Why Data Centers Favor On-Site Gas Power

Most data center developers opting for on-site gas power say that they see it as a “bridge” solution until a grid connection is secured. Yet economics may favor keeping those assets running even after grid power becomes available.

A recent BloombergNEF analysis shows the marginal cost of operating an on-site gas plant may be below industrial electricity tariffs, making continued generation from on-site assets the cheaper option in many cases. 

Marginal generation costs depend on fuel prices and variable operating expenses. BloombergNEF modeled the marginal cost of operating engines, turbines and fuel cells at a mid-scenario gas price of $3.97 per million British thermal units. Gas engines, such as ones manufactured by Wartsila and INNIO, have the highest marginal cost, at $43.2 per megawatt-hour (MWh). Fuel cells, most prominently procured from Bloom Energy, are the cheapest to continue running, at $21.5/MWh, benefiting from high thermal efficiencies and the lowest variable operational cost.  

Securing a grid connection does not necessarily make on-site generation redundant. Developers can continue using gas plants to supply most of a facility’s electricity while relying on the grid for reliability, reserve them for backup or peak demand, or in some cases export electricity to the grid.

The optimal operating strategy will depend on the relative cost of grid electricity, fuel prices and the marginal cost of operating the gas plant. More efficient technologies such as fuel cells and combined-cycle gas turbines are likely to be dispatched more frequently because of their lower running costs.  

The contracted electricity price will ultimately determine how often developers rely on the grid. Industrial electricity tariffs are forecast to average $88.6/MWh in 2027, while wholesale power prices are expected to range from $24.4/MWh to $74.7/MWh, according to the US Energy Information Administration.

Developers with access to low electricity prices may increasingly shift demand to the grid, while those paying the highest industrial tariffs could continue to favor on-site generation even after their grid connection is in place.