- Wood Mackenzie says the rapid expansion of AI data centres is outpacing US grid development and creating major risks for power markets and consumers.
- More than 90 GW of collocated generation projects are planned, but the consultancy warns the model is technically complex and difficult to scale.
- Grid operators are planning almost US$100 billion in transmission investments, raising concerns over who will bear the cost.
The rapid growth of artificial intelligence driven data centres in the United States is placing unprecedented pressure on electricity grids, with new analysis from Wood Mackenzie warning that the race to secure power could threaten project viability, market stability and electricity affordability.
In its latest Horizons report, titled Breaking the speed limit: Can US data centre development outpace grid development?, the consultancy said data centre developers are increasingly pursuing collocated generation and flexible grid interconnection models as transmission upgrades remain between five and ten years away.
According to the report, the industry is underestimating the technical, regulatory and economic risks associated with these approaches.
Ben Hertz Shargel, Global Head of Grid Transformation and Large Loads at Wood Mackenzie, said firm grid access supported by major transmission expansion remains the ultimate objective for both utilities and data centre operators.
He warned that many developers are overlooking the risks attached to collocation projects and conditional interconnection agreements.
The report highlights mounting pressure in deregulated electricity markets. PJM Interconnection currently has 78 GW of committed data centre demand compared with only 36 GW of accredited generation capacity in its development pipeline.
In Texas, electricity prices remain between US$30 and US$40 per MWh, well below the US$78 to US$100 per MWh that Wood Mackenzie estimates is needed to encourage investment in new gas fired generation capacity.
The consultancy’s accelerated growth scenario projects the need for 16.4 GW of new gas generation capacity annually through to 2035, compared with an average of just 4 GW per year added between 2023 and 2025.
Chris Seiple, Vice Chairman for Energy Transition and Power and Renewables at Wood Mackenzie, said deregulated power markets face a growing conflict between affordability and rising electricity demand.
He said higher electricity prices may be required to attract investment in new generation capacity, but warned this would increase costs for consumers and could trigger political backlash.
To address the challenge, PJM Interconnection is creating a two tier generation pricing system that offers higher prices for new generation contracted directly by large electricity users, while existing generators receive lower prices.
Wood Mackenzie warned this could accelerate the retirement of older gas and coal plants, further increasing reliability risks.
Texas, meanwhile, continues to rely on competitive electricity markets to deliver new generation investment without introducing a comparable support mechanism.
The report also points to growing regulatory risks as governments and grid operators respond to rising affordability concerns. Wood Mackenzie said future market rule changes are increasingly likely to be driven by political pressure rather than long term grid planning considerations.
Collocation, also known as bring your own generation, has emerged as a widely promoted solution to grid congestion, with more than 90 GW of such projects currently in US interconnection queues.
However, Wood Mackenzie said the model is only viable for the largest and most financially capable hyperscale operators because of its significant technical complexity and high capital requirements.
The report identified several engineering challenges linked to powering AI focused data centres. Sudden fluctuations in power demand can damage gas turbines and reciprocating engines, while lithium ion batteries used to stabilise power flows may experience rapid degradation.
Wood Mackenzie also warned that irregular electricity consumption patterns from AI cooling systems and graphics processing units can create power harmonics and sub synchronous oscillations that threaten grid stability and damage electrical equipment.
Grid reliability concerns are already prompting tighter regulatory oversight. In 2024, around 60 data centres in Virginia disconnected from the grid simultaneously following a minor disturbance, nearly triggering a broader grid failure.
As a result, Electric Reliability Council of Texas is revising its voltage and frequency ride through requirements to prevent unnecessary switching to backup power during minor grid events.
According to the report, many late stage data centre projects may struggle to comply with the proposed rules, potentially requiring expensive redesigns and additional electrical infrastructure investments.
The report also raises concerns over transmission cost allocation. US grid operators are planning close to US$100 billion in transmission investments to support growing electricity demand from data centres, including US$11.8 billion by PJM Interconnection, more than US$30 billion by Midcontinent Independent System Operator, US$33 billion by Electric Reliability Council of Texas and US$8.6 billion by Southwest Power Pool.
Wood Mackenzie warned that unless cost allocation rules are reformed, a substantial portion of these infrastructure costs could ultimately be passed on to existing electricity consumers rather than the data centres driving the investment requirements.
Link to the full report HERE
Author: Bryan Groenendaal
