Data-Center Reliance on Fossil Fuels May Delay Clean-Energy Transition

Summary

• Data centers increase reliance on fossil fuels, delaying transition to clean energy
• Utilities add gas plants, delay retirements to meet data-center demand
• Data companies’ green pledges fall short, rely on existing clean power

(Reuters) – A spike in electricity demand from the world’s big data providers is raising a worrying possibility for the world’s climate: a near-term surge in fossil-fuel use.

Utilities, power regulators and researchers in a half-dozen countries told Reuters the surprising growth in power demand driven by the rise of artificial intelligence and cloud computing is being met in the near-term by fossil fuels like natural gas, and even coal, because the pace of clean-energy deployments is moving too slowly to keep up.

In the United States, home to a third of world data centers, utilities are adding new gas plants and delaying the retirements of fossil-fuel power plants as a slew of sprawling new data centers plug in to the grid. In Poland, Germany and Malaysia, coal could also be in the mix, according to interviews with company executives, regulators and analysts.

The outlook poses a new obstacle to world governments, now gathered at the UN’s annual climate conference in Baku, which are already struggling to meet ambitious targets to decarbonize power systems.

COP29 host Azerbaijan held the first-ever Digitalization Day at a world climate summit and launched a declaration, endorsed so far by 68 countries including China and Korea, to limit the environmental impact of digitalization.

The outlook also reveals the shortcomings of data-company pledges to be green. Companies including Meta Platforms, Microsoft  and Amazon.com are committing to sourcing renewable energy and zeroing out emissions with clean power and offset credits – but often that only means siphoning clean power out of the grid that could have been used somewhere else.

Meanwhile, agreements by data providers to power new data centers with advanced nuclear reactors or resurrected nuclear plants are uncertain and years off.

“I think everyone agrees that we need more and more renewable energy to keep up with a growing demand,” said Meta spokesman Jim Cullinan. “I think it is up to the utilities to comment on how they will fill the supply.”

Amazon told Reuters that investing in new renewable energy for the grid, including in regions relying heavily on fossil fuels, is part of its strategy to decarbonize.

Investment bank Morgan Stanley projects the global data-center industry will produce around 2.5 billion metric tons of carbon dioxide-equivalent through the end of the decade, the equivalent of Russia’s annual emissions.

PUMPING THE GAS

Northern Virginia in the U.S. has the biggest concentration of data centers in the world. Utility Dominion, which serves the area, has an answer: gas.

The utility is building a 1,000-megawatt gas plant in Chesterfield County and recently slashed its 15-year projection for renewables to 80% from 95% of its power mix.

“Overall, power demand in our service territory is growing at an unprecedented pace,” said spokesman Aaron Ruby.

Several other U.S. utilities said they are keeping on fossil-fired power plants longer and building new facilities as data-center demand grows, according to a Reuters review of recent company earnings calls.

Entergy, for example, began building its first natural gas-fired power plant in a half-century, the company said. The 754-MW power station will serve two Amazon data-center complexes being built in Mississippi.

Nearly half of utility NiSource’s new $19.3 billion capital expenditure plan through 2029, meanwhile, will be spent on natural gas system improvements, the company said. NiSource covers some of the most quickly developing data center markets in parts of Indiana, Ohio and Virginia.

Rob Thummel, senior portfolio manager at Tortoise Capital, said natural gas is a clear answer for data centers.

“It’s just the lowest cost, most reliable and it is decarbonizing in terms of it replacing coal,” he said. “Is it perfect solution? No. But I don’t know if we have a perfect solution to power these data centers.”

S&P said data centers could add between 3 billion and 6 billion cubic feet per day to U.S. natural gas demand by the end of the decade.

That will worsen the U.S. performance on emissions, possibly for decades, clean-energy consultancy RMI said.

“Data centers are just a warm-up act compared to the amount of electrification we’re going to have going forward. And if our first instinct is to start building gas plants and nuclear plants in order to do that, we’re just going to create an energy system we cannot afford,” RMI CEO Jon Creyts said.

President-elect Donald Trump has said he intends to boost the U.S. power system when he takes office, and sources close to his transition team have said his plans are likely to prioritize gas development over renewables.

COAL IN THE MIX?

Research firm McKinsey said in a report last month most of the increase in data-center power consumption in the European Union by 2030 will be supplied low-carbon sources.

McKinsey declined to elaborate when asked whether low-carbon sources included natural gas, and whether the trend could prolong the life of coal.

In some parts of Europe, data centers will need coal.

In Poland, for example, a rush of new datacenter projects will need to run at least partially off baseload sources like coal because of the still-low volume of renewables in the country, according to Szymon Kowalski, deputy head of Re-Source Poland, a platform for corporate renewable energy sourcing.

The share of coal in Poland’s energy mix has been falling for years as it ramps up renewables, but still stood above 60% in 2023, according to the International Energy Agency.

In Ireland, meanwhile, data centers now account for over 20% of electricity consumption, according to the IEA.

System operator EirGrid told Reuters it will meet demand with 650 MW of temporary emergency generation capacity, and by delaying the retirement of older generators. It said natural gas would be an important part of the mix.

Ireland’s only coal station, ESB Group’s 915 MW Moneypoint plant, extended its retirement date last year to 2029 from 2025, but intends to burn fuel oil instead of coal during that period.

In Germany, Microsoft this year announced plans to expand data-center capacity with a 3.2 billion euro ($3.38 billion) investment, near the 400-meter-deep Hambach coal mine.

Microsoft declined to say whether the project would rely on coal. “We are still in an early stage of the project, that’s why we do not comment,” spokesperson Jo Klein said.

In Malaysia, some data companies are taking power from the coal and gas-dominated grid instead of paying a premium for renewables, according to a government official familiar with the matter. Less than 50% of the green power Malaysia has sought to auction this year has been purchased, the official said.

($1 = 0.9467 euro)