Separating Signals from Background Noise in the Data Center Industry

In the fast-paced world of data centers, a new term has emerged: 'braggawatts.' Chris Sharp, CTO of data center developer and operator Digital Reality, recently used this term on the talk show Catalyst to refer to developers overstating their ability to secure power.

This trend of overstating power capabilities is causing concern among industry experts. Sharp, for instance, has predicted that there will be 'very big challenges and failures' when customers overestimate their peak needs and ultimately underutilize infrastructure.

Sharp's concerns are echoed by Joe Tsai, Alibaba's chairman, who has expressed concerns about a potential bubble in data center construction. Similarly, research from Wells Fargo found that Amazon Web Services has paused a portion of its discussions on colocated data centers, particularly those abroad. Microsoft has also paused the construction of data centers, with its project in New Albany, Ohio, currently on hold.

However, there is explosive, actual demand growth for compute, leading to a need for lots of gigawatts of new data centers, according to Shayle Kann, partner at Energy Impact Partners. This demand growth is driven by the increasing complexity of inference requests as they run through multiple models, requiring closer proximity to these resources.

Proximity to central business districts is crucial for reducing latency and meeting throughput requirements in data center development. Working with utility operators to understand power requirements is equally important for large contiguous infrastructure projects. Collaborative, long-term planning with utilities and power providers is necessary to build for peak demand expected at any given time.

Utilities are becoming more discerning, looking for customers and developers that make realistic requests and actually use the capacity they ask for. Oversized interconnection requests may be filed by developers as a hedge, even if they're 'phantom requests' that don't represent real load.

Despite the caution in the market, some investors are not writing off projects entirely. While some are pausing new investments in illiquid markets, others, especially in the USA, are actively expanding and establishing new hyperscale data centers. Microsoft, for instance, is actively expanding and establishing new hyperscale data centers in places like Elsdorf, Germany.

The paradox is that all this noise in the market may obscure real demand for data centers. The volume of data centers in development is likely much more than what will actually happen, according to Kann. The key lies in striking a balance between ambitious growth and realistic planning, ensuring that the demand for data centers is met without unnecessary overbuilding.