Bits, Bytes, and Bottlenecks: A Story of Two Data Center Corridors
How Data Center Expansion Happens at the Local Level
Hello, I’m Ylli Bajraktari, CEO of the Special Competitive Studies Project. In this edition of our newsletter, SCSP’s David Lin and Nyah Stewart share insights from a recent site visit to a data center, examining how the build-out of this critical industry plays out on a local level in the United States and the People’s Republic of China (PRC).
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Bits, Bytes, and Bottlenecks: A Story of Two Data Center Corridors
This month, as a follow-on to SCSP’s recent AI+Energy Summit, our team had the unique opportunity to travel with staffers from the Senate Foreign Relations Committee to the epicenter of the United States' data center ecosystem – Loudoun County, Virginia. As we walked through a data center facility and electric substation, seeing the convergence between atoms and bits, we couldn’t help but draw parallels to similar developments happening across the globe, particularly in China’s rapidly expanding digital corridor.
Loudoun County: America’s Data Center Alley
Over the last 14 years, there has not been a single day when a data center was not under development in Loudoun County. Now, 200 towering and windowless structures sit within 25 square miles, making Virginia the world's largest data center market and home to 35% of all known hyperscale data centers worldwide.
The state and local governments have supported this exponential growth in data centers through incentive programs and tax breaks. A dense fiber optic network, affordable land, and, crucially, cheap power, have fueled data center build-out over the past decade. In return, these facilities have transformed the county’s farmland into a thriving tech industry hub. Data centers in Loudoun County generate approximately $587 million in annual tax revenue and support thousands of local jobs, proving that these centers not only have an outsized physical presence, but an enormous economic one as well.
Demand Outpacing Supply?
The appetite for data centers in the region is not letting up. Data centers in Northern Virginia have a vacancy rate of 0.9%, a drop from 1.8% the previous year – one of the lowest in the country. However, data center expansion in Loudon County currently faces constraints. In 2021, these Virginia-based facilities handle 70% of the world’s internet traffic, but building out this digital infrastructure requires more physical infrastructure, especially as artificial intelligence (AI) becomes more compute-intensive. Consequently, power infrastructure is the most crucial and limiting aspect of data center growth.
Inside these facilities, each data cabinet is estimated to consume the same amount of electricity as a home. Data center capacity in the area is expected to grow to 21 gigawatts (GW) by 2040 – adding the state of New Jersey’s power demand to Virginia. As AI training clusters become larger and AI use becomes more omnipresent, the demand for data centers and, therefore, for the electricity to power them, will continue to rise. Meeting the power needs of these large megawatt facilities requires physical electrical infrastructure, like transformers and substations, to connect them to local transmission lines.
Yet, there might not be enough physical space or time to quickly build the necessary infrastructure around continuous data center expansion. Building new transmission lines takes 4-7 years, whereas data center construction can be completed in one. Innovations, like co-locating new energy generation sources, compute efficiency, or even grid-enhancing technologies (GETs), will probably not be the silver bullet to meet near-term energy demand or solve the lack of space. Overcoming these challenges and acquiring the resources to support this critical industry is necessary to continue bolstering local and national competitiveness.
Guizhou: China’s Big Data Valley
While the United States remains the global leader in data center capacity, China is undertaking a rapid data center buildout that matches the pace currently underway in America. The epicenter of China’s data center buildout in many ways originates in a low-profile rural province in southwest China: Guizhou.
A region known for its breathtaking mountainous views and sprawling landscapes has been steadily emerging as the epicenter of China’s explosion in data centers. Referred to as the “Big Data Valley” of China, Guizhou’s data center buildout is ongoing and the province was designated as China’s first “national big data comprehensive pilot zone” in 2016. The data-centric buildout continues today. As of July, PRC industrial planners in Guizhou issued a policy plan to build a “10,000 Gigabit City” to build higher speed interconnects between its data centers. However, Guizhou’s data center buildout has been over a decade in the making, dating back as early as 2011. By early 2022, the province boasted a total of 23 data centers in operation. As of this past summer, 47 data centers were under construction across the province.
Guizhou's unique geographical features, particularly its cool climate and abundant water resources, make it an ideal location for data centers. The province's relatively low population density and stable geological conditions further enhance its suitability for the resource-intensive data center industry. Energy costs in eastern China are at least 20 to 25 percent more expensive than prices in energy-resource-rich western regions.
In light of the cost differentials, Beijing has spent over $6 billion to build data centers across the country, including in Guizhou, in line with its “Eastern Data Calculated in the West” strategy. The rationale for the EDCW project was simple: both processing demand and power costs are untenably high along the eastern coast, while the opposite is true in China’s western regions. Inland areas are rich in renewable energy resources, like solar, wind, and hydropower, and data processing demand is low. The goal of the EDCW is to build eight hub nodes and ten associated data center clusters. Guizhou is one of the main hubs.
Data Center Overcapacity?
While the U.S. data center buildout struggles to catch up with demand, China finds itself in an opposite dilemma. Supply and capacity appear to outweigh demand, leading to a significant oversupply of data centers. The government’s aggressive investment and policy incentives, such as EDCW, have encouraged rapid data center construction, at times outpacing actual demand. As a result, many data centers are underutilized, facing high operating costs and low occupancy rates in many of the designated EDCW locales, including Guizhou.
Several factors contribute to this issue. Firstly, the government's focus on low-cost regions has resulted in underinvestment in critical infrastructure, including power grids and fiber optic networks. This has limited the ability of data centers to efficiently operate and connect to the broader internet. Secondly, high network charges imposed by state-owned telecom operators further increase the cost of running data centers.
To address the overcapacity issue, the Chinese government has implemented measures to curb excessive investment and promote rational development. However, the challenges remain significant. The industry is grappling with high debt levels, declining profitability, and uncertainty about future demand. As China continues to shape the global AI landscape, it is crucial to strike a balance between ambitious goals and sustainable development.
The Subnational Ground Game of the Tech Competition
Data centers are the beating heart of the digital age, powering everything from online shopping to artificial intelligence. While we often frame data center competition as a national race between the United States and China, the real stories unfold in places like Loudoun County, Virginia, and Guizhou province, where local decisions about land use, power infrastructure, and economic incentives shape global digital capabilities.
While both regions offer unique advantages, they also face distinct hurdles when rapidly expanding these facilities. Loudoun County's primary obstacles are in meeting the increasing energy demands of its data centers, while Guizhou grapples with overcapacity and infrastructure limitations.
These local realities will determine the future of our digital infrastructure. As AI computing demands grow exponentially, America’s technological leadership will depend on the ability to find solutions to these challenges – navigating the complex interplay of energy, space, and infrastructure. This may involve exploring innovative energy sources, optimizing data center efficiency, and fostering international cooperation to share best practices, all at the local level. By helping communities address these issues, the United States can ensure the continued growth of the national data center economy and preserve its digital dominance.