercialized, and the irregular way in which AI cooling and GPU loads consume power introduces power harmonics, which, if unfiltered, cause equipment to overheat and degrade. Sub-synchronous oscillations, meanwhile, pose a fundamental stability risk to local generators and to distant ones on the transmission system.

And on top of this, the need to protect against downtime exposes data center companies to significant regulatory risk.

There's also, said the firm, a fundamental problem with cost allocation. While grid operators are planning close to $100 billion in transmission investments, much of this could be spread across all existing ratepayers, rather than assigned specifically to a data center.

"Grid operators are positioning flexible interconnections as a stopgap, not a long-term solution," said Seiple.

"The expectation – and often the requirement – is that transmission will eventually provide complete, firm service to large loads. That could cause costs to rise for existing customers if cost allocation methodologies aren't changed and if the data center demand doesn't materialize as forecast."

Data center operators are all too aware of the problem. Research from Savills late last year found that only 850MW of power capacity was delivered across EMEA during the first three quarters of 2025, down by 11% compared with the same period last year. They've been attempting to deal with this by concentrating facilities in the most favorable regions, with some pivoting to emerging markets offering more accessible land and power.