David Schleicher: Last week we had our annual meeting and I reported to our members that about 65% of NOVEC sales and NOVEC revenue now goes to data centers. That number was 50% last year. By 2033, that number will be north of 90%.
It does create a very interesting dynamic when you have such a large percentage of your sales dedicated to such a small number of meters.
Teri Viswanath: That’s Dave Schleicher, the CEO of Northern Virginia Electric Cooperative, or NOVEC. And if you’ve ever been curious on where the internet calls home, it’s probably in Dave’s neighborhood in Loudoun County, Virginia.
Hello, I’m Teri Viswanath, the energy economist at CoBank and your co-host of Power Plays. This month, my colleague and co-host Tamra Reynolds and I wanted to explore the growing electricity demand from data centers, and why U.S. electric cooperatives should begin planning for this emerging source of energy demand.
Tamra Reynolds: Hey Teri. Data centers are one of the most energy-intensive building types, consuming 10 to 50 times the energy per floor space of a typical commercial building. Altogether, the Department of Energy estimates that our domestic data centers account for 2% of the total U.S. electricity use. And, as our country's use of data grows, well...energy use will grow in tandem.
In addition to Dave, we also invited our own Jeff Johnston, CoBank’s lead economist covering the communications sector, to this conversation. I asked Jeff what’s driving the increase in electricity demand from data centers…and just how big that growth could be. Here’s what he had to say.
Jeff Johnston: Let's talk about it from an application standpoint, and then we can spend some time talking about things from an architecture standpoint. From an application standpoint, you're seeing a lot of organizations start to adopt cloud-based applications for a variety of reasons.
The efficiencies that these applications deliver are really, really important right now, especially in this current labor and market environment we're in right now. There’s 1.6 open jobs for every one person looking for a job right now. Turning to the cloud, turning to these cloud-based applications that deliver these technology efficiencies, are enabling them to do more with less.
And then on the consumer side, I would say certainly streaming video. We've seen a lot of this so far around Netflix and Disney+ and all these applications that are really gaining a lot of traction. We're seeing a lot of people cut the cord and turn to streaming. Then as we look a little bit further out, and we can get into more of this here in a moment, but certainly AI is super exciting for a whole variety of reasons. I think that's going to drive exponential growth in the data center market.
Viswanath: Jeff broke it down further for us.
Johnston: I have a fascinating stat I like to share. It took Netflix three-and-a-half years to reach a million customers. It took Twitter, now X, two years to reach a million customers, and it took Facebook 10 months to reach a million customers. It took ChatGPT, which we all know is the new generative AI application that Microsoft invested $10 billion in, it took ChatGPT five days to reach 1 million subscribers.
Reynolds: But just where is all of this headed? I mentioned that data centers already account for 2% of U.S. electricity demand, so just big is “big data?”
Johnston: I think it was in 2020, the entire datasphere of the world, so all of the data that was created in the world in 2020 was something like 64 zettabytes.
And, this one particular forecast from an investment firm that does their homework, they were projecting that by 2035, 2040, from self-driving cars alone, the entire data sphere will grow to somewhere between 10,000 to 15,000 zettabytes. That is just mind-blowing, crazy, insane growth. I don't think we've ever seen before in the history of mankind. I believe that. It's that exciting.
Viswanath: Tamra, I know that a few of the co-ops you work with in Texas are witnessing data center growth. But you asked Jeff specifically when we might see expansion beyond major data center hubs. Here’s that conversation.
Reynolds: From our view on the electric side, we've seen pockets of where this has started to grow across the country. From your view maybe, why are people picking certain areas of the country? What's driving them to Northern Virginia, or say, Texas, or some of those places where we're seeing these pop up in more regular fashion?
Johnston: I think a lot of it has to do with the existing infrastructure that's in place and the connectivity associated with that infrastructure, the various direct on-ramps and off-ramps that are really important to enterprises and to cloud service providers. Building this infrastructure takes an awful long time. In that more centralized computing and storage environment, like you mentioned in Northern Virginia, in Dallas, and Phoenix, in Chicago...I mean all these major, major hubs. I think you're going to continue to see them grow at a pretty impressive clip.
