The phantom data center: What it is (or isn’t) and why it’s holding back AI’s true potential.

In the age of AI, utilities are now facing new and unexpected challenges: phantom data centers. On the surface, that may seem silly. Why (and how) do we manufacture something as complex as a data center? But as the demand for AI skyrockets along with the need for more computing power, especially in regions like Northern Virginia. Speculation surrounding data center development is causing confusion. Data Center Capital of the World. In this evolving landscape, power companies are exposed to power demands from real estate developers. actually Build the infrastructure they claim.

Fake data centers have become an urgent bottleneck in scaling data infrastructure to keep up with computing demands. This new phenomenon is preventing capital from flowing to where it is actually needed. Companies that can help solve this problem, and perhaps leverage AI to solve the problems created by AI, will have a huge advantage.

The mirage of gigawatt demands

Dominion Energy, Northern Virginia’s largest electric utility, 50 gigawatts of power from data center projects. This is more electricity than Iceland consumes in a year.

However, many of these claims are speculative or flat-out false. Developers are eyeing potential sites and staking their rights to power capacity long before they have funding or a strategy for how to break ground. In fact, estimates suggest that as many as 90% of these requests are completely bogus.

In the early days of the data center boom, utilities didn’t have to worry about spurious demand. Companies like Amazon, Google, and Microsoft (called “hyperscalers” because they operate data centers with hundreds of thousands of servers) submit simple requests for power, and power companies can easily supply them. I did. But now, in a frenzy to secure power capacity, requests are pouring in from little-known developers and speculators with questionable track records. Utility companies that traditionally served only a small number of power-hungry customers were suddenly inundated with orders for power capacity that dwarfed the entire power grid.

Utilities have a hard time separating fact from fiction

The challenges for utilities are not just technical, but existential. They are tasked with determining what is real and what is fake. And they are ill-equipped to deal with this. Historically, utilities have been slow-moving, risk-averse institutions. They are now being asked to scrutinize speculators, many of whom are simply playing the real estate game and looking to flip their stakes when the market heats up.

Utilities have groups tasked with economic development, but these teams aren’t used to handling dozens of speculative requests at once. This is like a land rush, with only a small fraction of the interested parties actually planning to build anything tangible. result? paralysis. Not knowing which projects will come to fruition makes utilities hesitant to allocate power and slows down the entire development cycle.

capital wall

There is no shortage of capital flowing into the data center space, but that abundance is part of the problem. Easy access to capital breeds speculation. In a way, this is similar to the Better Mousetrap problem. That means there are too many players chasing an oversupplied market. This influx of speculators is creating indecision not only for power companies, but also for local communities, which must decide whether to grant permission for land use and infrastructure development.

Adding to the complexity is that data centers are not dedicated to AI. Yes, AI is driving a surge in demand, but there’s also a persistent need for cloud computing. Developers are building data centers that support both, but it’s becoming increasingly difficult to differentiate between the two, especially when projects blend AI hype with traditional cloud infrastructure.

What’s true?

Legitimate players – the aforementioned Apple, Google, and Microsoft – are building real data centers, many of which are tied to “behind-the-meter” deals with renewable energy providers and grid interconnection bottlenecks. Strategies such as building microgrids are being adopted to avoid this. But as real projects proliferate, so do fake projects. The utility landscape is becoming increasingly chaotic as developers with little experience in the field try to make a profit.

The problem is not just financial risk. The capital required to build a single gigawatt campus can easily exceed billions of dollars, but infrastructure development at this scale is extremely complex. While a 6 gigawatt campus sounds impressive, financial and engineering realities make it nearly impossible to build in a reasonable time frame. But speculators are throwing around these huge numbers, hoping to secure power capacity in hopes of flipping the project later.

Why the grid can’t keep up with data center demand

The power grid itself has become a bottleneck as power companies struggle to separate fact from fiction. McKinsey recently announced that the world’s demand for data centers is the highest. 152 GW by 2030adding 250 terawatt-hours of new electricity demand. In the US, data centers can be the only culprit. 8% of total electricity demand by 2030This is an impressive number considering that demand has increased very little over the past 20 years.

But the power grid is not ready to handle this influx. Interconnection and transmission problems are so pervasive that some estimates suggest the United States could run out of power capacity by 2027 to 2029 unless alternative solutions are found. Developers are increasingly turning to on-site power generation, such as gas turbines and microgrids, to avoid interconnection bottlenecks, but these band-aids only highlight the limits of the grid.

Conclusion: Utilities as gatekeepers

The real bottleneck is not lack of capital (trust me, there is plenty of capital here) or even technology. It’s the utility’s ability to act as a gatekeeper, determining who’s real and who’s just playing a speculative game. Without a robust process for vetting developers, the grid risks being overwhelmed by projects that never materialize. The era of fake data centers is upon us, and until utilities adapt, the entire industry may struggle to keep up with real demand.

In this chaotic environment, the distribution of power is not the only thing that matters. It’s about utilities learning how to navigate new speculative frontiers so that businesses (and AI) can thrive.

Sophie Bacalar is the next partner. cooperation fund.