Overbuild, under capacity: McKinsey data center study looks ahead

Data center construction is a hot topic for the tech industry—and for energy interests.

One of the top concerns for builders and investors, as well as policymakers, is the risk of overbuilding. While we’re at a boom moment in the industry, is it possible that the infrastructure goes too hard, too fast?

Not so, according to a July McKinsey study, which argues that even if data center construction hits a wall or underdelivers, the power grid improvements and build-outs will still provide an overall benefit.

Data center operators prefer an onsite or hybrid approach to energy generation (20% and 45%, respectively), and project that, by 2030, 64% of energy will be gas-fueled, followed by 23% renewables and 13% nuclear.

Sam DeFabrizio, a partner at McKinsey who was a coauthor on the research, told IT Brew that the demand is real and will continue,and that the lack of supply to meet the need is driving the industry.

“We are undersupplied because we have players that are trying to put GPUs into a powered shell today that can’t get the power; when you’re doing infrastructure development, which often has a 10-, 15-, 20-year time horizon, sometimes more, you have to feel confident that that demand will be maintained,” DeFabrizio said. “What we try to do in some of the charts is say we’re expecting a 5x growth over the next five or over the next 10 years of total data center demand in the US.”

Market solutions. That confidence in the market is shared by Brian Marconi and Sasibeh Beyene, partners at CohnReznick, an accounting firm that specializes in the data center advisory market. They told IT Brew that the challenges for energy companies in managing the potential of overbuild are daunting but solvable, requiring looking past meter solutions, which rely on provided and measured energy production rather than generated onsite, for a diversity of tactics in energy production.

“A lot of data center developers that are currently contemplating behind the meter power generation solutions, and that’s been powered by natural gas or other sources of energy,” Beyene said. “That’s become an attractive alternative.”

Searching for alternative fuels is part of that process, be they renewables or increased use of natural gas. For developers who worry about the investment in new energy infrastructure, especially with the fear of data center overbuild, there’s a flip side to the equation: generated energy can be pushed back to the grid if it’s unused, a net positive for developers.

Furthermore, Marconi said, data centers are only part of the tech infrastructure equation: “As things continue to go this route of needing compute, thinking outside of AI, there’s a number of different things like self-driving vehicles and things like that that will need more and more compute power.”

Checking in. For DeFabrizio, the boom moment for data centers and AI is creating the right kind of pressure on supply. When demand is this high, developers and investors are more willing to try new things and innovate.

“Because demand is so much higher than supply, and people are willing to take a bet to get power in any way possible, we’re seeing an opportunity to underwrite some of the energy investments that would historically require a large amount of public sector capital,” DeFabrizio said. “We’re adding tools to a belt in terms of how to supply energy across the country.”