But then I think what you're going to start to see as AI starts to take hold on a much deeper level. You're going to start to see more of these edge computing type of location start to pop up, which I think really play into the strengths of rural electric cooperatives and rural telecom operators.
An edge computing location needs three things. It needs like a building of some type to store servers in. Beyond that, it needs power and it needs connectivity. You may think you've got some assets in rural parts of the country that aren't close to any major manufacturing plant that may need edge computing, but certainly on the agriculture industry, there's a lot of these farmers and ranchers that I think could make really good use of infrastructure for storing and computing to reduce costs.
That's just one example. There's manufacturing, there's distribution, there's mining, there's all sorts of other types of industry verticals that I think could make good use of rural storage and compute and locations that have good, strong, reliable connectivity. It’s coming, and I really think some of those rural assets that maybe aren't generating what some folks thought they would at this point, I think there's opportunity down the road for those to really start to add value.
Reynolds: So, if an increasing number of electric co-ops might encounter new data centers in their territory, what should they expect? Once again this is Dave Schleicher from NOVEC.
Schleicher: NOVEC is the largest cooperative in Virginia with about 180,000 meters serving across six counties, predominantly Loudoun County and Prince William County just on the western side of the Washington DC metro area. We have about 347 full-time employees and we rank 11th in the United States in terms of size based on customers. However, at the end of '22, we ranked number one in the country in terms of sales and revenue. Among cooperatives, NOVEC had the highest sales and the highest revenues, 8.5 billion kilowatt hours delivered and $966 million in total revenue.
NOVEC served its first data centers 15 years ago, and these were single buildings. Not huge. Data centers, what were maybe 15 megawatts, now the campuses have evolved to being 1,000 megawatts. And at that point in time, you can't serve 1,000 megawatts from a single substation. You serve it from multiple transmission delivery points, you serve it via multiple substations. So the scale at which data center size has grown, is tremendous.
Data centers are also pushing that same limit inside their walls. In terms of power density, they're building square footage. The more power they can fit per square foot, the more efficient they can be on their real estate costs. Northern Virginia has reached the point that, quite honestly, the land use is saturated. Land is selling in excess of $2 million an acre. What used to be undesirable land sitting right next to a big transmission line has actually become more desirable land because it sits next to a big transmission line.
Right now, most computers and servers and data centers are air-cooled, meaning you blow air across them, but they're working on liquid-cooled technology to try to increase the heat transfer and allow the watts per square foot in a data center to go up.
Viswanath: But it is not just about energy density for data centers that’s evolving; it’s also the landscape, or the players in this space. As Dave will soon explain, this developing ecosystem will impact energy requirements.
Schleicher: There are data centers that essentially build for their own use, and you'll recognize the names: Amazon, Google, Facebook, Microsoft. Their business plans predict and plan what they need, and hence their building construction is part of an overall corporate effort. You find that those type of customers have more predictable construction schedules, more predictable load ramps. It's like you building a house that you are going to live in. Remember that analogy as I go to the next type.
The second type of data center is a data center company. Again, I'll quote names like QTS, CyrusOne, Yondr who build empty space data centers and then lease literally square footage within that data center to third parties to come in and locate their data center equipment within that complex. That's very much like an apartment building. It's like you build an apartment building and you find tenants to want to come and lease space. The challenge there is their load ramping is a little less predictable than the companies who are building data centers according to some large corporate plan.
Those are the two different models we face and they both have their challenges.
Reynolds: Serving this type of data center member comes with its own challenges. Teri, we hosted a podcast, When a Crypto Miner Comes to Town, about a year ago and discussed some of the challenges that occur with serving these energy-dense consumers. There have been headlines that talk about the potential flexibility of that segment, but it comes at a cost. So, what is this load really like? Again, this is Dave…
Schleicher: I think we view the segment as, quite honestly, critical infrastructure, no different than we would view a military base or a 911 center because so much of our lives flows through our phones and our computers and everything's in the cloud. If you want to know where the cloud is, the cloud is in Northern Virginia.
