This article was written in collaboration with Michael Yuffee, partner at Baker Botts in Washington DC & section chair of energy regulatory (firmwide), and Suzana Vukasinovic, senior associate at Baker Botts in London.

Data centers are the physical foundations of the digital world.

Once considered a niche intersection of real estate and technology, data centers are now understood as a key component of critical infrastructure and as a rapidly growing asset class for investors. They also have a ravenous appetite for electricity.

And as technology continues to evolve, becoming ever-more data-driven and compute-hungry, the demand for data centers and, correspondingly, power continues to soar. And yet, concerns for our climate mean that sources and uses of energy are under more scrutiny than ever before.

This presents an intractable challenge to the technology sector. How to maintain current rates of innovation and growth, which are seemingly inseparable from an ever-increasing need for energy, whilst ensuring sustainability?

More data, more problems?

The proliferation of generative artificial intelligence, blockchain, content streaming, the Internet of things, cloud computing, and e-commerce have all contributed to increasing data creation and use in recent years. And this trend is set to continue.

IDC predicts that data creation or replication will leap to 181 zettabytes in 2025, up from 64.2 zettabytes in 2020. (A zettabyte is equal to one billion terabytes.) The data center industry is racing to keep pace with this explosive growth, and there are currently more than 8000 data centers in the world, with approximately 33 percent of these located in the United States, 16 percent in Europe, and close to 10 percent in China.

And because data requires compute, and compute requires energy, data centers’ power consumption is growing as well. In 2022, according to the International Energy Agency, data centers consumed 420TWh; almost 2 percent of total global electricity consumption. This is expected to rise to somewhere between 650TWh and 1,050TWh by 2026 – an increase equal to approximately the entire power consumption of Sweden or Germany.

In parallel, worldwide efforts to reduce carbon emissions are ramping up. The Paris Agreement sets the global objective of limiting global warming to less than 2° Celsius (while pursuing efforts to limit the increase to 1.5° Celsius), which will require carbon emissions to reach net-zero by 2050. Many countries have set 2030 interim targets as part of their National Determined Contributions under the Paris Agreement: the United States has pledged to reduce emissions by 50-52 percent by 2030 compared to 2005 levels; the European Union aims to cut emissions by 55 percent by 2030 from 1990 levels; and China aims for carbon emissions to peak by 2030 and achieve carbon neutrality by 2060.

The technology sector is setting even more ambitious goals for itself. In 2019, Amazon committed to achieve net-zero carbon emissions by 2040. Google aims to achieve net-zero emissions across all its operations by 2030. Microsoft aims to be carbon-negative by 2030, and by 2050 intends to remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975.

Such targets necessitate transitioning from traditional to renewable sources of energy. To supply its expanding network of data centers with readily available, sustainable energy, the technology industry is turning to innovative solutions.

Nuclear power

In September 2024, Microsoft entered a groundbreaking power purchase agreement (PPA) with Constellation Energy to purchase nuclear power from the Three Mile Island nuclear plant in Pennsylvania. Constellation Energy will invest $1.6 billion to restart the dormant reactor in Unit 1 of the plant, which has been inoperative since 2019. At peak production, the reactor can generate 837 megawatts; enough to power 800,000 homes. (The Unit 2 reactor, which suffered a partial meltdown in 1979 – the most significant nuclear accident in US history – will remain closed.) Under the PPA, which will last 20 years, Microsoft will offtake the plant’s entire capacity to power its data centers in Pennsylvania, Chicago, Virginia, and Ohio. Constellation Energy aims to reopen Three Mile Island in 2028, subject to regulatory approvals from the federal Nuclear Regulatory Commission and state and local authorities. If approved, it will be the first nuclear reactor in the US to be recommissioned after closure, and the first time a commercial nuclear plant’s output has been allocated to a single customer.

In October 2024, Google signed a “world’s first” deal with Kairos Power to build six to seven small modular nuclear reactors (SMRs). SMRs are nuclear fission reactors that have a power capacity of up to 300MW electric per unit, which is about one-third of the generating capacity of conventional fission reactors. Their smaller physical size means that they can be more easily manufactured and transported. Google’s SMRs will be capable of producing 500 megawatts in total, and may either feed into the main grid, or be directly connected to Google’s data centers via a microgrid.

Also in October 2024, Amazon Web Services announced that it is investing over $500 million in SMRs through partnerships with Dominion Energy in Virginia and Energy Northwest in Washington State. These were not Amazon’s first moves into nuclear power. In March 2024, Amazon Web Services purchased Talen Energy’s Pennsylvania data center campus, Cumulus Data Assets, for $650 million. Cumulus Data Assets is directly powered by the nearby Susquehanna Steam Electric Station, one of the largest nuclear power plants in the United States, which can generate up to 2.5 gigawatts of power and will provide energy to Amazon Web Services as it develops a new 960-megawatt data center at the site.

The advantages of nuclear power for data centers include:

• Consistent and reliable energy: Data centers require constant power to ensure uninterrupted service. Nuclear power provides a reliable and continuous energy supply, allowing technology companies to minimize their exposure to the risk of power disruptions or outages.
• Carbon-free operation: Nuclear power plants produce no greenhouse gas emissions during operation and are therefore a prime candidate for helping technology companies achieve their sustainability goals.
• Price stability: Nuclear power provides long-term, stable pricing. This is crucial for data centers where energy is a significant operational cost. Stable and predictable energy costs allow for longer-term PPAs, enabling companies to better manage financial risks.
• Efficiency: Nuclear power plants produce large amounts of electricity using relatively small amounts of fuel. This is especially important for high-energy consumers like data centers.
• Scalability: Nuclear power is an adaptable energy source that can be ramped up to meet future needs, ensuring long-term energy security as data center demand continues to increase.

