Energy hungry tech bro's add to our electricity woes?
What does the emergence of data centres in NZ mean of for our electricity supply?
Data centres are big business and increasing so as time goes on. The global data center industry is estimated to be around $200 billion annually and growing.
As we know money is a claim on energy, and data centres are energy hungry beasts. The AI generated search that google provides of their home page for example is alleged to use 30 times more energy than a conventional search. This is due to the processing power required to locate and aggregate a vast body of data in milli seconds.
Data centres like “clean” power too. By “clean” I do not mean environmentally friendly, although that is a bonus, I mean power that is free of “noise”. In electrical terms “noise” means fluctuations in frequency, voltage or current. The cleanest power in the grid is baseload generated by large steady state systems like hydro, geothermal, nuclear and gas.
Not only is all this data processing energy hungry it also requires real estate to house all the data for a data driven world. As such data centers are popping up all over the world including New Zealand.
So, how are they being powered and what does this mean for a grid that is already dangerously close to brown out?
The balance of power.
Let’s take a look at Microsoft’s new data center in Auckland as a bit if a case study.
In my recent article, 2025 New Zealand Energy Stocktake, I look at the balance of new generation capacity being added to the grid vs generation being retired:
The following table is what has been added or is expected to come online in time for winter. Noting that not everything is captured here. There are a handful of smaller 5-10MW solar projects that are not included. These don’t really have any impact at scale and especially not in winter.
On face value this looks encouraging with the ~2200 GWh of generation capacity added to the system. The bulk of which is high quality baseload geothermal that is not subject to the vagaries of the weather and available on those frosty, calm, and dark winter mornings.
In that article I made a tongue in cheek comment at the end of that article about data centre energy requirements being a threat to the wider grid. What I did not fully appreciate at the time is that the data centres had already arrived in New Zealand.
Specifically, that all of the power generated by the Te Huka geothermal plant is contracted to Microsoft for data centers in Auckland.
RNZ 12th December 2024 - Global tech giant Microsoft opens its first hyperscale data centre in New Zealand on Thursday, which is expected to give businesses and organisations access to tools designed to super-charge productivity.
Microsoft country manager Vanessa Sorenson said the New Zealand centre was the most sustainable hyperscale centre in its portfolio, with data centres in more than 60 locations around the world.
Microsoft paid Contact Energy $300 million in 2022 to support the development of the Te Huka Unit 3 geothermal facility, alongside a contract to buy renewable energy over the next 10 years.
So, how much of the electricity from Te Huka will Microsoft actually offtake as part of bankrolling the development?
To answer that question, we go to Contact’s media release:
The arrangement will see Contact provide Microsoft with all the renewable energy attributes generated by Contact’s new 51.4MW Te Huka Unit 3 geothermal power station.
If we are to take this literally, ALL of the 51.4 MW of generation provided by Te Huka will go to Microsoft.
In practical terms the data center will be connected to the grid and will draw from the wider generation mix in the grid. Microsoft will however be able to use renewable energy certificates provided by Contact to claim that their operations supplied by renewable energy.
What this effectively means, assuming Microsoft needs all the power now, is that we have about 450 GWh less generation available to the wider NZ Inc. from the table above. This is also high-quality baseload generation too.
Tech companies love baseload for the same reasons we should all love baseload. It’s reliable, always on and does not introduce complexity or noisy (frequency / voltage issues) power to the grid.
Now, a data center industry in NZ is not necessarily a bad thing, it’s economic activity and it will generate jobs in building and operating the data centers.
I will steer clear of the wider societal AI debate here, but for those interested in this aspect I would point you to an interesting podcast, Markets with Madison - We must pick a side in AI arms race. This was particularly insightful for me as I did not realise that there were three big military tech companies operating in NZ and one is heavily in the AI space.
The more pertinent questions for me are:
How does the offtake contract work and will Microsoft be subject to the industry destroying phenomenon of “demand management” if the grid is becoming overloaded?
Are the Microsoft revenues kept and taxed in New Zealand or re-patriated to more tax friendly jurisdictions?
The reasons for these questions are pretty straight forward. We are heading into what is increasingly likely to be another dry winter and the grid is already under a lot of pressure.
We already have wholesale power prices routinely exceeding $350 MWh, which is very high. If this continues, and I see no reason why it won’t in the absence of substantial rain inflows, it could translate into household power bills increasing by something like 50% and puts even more pressure on industries already struggling to be competitive.
Which leads us to the second question. If the tech industry can secure 51.4 MW of baseload generation when the NZ energy market in this much turmoil, it would not be unreasonable to hope it brings significant upside for the NZ economy.
Microsoft think that they add value and have a glossy brochure explaining what these benefits are. In summary they are:
120 short term construction jobs.
32 full time roles for employees and contractors.
Pay rates on the precincts.
GST on local sales.
Income tax from employees.
Conspicuously absent is how much corporate tax will be generated for NZ and how much of the profits will be offshored to the parent company.
It does not sit well with me to be having this discussion. I would much prefer to be welcoming businesses to New Zealand of all stripes.
Unfortunately, however when we have energy scarcity that will result in other industries and homes paying very high prices, or potentially going without, we are forced into making value judgements.
This is again why we need to be aspirational and build more baseload, to the point where we have excess capacity. Then these problems would not exist.
Larry
Our electricity supply is rapidly approaching another crisis as lake levels fall and there is insufficient coal at Huntly to run that station around the clock. Isn't it ridiculous to be adding data centres, swapping coal gas boilers for electricity and pushing electric cars while we cannot keep existing users supplied?
It would be interesting to know where Transpower sit in this surely Microsoft would want to tie them into the continuity of supply deal as per Contact