Fitch Ratings’s Shalini Mahajan on why it’s so hard to predict data center electrical demand

Data centers are ravenous for power—and increasingly, there’s not enough to go around.

According to the Washington Post, the International Energy Agency estimates data centers sapped 4% of US power in 2022 and will suck up 6% by 2026. It’s only expected to go up after that, especially with the surge in power-hungry AI operations.

Hubs like Northern Virginia, Atlanta, and Salt Lake City are turning to tactics like rationing electricity, halting new data center construction, and building new transmission lines. Analysts at Fitch Ratings, however, have pointed to the possibility that utilities could overestimate demand and overbuild, “given inconsistent methodologies for forecasting load.”

Shalini Mahajan, managing director at Fitch and deputy head for its North American Corporate Ratings Group, talked with IT Brew about why it’s so hard to pin down this “unprecedented” market.

Why are there so many issues with forecasting demand for the utility companies?

Typically in past years, you would get maybe a handful of such requests, and you’re talking smaller megawatts. Now, utilities are getting inundated with numerous requests, which can range from a few hundred megawatts to as much as a gigawatt or even larger. It’s hard for utilities…to distinguish between just indications of interest, where you can imagine a tech company which is desperate for power could be reaching out to multiple utilities at the same time, not sure which utilities have the capacity or ability to service them—and speak to market is critical.

It’s very hard for utilities to distinguish between, is it just merely an indication of interest, is it just the beginning of a conversation, or is there firm commitment, or willingness to have firm load commitment behind it? Which is where our sense is—that there is duplication or multiplication of requests from some of these hyperscalers to a number of utilities. And certainly, if you aggregate all that load, you know that’s that’s overblown.

At the end of the day, they may choose to locate their data center at one specific location, and all that indication of interest from other utilities is just going to evaporate.

Why are there so many issues with forecasting demand for the utility companies?

Because utilities are regulated and heavily regulated, there is a process. So it’s not that a utility can decide, “I’m getting the request for 10,000 gigawatts, and I can quickly figure out how I service that load, and then go ahead and place orders, and do it.” That’s not usually how things work. Usually, utilities undertake an exercise. It could be annual in certain cases. It could be biannual in other cases, or sometimes even tri-annual, where they are doing long-term forecasting of offload of demand and supply. Often they present different scenarios of how they can meet that load. There’s never just one good answer.

[Utilities] have to defend their decisions that anything that they’re doing is the lowest cost to customers. Many times, projects have to be competitively bid so that they are the lowest cost to customers, and there’s a regulatory process attached to it. Things just don’t happen at the pace that some of the tech companies might be used to.

Do you see power supply as a soft or hard constraint on data center growth?

The constraint is just in terms of the speed to market. The interconnection queue is already clogged up. There are supply chain issues in them being able to get [equipment], especially when it comes to gas turbines…That would be the biggest thing that I would point to.

Lastly, I think another element that could be a constraining factor is that the tech companies and utilities need to work out the right rate design because there is a worry that rest of your customers could be left holding the bag for some of these large investments that you’re doing on behalf of just a couple of large tech companies.