Nearing Net Zero: Life’s a gas for US data centers

Elena Lambros
Hello and welcome to ESG Matters by Ashurst Perkins Coie. My name is Elena Lambros, and I'm a risk advisory partner based in Brisbane.

You're listening to a special audio podcast taken from our regular Nearing Net Zero video mini-series. In this episode, we discuss the race to power data centers and, in particular, what Australia might learn from the United States’ experience.

As always, I was joined for this episode by my regular co-host for Nearing Net Zero, Dan Brown. Dan is our Global Co-leader for the Energy and Infrastructure industry here at Ashurst Perkins Coie. And we also had the pleasure of welcoming Buck Endemann into the studio while he was visiting Sydney from San Francisco. Alongside Dan, Buck is also our global Co-head of Energy and Infrastructure at Ashurst Perkins Coie.

We began the episode by asking Buck how gas is being used in the U.S. to power data centers. Let's hear what he had to say.

Buck Endemann
The race to power in the U.S. is so intense that gas is playing a major role in a way that we couldn't foresee even five or 10 years ago. In particular, behind-the-meter gas is something that really isn't contemplated much in state utility plans and state laws that regulate clean energy policies.

So you fall in a bit of of a loophole, I'd say, in the United States, where rather than a clean energy policy for behind-the-meter gas, you're really getting to local air district and federal Clean Air Act permitting for new gas plants being regulated the same way if they were behind-the-meter or front-of-the-meter.

These net zero commitments are important for data center companies and hyperscalers generally. But there aren't too many federal or state requirements for data centers to use clean energy. So if you're not getting power from the incumbent utility, the regulatory burden on you using whatever type of power, whatever type of generation you want, is a bit lower.

Dan Brown
That's really interesting, isn't it? Because when we compare that to the Australian context, this is a real conversation that's playing out and a policy consideration that's playing out in the Australian market at the moment.

We have a series of states that have been very, very clear and specific about the generation sources for new data center developments here in the Australian market, and some of those go so far as to nominate percentages of types of technology that must be used to provide green electrons for these data centers. Whereas other states are more relaxed about the source of power and giving the data center developers the opportunity to just solve that speed-to-compute problem themselves, regardless of the technology or the color of those electrons, so to speak.

And it's really creating, I guess, almost like a two-speed economy where developers will actually situate and develop their projects, depending on the available opportunities to contract that type of energy. But it doesn't seem like that's something that's so prescriptive in the U.S. at the moment around nominating: “Hey, data center developer, you have to use this type of electrons for your project”.

Buck Endemann
That's exactly right. I'd say, to the extent we're prescriptive in the United States with data centers and the speed-to-power, it's been “bring your own capacity. Yeah, we want to make sure you're coming online, you're not overburdening the grid and causing reliability or energy scarcity or price problems for the rest of our customers”.

Again, because most of the renewable portfolio standards are rolled out in the backs of utilities who are servicing existing load – if you bring your own load or you bring your own capacity, it's going to fall outside the purview of a lot of state regulators.

I'm not saying there haven't been efforts and pledges and orders and exhortations to make sure that you're bringing clean power to the grid, or you're powering your data center operations with renewables or some other sort of zero carbon energy. It's just that the “regulatory hook” just isn't quite there like it has been in the past.

Dan Brown

Yeah, and one of the things that we talk a lot about on Nearing Net Zero is how are businesses actually progressing down that pathway to net zero. And I think if we rewind about maybe four or five years ago, I can recall a time when hyperscalers and those types of global corporations were all about 24/7 firmed green electrons, but it feels like there's been an erosion or a step away from that stringent promise around decarbonisation, perhaps driven by the reality of the growth in their businesses and the availability of green electrons to be able to unleash that 24/7 firm green power. Is that what you're seeing in the US?

Buck Endemann
Absolutely, it's really a race to compute, right? And the ecosystem is broader than the hyperscalers that made very public and very excellent commitments, made real progress towards 24/7 power. That was always a small club, right? Because those types of commitments to see them through takes a lot of capital, takes a lot of patience, and takes a lot of betting on newer technologies. And I think the industry is better off for all of for those efforts.

But there's an entire other class of company out there that – while green power and climate goals are important – they're not an overriding or even articulated consideration when it comes to new development, and those companies are having a massive role in the build-out of data centers across the United States.

We're still seeing at the very top of the market real commitments to green power, real commitments to carbon removals, and we're privileged to work on those deals, and they're attracting the right capital, but bring down the cost. But in an open-ended race to compute right now, not everyone is playing or needs to play by those particular sorts of corporate commitments or rules, and it's really a race to power.

Elena Lambros
Yes and then if people are playing by those different rules, are you seeing litigation or long approval timeframes coming into play to try and balance out that race? If it's not based on an even playing field.

