Wood Mackenzie Reports Growing Momentum Behind Collocated Power Solutions For AI Data Centers

Artificial intelligence companies are increasingly exploring new ways to secure electricity supplies without causing higher power bills for households, as concerns over the energy demands of data centres continue to grow. Rising political scrutiny and public concerns about electricity affordability are pushing technology companies to look for alternative power solutions, including dedicated on-site generation and collocated energy facilities.

The rapid expansion of AI has brought two significant challenges into focus. On the commercial side, some businesses are still evaluating whether AI tools are delivering enough productivity gains to justify their costs. At the same time, growing opposition to data centre development is emerging across the United States, largely driven by fears that the facilities could increase electricity prices for consumers.

Several states across the political spectrum have recently debated restrictions on new data centre projects. Proposed measures have appeared in states including Vermont, New York, Oklahoma, South Dakota, Pennsylvania, and Georgia, highlighting the widespread nature of concerns surrounding the industry’s growing electricity consumption.

While energy is essential for operating AI systems, electricity costs make up only a relatively small portion of the overall cost of AI services. A recent example highlighted this dynamic when SpaceX disclosed that Anthropic is paying approximately $1.25 billion per month for computing capacity at the Colossus data centre complex in Tennessee.

Although the facility consumes around 300 megawatts of power, the electricity costs are estimated to represent only a small percentage of the total amount being paid for access to the computing infrastructure. Despite the limited impact of electricity costs on AI business models, energy consumption remains a major political issue.

Concerns that large-scale data centres could place additional pressure on electricity grids and drive up household utility bills have become a central factor behind local resistance to new developments.Electricity demand growth has not yet caused widespread increases in power prices across the United States.

However, certain regions are beginning to experience pressure. One notable example is the PJM Interconnection grid, which serves a large area stretching from New Jersey to Tennessee and has seen increasing demand from data centres and other large electricity users.The issue has also become increasingly prominent among policymakers.

Governors in New Jersey and Pennsylvania recently introduced plans aimed at ensuring that the cost of supporting new data centre developments does not fall on ordinary electricity consumers.Major technology companies and data centre operators have already committed to covering the costs associated with additional power generation and grid infrastructure needed for their facilities.

Earlier this year, leading firms signed the Ratepayer Protection Pledge, which included commitments to fund new generation capacity, support grid upgrades, and enhance overall system reliability.However, translating those commitments into practice remains challenging. Electricity markets and utility regulations are generally designed to distribute infrastructure costs across all customers rather than assigning them to individual users.

As a result, isolating and allocating costs associated with specific data centre projects can be difficult, particularly when increased demand affects broader supply chains.Natural gas markets present another challenge. As demand for gas-fired electricity generation increases to support AI infrastructure, higher natural gas prices could affect households and businesses alike, making it difficult to shield consumers from indirect cost increases.

Environmental concerns also remain a significant consideration. Increased power generation raises questions about greenhouse gas emissions and local air quality impacts. Although climate priorities have received less attention in some policy discussions recently, environmental considerations are expected to remain an important factor in future energy planning decisions.

To address these challenges, major technology companies are beginning to invest in innovative energy solutions. Microsoft, Amazon, Google, and Meta recently announced a collaborative initiative aimed at supporting new energy and materials technologies for data centres. Working alongside the nonprofit investment organization Elemental Impact and other partners, the companies plan to support up to ten technology startups through investments ranging from $500,000 to $5 million per project by the end of 2027.

Although the financial scale of the initiative is relatively modest compared to the hundreds of billions of dollars technology companies are expected to spend on AI infrastructure, it signals a growing recognition that energy affordability and sustainability will play a critical role in the long-term success of the AI industry.

Dawn Lippert, CEO and founder of Elemental Impact, described the current wave of data centre construction as an opportunity to accelerate the commercialization of technologies capable of delivering affordable, reliable, and sustainable energy solutions for local communities. The challenge, however, is that most emerging energy technologies require many years to reach commercial scale.

Even advanced technologies such as small modular nuclear reactors and fusion energy are unlikely to contribute significantly to electricity generation over the next decade. As a result, AI companies must largely rely on existing energy technologies while addressing today’s operational and political challenges. According to a recent analysis by Wood Mackenzie experts Ben Hertz-Shargel and Chris Seiple, access to grid power remains the preferred option for most data centres because it typically provides lower costs and greater reliability than dedicated on-site generation.

However, where grid connection timelines are lengthy, self-supplied power solutions may become a practical alternative.The analysts noted that political concerns about rising household electricity bills are likely to accelerate interest in collocated power facilities. As affordability becomes a more urgent issue for governments and consumers, policymakers may introduce additional regulations governing large energy users, including data centres.

Companies capable of operating effectively with dedicated power supplies and reduced dependence on traditional grid connections could gain a competitive advantage by bringing AI capacity online more quickly than their rivals.Beyond the AI and electricity debate, energy markets continue to monitor developments in the Middle East. Reports have suggested that the United States and Iran may be moving closer to a temporary agreement that could allow shipping through the Strait of Hormuz to resume normally.

However, no formal deal had been announced at the time of reporting, and uncertainty remains.Wood Mackenzie analysts recently assessed multiple scenarios for the reopening of the strategic waterway, ranging from a rapid agreement to prolonged disruption lasting through the end of the year. Their analysis suggests that an extended disruption could push oil prices significantly higher and increase the risk of a global economic slowdown.

Meanwhile, concerns about energy supply security have been reinforced by substantial drawdowns in the U.S. Strategic Petroleum Reserve. Industry executives have warned that inventories are approaching unusually low levels, increasing the possibility of price volatility if supply disruptions continue

.In other industry developments, the U.S. government recently completed a record-setting lease sale for federal land in New Mexico’s Delaware Basin, generating more than $4 billion in bids. Energy companies continue to show strong interest in the region, driven by high-quality resources, improving infrastructure, and growing electricity demand linked to data centre development.

Separately, BP announced the immediate departure of chairman Albert Manifold following concerns related to governance and oversight. The decision comes less than a year after his appointment and only months after the company welcomed new CEO Meg O’Neill, marking another significant leadership change for the energy major.