News & Insights

Key insights

• The next phase of the technological revolution will see a global push to build resource-intensive, state-of-the-art data centers.
• Data-intensive computing applications, including AI and crypto, are driving a surge in electricity consumption, described as the data center power grab.
• Powering the expanding digital economy is a mammoth task for utilities and the broader energy sector at a time when economies are transitioning to renewables.
• The world will need a lot more renewable energy to satisfy data centers' growing AI workloads and meet net zero obligations.

The journey to net zero and the AI data center boom are inextricably linked. Beyond the hype and headlines of the data center power grab, the story is more nuanced. Could the surge in energy demand drive much-needed investment in renewables and collaboration between Big Tech and utilities?

This report considers the potential for deep-pocketed Big Tech to take a necessary, hands-on role in backing the next phase of clean-energy development.

The growing need for data centers and electricity

The explosion of data that characterizes our digitized world is increasingly stored in vast data centers rather than on companies' servers. Uses for artificial intelligence (AI) are expanding across a diverse range of sectors, demanding vast computing power.

The capacity needed to satisfy businesses' growing appetite for advanced analytics is driving a construction boom in many regions around the world. The growth of cryptocurrencies, 5G networks and cloud-based services are other drivers of that growth. Tech giants are leading the charge to build thousands of new data centers to meet the huge growth in demand.

Building the infrastructure to support the expanding digital economy is one part of the challenge to power tomorrow's digital needs. The other is powering the growing stock of data centers. Such facilities are intensively resource-hungry, with a medium data center consuming as much energy in a year as a large town and as much water as three average-sized hospitals.²

"AI is extremely energy intensive and requires more power than traditional data centers." says Stefan Szulc, executive director of Global Energy, Gallagher. "For example, experts say that it takes 10 times more energy to perform a ChatGPT search compared to a Google search, which is a massive increase. And it runs on a constant basis, needing continuous electricity to operate."

Meeting the growing demand for AI and the data centers needed to support the technology presents both a challenge and an opportunity. To power the future digital economy, Big Tech firms are stepping up to help meet this demand by spurring investment in clean projects to increase generation capacity and upgrade aging utility company assets.

Such a transition will require smart-grid technology, innovations in energy efficiency and significant ongoing investment in the evolving energy mix.

How AI data centers are driving demand surge

It's estimated that global electricity consumption from data centers in 2022 (excluding energy used for crypto mining) reached an estimated 240-340 TWh in 2022,¹ equivalent to 1%-1.3% of global electricity demand. Including crypto, the proportion rises to closer to 2%. By the end of the decade, this percentage is set to rise to 3%-4% across all regions.

Currently in the US, a staggering 2.5% of total electricity consumption can be attributed to data centers, rising to nearly 20% in North Virginia, where around half of the country's data centers are located. Data centers could account for an estimated 7.5% of all US electricity consumption by 2030.³

Demand for energy is increasing beyond technology and data centers. Rising populations and incomes, vehicle electrification and the push to bring manufacturing back to the US are also driving the increased power consumption across the country." says Szulc. "Overall energy consumption is expected to continue to grow with data centers playing a critical role in this trend."

"According to statistics, the current energy consumption of data centers is around 1% or 2% in the US, " he continues. "However, this is projected to increase to about 9% or 10% over the next decade. This represents a massive growth in energy consumption. "

The impact of data centers on national infrastructure, such as power and water, is already being felt. Regulatory scrutiny of the "power grab" by data centers is also increasing, with authorities in some key data center jurisdictions, such as Singapore and Amsterdam, placing limits on new construction projects to reduce the current strain on local power grids.⁴

In addition to energy security considerations, authorities are concerned about the impact data centers' power use is having on net-zero emissions targets. Some jurisdictions are set to introduce legislation mandating the use of low-carbon energy sources by data center owners.

In the European Union, the European Commission's proposed revisions to the EU Energy Efficiency Directive (EU/2023/1791)⁵ has raised the bar for energy efficiency in member countries, introducing an obligation on the part of data center owners to monitor and report the energy performance and water consumption of facilities.