Buck Endemann
Well, we are. I wouldn't say the race is, or rather, the litigation or the ability to impede progress for data centers is based on strictly net zero or climate commitments. It’s really based on a multitude of factors, right? It's environmental concerns, of which climate is just one.

Elena Lambros
That's right.

Buck Endemann
It might be water concerns, water scarcity. It could be that we're going to overwhelm the local grid and drive up costs for the rest of the consumers. So, as you know, in the United States, there's no shortage of ways to litigate a project under environmental noise, visual impacts, and there's both state and federal mechanisms to do that, and with local organized opposition, you can drag development timelines out into a series of years. Some of those efforts are led by people very concerned about climate impacts. Many of those efforts are also led by people who are very concerned about other very localized impacts.

Dan Brown
Just on that carbon reduction piece, Buck. One of the things that I'd love to have a deeper understanding of, particularly as it relates to the U.S. (and this is going to sound like a shameless plug for our colleagues!) but our firm in the U.K. and Europe have world-beating experience in carbon capture and storage; the programs that are being rolled out in the United Kingdom and in Europe, and our teams that advise on those, are absolutely at the forefront of the market.

What are you seeing in the U.S. around that carbon capture piece? Is this something that is becoming more prominent? You know, we have a race-to or speed-to-compute. There's a cost associated with it in terms of using gas or other non-renewable generation sources, but does carbon capture have a role to play to help ultimately come good on those promises around decarbonisation?

Buck Endemann
It does have a role to play, but yet it still remains very expensive, right? And in the U.S. we have “some carrots and some sticks” in order to facilitate and nudge people towards carbon capture.
Traditionally, the carrot has been a large tax credit, perhaps not large enough to spur the carbon capture industry to capture and sequester in every instance. And the stick is really the regulatory approach we've had for many years, and may not be regulating CO2 or methane so much as it regulates other criteria pollutants under the Clean Air Act.

So that's under a very traditional form of regulation, which carbon capture and sequestration might not even mitigate.

We are left with sort of a “legacy stick” approach, a carrot that isn't quite juicy enough to get these projects “to pencil”, and generally speaking, if we can build the gas plant, we're going to do it.
So we do see some of those projects getting built and financed, but there's also been some regulatory changes – and foreseen regulatory changes at the federal level – making that regulatory stick, perhaps not as big as it once was. So, [for] carbon capture in the United States, the momentum has slowed a bit, yet it still remains a key piece for those people very interested in pursuing a net zero strategy.

Dan Brown 09:58
Yeah, just really quickly, one of the things that I'd love to talk about is the other uses of gas-fired power. So people like Paul Simshauser and Joel Gilmore, through Griffith University, have written some stellar papers where effectively they've taken 80 years of weather data, analyzed that against the current build-out of renewables and the proposed build-out of renewables, and they still identify a period of time mainly during winter months, where there's a shortfall that only gas peakers can fill.

Are you seeing similar trends in the U.S. where sure gas-fired power stations are predominantly being used for speed-to-compute? Are there other electricity or energy markets that are needing that firming from those gas peakers because the demand is just so great and it's unserved in certain periods?

Buck Endemann
Absolutely, the capacity issues in the United States vary widely by geography. We've seen in our RTOs and ISOs or organized electricity markets, which aren't perfect from a capacity perspective, but we generally see capacity priced in those markets, capacity being attracted to those markets and coming online. And even in places like Texas, which don't have capacity markets, simply the price of energy has attracted capacity to that market, and there's different state and other utility programs integrated resource planning meant to do that.

However, there's still large parts of the country where capacity remains an issue. Even data centers aside, asset retirements, the availability of very cheap midday energy from solar has chased some energy assets out of the market. And while batteries play a big role in firming capacity across the United States, particularly in some organized markets, there is the realization that gas is going to be needed and will be necessary to play a role to make sure the lights stay on; our system stays on.

Elena Lambros
Yeah, a really great way to finish, I think. Can I just ask: Is there anything else you wanted to share while you're here in Australia?

Buck Endemann
Not much. It's just an exciting time for power markets here in the U.S. I'd say in Australia, the intersection between the federal and the state level regulatory processes isn't very different from what we have in the United States, and as everyone turns their eyes to Australia as the next big frontier in data center development (for many, many reasons, wonderful resources, lots of land, excellent workforce) many of the lessons we're learning right now in the United States are going to be very relevant for you folks in just a couple of months.

Elena Lambros
Thank you for listening to this episode of ESG Matters by Ashurst Perkins Coie. If you enjoyed today's discussion, you can catch future episodes of Nearing Net Zero on video, via YouTube, or on audio wherever you get your podcasts.

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In the meantime, thanks again for listening, and goodbye for now.