The “co-location” of power plants and large energy users on the same site is gaining traction as a way to provide electricity to data centers without raising household bills. It seems like a quick fix but is really a symptom of a grid that has struggled to anticipate and meet rising demand. While co-location may provide near-term relief for select industries willing to pay for it, it won’t scale to keep power reliable and affordable for everyone. To do that, we need interregional, high-voltage transmission to arbitrage power over long distances to serve load wherever it is.
Co-location isn’t new, but the playbook is changing
Co-location is not a new concept. Small industrial facilities and residential properties often generate power on-site, allowing a property to use that power directly rather than buy it from the grid. Such configurations, which are referred to as behind-the-meter set-ups, are typically motivated by cost savings. Customers often still maintain a grid connection in case their on-site power source fails.
Recent co-location proposals differ vastly from these traditional arrangements in both scale and motivation. Unlike typical residential or industrial behind-the meter arrangements, data centers often require as much power as a small city. Data center developers are proposing to build their own on-site power plants or exclusively buy power from nearby plants as a primary source of power, allowing them to circumvent long wait times to connect to the grid.
However, data centers do resemble traditional behind-the-meter customers in one key respect: They still want to maintain a grid connection to increase their facilities’ resilience. The desire to fast track their main power source while still maintaining grid access has introduced new challenges for grid operators.
Bypassing the grid … for now
In a recent proceeding, the Federal Energy Regulatory Commission (FERC) identified several co-location options that data centers and other large energy customers can use. Options range from traditional service, where co-located customers can get power from the grid in any amount at any time, to isolated set-ups, where co-located customers have no connection to the grid whatsoever. Middle-ground options are “firm” and “non-firm” service, which allow co-located customers to access the grid only in limited amounts or at limited times. For example, a data center might be allowed to pull grid power only during off-peak hours, or only up to a set cap, rather than on-demand.
Data center developers weigh three factors when evaluating which grid connection is right for their co-located set-up: how much a grid connection will cost, how quickly they can get connected, and how reliable the connection will be. While traditional service provides the most certain level of grid access, it often takes years to obtain and requires substantial and costly system upgrades.
At the other end of the spectrum, isolated set-ups are often speedy, but they are also operationally risky and very expensive to maintain. Because of this, most customers who opt for isolated or firm/non-firm arrangements rarely intend to bypass the grid permanently, preferring to maintain a path to traditional grid service instead. In other words, co-location is a way to get power now while waiting for full grid access later. This means that the long-term transmission buildout the country needs won’t shrink significantly because of co-location.
An option, not a silver bullet
Co-location can be a valuable tool to bring much-needed flexibility to the grid in the short term. It may also send a planning and investment signal, informing grid operators where to expect future power demand.
But since most data centers will ultimately seek to connect to the grid, co-location is not a long-term substitute for systemwide planning nor a silver bullet solution to affordability concerns. At best, it is a permanent solution for certain industries, such as those that are too far from grid infrastructure, and a temporary workaround for most others. Without nuanced application, co-location risks becoming the next foot that kicks the “grid modernization” can down the road.
The long-term solution is to serve all customers while enabling global competitiveness by building more high-capacity transmission, which can stabilize power prices and keep power reliable by bringing it from where it is cheap to where it is needed most. Co-location may buy us time, but transmission is what will actually solve the problem.