The load shape is flat. They sit at a particular load level. They have about a 97%, 98% load factor, so whatever their peak demand is, they pretty much sit flat right at that number and they just run and run and run. You'll see it go a little bit higher on really hot days when the air conditioning and the cooling is running a little harder. You may see it run a little bit lower on a really cold day when they can use a little bit more evaporative cooling instead of refrigerant cooling, but for the most part, very, very high load factor.
So, no I would not view them as shed-able load or demand response load.
Viswanath: So, based on Dave’s comments, we know that when a data center comes to town, this operation can oftentimes tax a distribution company. So how does his shop approach serving that member? Listen to what he has to say.
Schleicher: I'll start by saying the processes that NOVEC has today compared to the processes we had even two or three years ago, let alone 10 years ago, are completely different. NOVEC was traditionally a Washington DC bedroom community, our load growth, and it was fast. It was 5%, 6%, 7% compounded annual growth due to residential subdivisions, small commercial, so we're used to fast growth. We're not used to this kind of fast growth and this type of growth. Our processes have changed and they continue to change, and in two years from now, they may change again.
What we've really tried to do is standardize what I call the intake process for data centers because every single data center would love for you to build a customized substation, a customized delivery method, a customized topography for the substation for them. In our case, these are NOVEC substations.
Now, there are going to be some situations where data centers may take service directly off the transmission system, or the co-op may have a bulk electric transmission system to serve the data center. In our case, we don't have that. In these cases, we're tapping directly off the Dominion 230 kV system, and we have a very standardized approach.
We have also shared our processes with at least two or three cooperatives both here in Virginia and over in Maryland who have been approached, and we'll share them with others as they come and ask, because I think at the end of the day, it's in everybody's benefit to have a consistent process. When X, Y, Z data center goes to NOVEC or they go to Rappahannock or they go to Southside or they go to Southern Maryland, they are treated with a similar intake process.
The more that we can, as a co-op organization, give them a common platform for requesting service and managing service, I think we'll all be more successful and we'll avoid, if you will, reinventing the wheel.
Reynolds: Now, let’s get into the specifics, with a prospective data center putting in a request for new service in NOVEC territory.
Schleicher: The process really works that they come to us with a site plan, with proof of zoning, land ownership. We then work with Dominion, our planning engineers, to come up with what I'll call a method of supply. How are we going to serve that site? Where's the substation going to go? How big is the substation? What's the low-side breaker arrangement? We have a standard substation design. The high side and the transformation in most of our substations is identical from one data center to the next.
Once we come up with that plan, we go back to the data center customer with a price and a schedule. If they agree to that, we sign an electric service agreement. That triggers detailed design engineering. It triggers the procurement of long lead time material. Things like 230 kV breakers, 230 kV to 235 kV transformers are all out there between 30 and 45 months delivery time. You're literally looking at three to four years.
Once you get it energized, that's just the beginning of the fun from a load forecasting perspective because then the question becomes, how fast do they ramp? We energize them. We've got data centers that have sat here at 5%, 10% of contracted load for a couple of years waiting for that big project to come on board. We have other data centers that, boy, once you energize them, within about two or three months, they're at 30%, 40%, 50% of contracted load.
Viswanath: I was curious about the financial arrangements with this type of member. What exactly does billing look like? And, more to the point, what are the financial ramifications for supplying these data centers? I asked Dave these questions and here’s what he had to say…
Schleicher: We have several tariffs on file with the FCC for data centers, and they are somewhat load-based, so at some megawatt level, you move from one rate schedule to the next and from the second rate schedule to the third. Two of those rate schedules do allow for access to what we call market-based rates. At that point, we provide the data center access to the PJM marketplace.