"Isn't it ironic that Big Tech firms have aggressive sustainability and decarbonization goals and are striving for net zero emissions, while AI is consuming a lot of power that is coming from fossil fuel energy sources?" observes Szulc. "It seems like a step forward and a step back at the same time, making it a very complex issue."

Energy security dominates data center growth opportunities

With access to power fast becoming a bottleneck for data center expansion, operators are looking for alternative solutions, including on-site power generation or locating new facilities near renewable energy projects. Longer-term, the development of new facilities could move away from hubs in London, Amsterdam, Silicon Valley and Singapore to countries such as Saudi Arabia.

In the near term, energy consumers in Europe continue to face historically high prices, with wars in Ukraine and the Middle East contributing to continuing insecurity around energy supplies. Many countries have been spurred into improving domestic energy security by reducing reliance on the global fossil fuels market, but the challenge of moving to more sustainable solutions will see ongoing pressure on national grids for years to come.

As Chris Noah, Gallagher UK's managing director for Renewable Energy Practice Retail notes, jurisdictions like the United Kingdom are likely to become more vulnerable in the near term, because the UK National Grid lacks the capacity to switch over to a significantly higher proportion of renewable energy generation.

"We are still heavily reliant on carbon-intensive production of electricity from gas and oil-fired power stations, and the infrastructure and grid are not yet ready for a complete transition," Noah says. "We can produce as much renewable energy as we want, but the issue lies with the stability of the National Grid to receive 100% zero-carbon electricity."

The increase in inverter-based technologies, such as wind, solar and storage, leave the inherent stability of the network at risk. The National Grid must, therefore, put systems in place to ensure the stability of the network while also meeting their net-zero targets."

He adds, "Blackouts are becoming a more prominent risk as we transition to renewables, not just for data centers but for various industries. Having backup options onsite, or the ability to hook into backup systems, is crucial for risk mitigation in data centers."

From efficiency drives to powering innovation

Rather than further exacerbating the cost and availability of energy, it's hoped the booming data center economy will instead drive transformation. We should see "the kind of electricity growth that hasn't been seen in a generation" in Europe and the US, according to Goldman Sachs.⁶

Those racing to build the next generation of data centers are providing much of the impetus, and capital, to support the future expansion of power generation. This push presents an opportunity for innovation and growth across the energy and utility sector, thinks Szulc.

"Meeting energy demand from data centers and beyond requires utilities to boost generation and transmission and distribution capabilities, and transform operating and business plans with an eye on maintaining reliable and affordable power for all. Data centers will require increased capacity, leading to substantial capital expenditure."

Whereas the focus of the last 3-4 years was largely on technological advances including improving the energy efficiency of existing data centers, the next phase of expansion is more of an increased power generation issue.

New generating resources are being considered including investments aimed at natural gas pipelines for onsite generation and small nuclear reactors.

"There are several factors at play with utilities," says Szulc. "One is the reduction of carbon emissions, which involves replacing outdated fossil fuel technology with more advanced alternatives. Additionally, utilities are looking to upgrade their infrastructure by implementing technologies such as smart grids and battery storage, which can more efficiently manage energy loads."

Can tech firms and power providers collaborate?

Relationships between data center owners and energy suppliers are also evolving. Power purchase agreements (PPAs), where technology companies invest in renewable energy projects and can secure a proportion of the output of those facilities to cover some or all of their energy needs, are growing in popularity.⁷

One major tech giant's data center in Hamina, on the Finnish coast, is emblematic of these approaches. The firm has a PPA with a Finnish energy company to secure 97% of the facility's energy from renewable sources, while employing a seawater-fed cooling system and a heat recovery system that recycles waste heat to warm homes, schools and public service buildings in the area.⁸

A growing number of data centers are being constructed with built-in renewable energy solutions and on-site batteries to store excess energy. The stored energy serves two purposes: It can be used during periods of peak market pricing to avoid purchasing energy at expensive rates, or it can act as a backup power source in the event of blackouts.