Microgrids

In June 2022, Microsoft contracted with Enchanted Rock, an electrical resiliency-as-a-service provider, to develop California’s largest microgrid. A microgrid is a small-scale power grid with defined boundaries that acts as a single, controllable entity that can be connected to or disconnected from the main grid.

Microgrids can be used to power a specific geographical area or a single building (like a university, hospital, or data center). Microsoft’s microgrid is fully supported by renewable natural gas and provides backup power to Microsoft’s data center in San Jose, California to ensure continuous operations. The project also aligns with Microsoft’s goal to eliminate its dependency on petroleum-based diesel (commonly used for data center backup generators).

In February 2024, Tencent commissioned a new microgrid at its data center in Tianjin, China. Powered by a large rooftop solar array, the microgrid includes a battery energy storage system and an AI-enabled control system to predict future electricity demand and generation. According to Tencent, the microgrid has a total installed capacity of 10.54 megawatts and can produce 12 million kilowatt-hours of electricity per year – equivalent to the power consumption of 6,000 households.

Advantages of microgrids for data centers include:

• Reduced line losses: When power has to travel a long distance from a centralized power station, line losses occur, meaning additional power is required to meet the same level of demand. As microgrids can generate power closer to the data center, line losses are minimized.
• Increased efficiency Microgrids can utilize advanced energy management systems and smart grid technologies to monitor and control the data center’s energy demand and usage in real-time, thereby increasing efficiency.
• Clean energy integration: Technology companies can integrate clean energy sources (including solar, wind, hydropower, biomass, and nuclear) into their microgrids, thereby reducing reliance on fossil fuels and cutting greenhouse gas emissions.
• Integrated storage: Microgrids can incorporate energy storage systems, such as batteries, which increase resiliency – a critical consideration for data centers. Energy storage systems also facilitate the use of renewable energy sources by enabling the storing of excess energy for later use, thereby reducing energy waste and mitigating the risk of intermittency associated with certain renewable energy sources.
• Reduced environmental impact: By reducing the need for extensive transmission and distribution infrastructure, microgrids minimize land use and environmental disruption.

Regulatory considerations

Given the inextricable link between data centers and power, it is not only technology and data regulations that stakeholders are having to consider when formulating their global data center strategies, but energy regulations as well.

Increasingly, new data center projects are raising regulatory concerns with respect to the impact of new large power loads on overall energy generation and transmission systems. On 1 November 2024, the United States Federal Energy Regulatory Commission held a technical conference to discuss the challenges of powering data centers.

The conference highlighted the regulatory and logistical complexities involved in ensuring reliable, sustainable power that can keep pace with the data center industry’s rapid expansion. Key issues identified include: (i) the need for accurate energy demand forecasts to facilitate generation and transmission infrastructure planning; (ii) ensuring adequacy of resources to serve both existing retail energy customers and the growing needs of data centers; (iii) modernizing regulatory frameworks to address co-located power generation and streamline transmission planning and interconnection; and (iv) appropriate regulatory tools available to regulators as they oversee grid expansion.

When evaluating potential markets for new data center projects, those with clear and sophisticated regulatory frameworks that support innovation in the face of energy challenges will generally be preferred.

The technology industries’ recent landmark nuclear deals were largely facilitated by the US Nuclear Energy Innovation and Modernization Act, which seeks to streamline the regulatory process for new nuclear technologies including SMRs. Similar deals may also be feasible in Europe, where the EU’s European Atomic Energy Community Treaty (1957) promotes nuclear research and safety across member states, and as a result, several EU countries have highly sophisticated regulatory frameworks for nuclear power, such as France, Finland, and Sweden.

That said, the use of nuclear power can face opposition from governments and the public due to concerns regarding safety and long-term waste storage. Accordingly, even in jurisdictions with enabling legislation, investors should be mindful of complex and lengthy approval and licensing processes.

Legislation is facilitating new microgrid projects as well. California’s Senate Bill 1339 provides for the California Public Utilities Commission (“CPUC”) to establish a clear regulatory framework for the development and operation of microgrids (and rulemaking proceedings are ongoing). Other US states with regulatory frameworks and policies generally favorable to microgrids include New York, Massachusetts, and Texas. Internationally, Germany, Australia, and Canada lead the way in supporting the development and operation of microgrids with clear and generally permissive legal frameworks and policies.

In some markets, laws provide for financial incentives (eg tax credits, grants, and subsidies) that can offset the costs of nuclear and microgrid projects. The US Energy Policy Act 2005 and the Inflation Reduction Act 2022 both support the development of advanced nuclear technologies through financial incentives.

And CPUC’s Microgrid Incentive Program was established in January 2021 with a $200 million budget to fund clean energy microgrids to support the critical needs of vulnerable communities impacted by grid outages and to test new technologies or regulatory approaches to inform future action.

Key Takeaways

• Demand is increasing: Technology requires data; data requires compute; and compute requires energy. And demand is increasing.
• Sustainability is key: In parallel, the technology industry is under escalating pressure to meet sustainability targets.
• Innovation: Recent nuclear power deals by hyperscalers and the increasing development of microgrids represent a strategic shift toward long-term, sustainable energy solutions that support both increasing digitalization and carbon-neutrality, demonstrating how tech giants are now innovating in energy as well as technology.
• Regulations: Energy regulations, as well as technology and data regulations, are now shaping global data center strategies. When seeking to develop, finance, invest in, or operate a data center, all relevant stakeholders should be mindful of how a jurisdiction’s applicable laws, regulations, and policies, including available financial incentives, can support, or work against, their energy requirements.