The data centers want to be able to say they're 100% renewable. They'd like to have control over their power supply costs, so we give them access into the PJM marketplace. They can choose between real-time pricing day ahead, entering the long-term bilateral contracts, finding renewable projects somewhere. Whatever they want to do, they can do and procure their energy. Now, that flows back to us through our PJM bill, but we give them access to PJM to strike those deals. The win for us, though, is that takes that load off of our plate in terms of our power supply folks trying to source that energy.
We're about a 1,700, 1,800-megawatt load right now, and about 1,000 of that megawatts is customer base load, and about 800, 900 of that is data center load. We are still procuring power, we're still managing the overall power supply portfolio for our 1,000 megawatts of base load customer. What we don't want to do is have data centers swinging around, maybe trying to pick the best deal. Do I want to go with NOVEC's power supply? Do I want to go out into the open market? Once we give them access to member-based rates at a certain load level, they go and take those market-based rates, and that's how they provide for power.
That reduces the risk back to our customers and to our power supply team to have to provide for them. That, again, I think is a win-win situation. The vast majority of our work is done via contribution in aid of construction, so most of our capital construction work is done with money that the customer has paid for ahead of time. We'll give them an estimate, we'll get contribution in aid of construction, and then after the project's done, we'll reconcile the actual cost to the estimated cost and settle up with the data center customer.
One of the things we see is we get a bill weekly from PJM, and we are moving in the direction of doing weekly billing with our data centers. Last summer during high gas prices, we were getting weekly bills from PJM north of $25 million. What we've reached is an agreement with our data centers to begin work towards weekly billing. That smooths out cash flow for us and it smooths out cash flow for them.
That breaks, I'll say, the monthly electric bill paradigm that we've all been in for our whole career. It's a benefit for both of us because we do look at their creditworthiness to be able to cover if they're overdue on their bill.
Reynolds: So, how has NOVEC evolved in terms of serving data centers?
Schleicher: In the last six months, we have worked with a consultant to redesign, reorganize our business processes, our organization structure to bring a much more project management, construction management-focused process to the table and let our engineers engineer, let us our engineers work with our contract engineers, let our project managers run the checklists of prerequisites and statuses and schedules and all that kind of stuff.
You got to scale, you got to resource for it. You have to build your contracts, you have to build your construction processes, your design processes, your forecasting processes to be robust enough to accommodate this kind of load.
It means you got to bring on some strategic partnerships with substation construction companies, with equipment manufacturers, with substation design firms, and not just one. We have strategic engineering design relationships with three major firms that you'd all recognize the names of if I said. We have four different substation construction companies. We have different equipment strategic relationships. You got to really go out there and firm up your supply chain, your design chain, your construction chain. You got to build a robust project management organization.
Viswanath: For electric cooperatives, what other advice would Dave share?
Schleicher: My advice to any CEO would be you have to build a robust enough leadership team and a robust enough business development, billing, accounting, customer service, metering team to support this level of work. Our employees have just met this challenge head-on. "This is what the customer wants. We're going to figure out a way to satisfy them."
If it's in our service territory and they've got zoning and they've got permitting and they request electric service, we serve them.
We don't take that lightly. We're not going to give up that obligation to serve them. We'll do it respectfully, and again, we'll do it in a way that safeguards those other 180,000 members because we can't put them at risk for these new members. On the other hand, we're beginning to see residential sales flatten out. This is the next-generation growth engine.
So I’d say to the other cooperatives, build your competencies, build your experience around engineering, around power supply, around metering, around contracts, and all those types of things so that as these challenges come in, you have the core competencies in your organization to be able to handle them.
Reynolds: This conversation with Dave and Jeff provided an important perspective of why electric co-ops need to consider what it means to serve data centers, a promising membership segment that we believe will scale this decade. I do hope all of you have enjoyed this conversation with us.
Viswanath: And that you will download our next episode in November, when we meet up with Rhodium’s Reva Goujon about geopolitical conflict and the impact on rural America. See you then.