Gallagher is working with clients on PPAs as well as providing "behind the meter" services that enable the asset owners to become more self-sufficient by generating power on-site through solar photovoltaic systems, wind turbines or hydrogen power plants.

"We can help clients become self-sufficient in energy by installing rooftop solar panels or solar farms near their facilities," explains Gallagher UK's Chris Noah. "By doing so, we offer data centers a more reliable energy source and fixed costs. We offer renewable energy power generation sources to these companies, guaranteeing them a fixed rate for 10 years.

"The advantage of this arrangement is that it allows our clients to budget for a fixed amount in the future without worrying about energy costs fluctuating unpredictably."

Such models should also allow data centers to sell any excess back to the grid, which will become more significant as the renewable portion of the energy mix grows and as smart grids come online.

"The grid historically operated in a centralized manner, meaning power was generated at the utility and then transmitted to the customer," says Szulc. "Now, infrastructure is being modernized, allowing power to be generated on the customer site , which is known as distributed generation versus centralized generation .

"A crucial aspect of innovation is collaboration," he continues. "It's important to consider how data centers will efficiently pull power and work with utilities and project developers. Battery storage could play a major role in this and help navigate high load times, such as when there are spikes in power usage when people are at home in the morning and evening."

An unlikely solution for the green energy transition?

Despite the concerns over data centers growing carbon footprint, the capital that tech companies provide is at the same time supporting the transition to cleaner energy sources. It's "a once-in-a-generation opportunity for a symbiotic relationship that could transform the global energy landscape," according to Forbes magazine, which also sees EVs and bitcoin mining as essential collaborators.¹⁰

"The tech data-center companies are helping with the expansion of renewable energy by buying power directly from solar and wind project developers via PPAs," says Szulc. "This is significant, because contracting with strong credit-worthy counterparties to buy the power from new renewable energy projects provides revenue certainty and is crucial for financing energy projects."

"These big, utility-scale renewable power projects supply power to the grid and more frequently, directly to big tech companies," says Szulc. "The financing of these projects through financial contracts is essential. Once these projects are underway, the insurance market plays a crucial role in supporting their growth through project development, construction and when operational."

The ever-expanding exposure footprint of data centers (and what it means for business within the digital ecosystem)

While the growth of the data center industry across multiple regions reduces the aggregation risk in major hubs, it also expands the scope of potential disruption from geopolitical and natural catastrophe risks.

In its guidance on data center security, the UK's National Protective Security Authority (NPSA) cites the global loss of services from one tech giant's self-managed data centers in October 2021. Billions of users were unable to access the company's social media platforms for several hours, as engineers were physically dispatched to affected data centers to reconfigure equipment.¹¹

Also in 2021, a fire at a facility owned by a French cloud service provider destroyed one of its data centers in Strasbourg and damaged another, disrupting millions of websites, including those run by government agencies, banks, retailers and news organizations.¹²

Data centers are also attractive targets for cybercriminals, with multiple avenues of attack open to threat actors. Customers are consequently exposed to extortion, the loss and theft of intellectual property and/or client data, causing business interruption and financial loss, and opening users up to liability claims, regulatory fines and reputational damage.

In June 2024, the Indonesian government's national data center, for instance, suffered a ransomware attack that affected several government agencies and services, most notably disrupting immigration checks at airports.¹³ Unusually, the hackers later handed the government a decryption key without the ransom being paid and apologized to Indonesian citizens for the disruption.

Data center owners need a holistic approach that combines physical, personal and cybersecurity protocols into a single risk management strategy that both reassures clients their data is protected and closely aligns with clients' own approaches to risk management. This is in addition to power and resource considerations and the availability of land.

"New data centers are not just going to pop up anywhere, but rather be built in areas with ample power sources and infrastructure," says Szulc. "It's going to be a more proactive, thoughtful process about how all this is going to work. You need to be working with all the parties, and that's a great thing. That's the collaboration piece among technology firms, utilities, project developers and regulators that is necessary when we have big challenges like this one. Energy demand from data centers will likely continue to influence and help fund the energy transition."

Published November 2024