India’s power-hungry data centre sector at a crossroads

Data centres are the engine rooms of the global digital economy, which artificial intelligence is rapidly reshaping. Collectively, they form “the Cloud” that stores, processes and generates our precious information. But their insatiable appetite for energy is such that data centre capacity is no longer measured in computing power, but rather in their energy consumption. For India, this has profound implications for its electricity demand and supply.  

The Indian government has taken significant steps to bolster the data centre sector, granting it infrastructure status and encouraging local and international investment. Over the past decade, this sector has attracted investments estimated at US$6.5 billion, generating an impressive US$1.2 billion in revenue last year. The country is now home to 262 data centres and ranks seventh in the world, just behind France and Canada (264 each). 

The country’s data centre capacity is expected to grow exponentially from 1.4 gigawatts (GW) last year to 9GW in 2030, and in doing so, they are likely to consume about 3% of India’s electricity in 2030, up from less than 1% currently. The challenge is to meet such demands sustainably, and the answer lies in battery storage and renewable energy. 

While natural gas has been hailed as a cleaner alternative to coal, the energy crisis in 2022 has raised questions about its viability. Domestic gas production meets only half of India’s needs and cannot keep pace with surging demand from the residential, commercial and industrial sectors, which is expected to drive demand up by 60% by 2030, leading to a greater reliance on imports. 

The growing reliance on imports would expose data centres to volatile pricing and higher costs amid rising global tensions and trade wars, undermining the purported benefits of natural gas as a stable energy source. As a recent IEEFA report stated, “Of all commodities, liquefied natural gas (LNG) is most sensitive to geopolitical disturbances, with conflict magnifying the market’s inherent volatility.”  

Meanwhile, battery costs and renewable energy tariffs have been falling. The latest tariffs for firm and dispatchable renewable energy, which provides a continuous power supply source, is Rs4.98-4.99, below the Central Energy Authority’s median natural gas tariff of Rs5.4. 

Last month, India’s domestic gas price cap was raised by 3.7%, from US$6.50 to US$6.75 per million British thermal units. It was the first rise since 2023, when the government reviewed the Administered Price Mechanism (APM) following the global energy crisis in 2022.  

With gas from old fields drying up, and new fields and imports exempt, the proportion of gas priced under the APM fell from 85% in 2020 to 64% last year, “indicating a clear shift towards higher-priced gas as new volumes came online”, according to the IEA. India will need to import more to bridge the demand gap as the amount of gas priced under the APM is likely to fall further, exposing more users to volatile spot market pricing.  

Switching data centres to gas at this critical juncture would be out of step for such an intrinsically innovative industry, ideally suited to lead the government’s ambitious plan to install 500GW of renewable energy capacity by 2030. 

India has five major data centre hubs: Mumbai (61), Hyderabad (33), Delhi NCR (31), Bangalore (31) and Chennai (30). Clustering is a feature of the industry globally. In India, however, such highly concentrated energy demand will further strain local power networks, given that an average data centre consumes as much power as an aluminium smelter or the equivalent of 100,000 homes.  

Conversely, these clusters are prime sites for renewable energy resources such as rooftop solar, battery + energy storage systems (BESS) and local microgrids. Globally, renewables power half of the new data centre and India is no exception. For example, the colossal Yotta NM1 data centre near Mumbai, India’s biggest, already gets half of its power from renewables, with a target of 70%. 

Government incentives have created a frenzy of activity in the energy storage sector. A key enabler is the Viability Gap Funding (VGF) scheme, which offers up to 30% support for capital expenditure to standalone BESS projects.  

In the first quarter of this year alone, Standalone ESS tenders reached 6.1GW, comprising 64% of all utility-scale energy storage tenders and exceeding the total capacity issued last year, according to a recent report by JMK Research and Analytics and IEEFA. 

The potential synergies here for the data centre sector are far more compelling than gas. 

India’s rapid transformation into a digital economy has driven energy demand growth to 7% annually. Increasing internet penetration, mobile use, e-commerce, electric vehicles, data centres and AI will accelerate this demand in coming years, adding to the pressure on networks.  

Data centres are at the cutting edge of information technology and the AI revolution. It doesn’t take artificial intelligence to tell us they should be powered by the most advanced, efficient and economical technology available rather than a fossil fuel with volatile pricing and costly, unbuilt or non-existent infrastructure.  

As battery storage grows cheaper and more accessible by the year, an investment in renewables backed by storage will pay dividends for decades.  

As India’s data centre sector approaches this crossroads, now is not the time to step on the gas.  

This article was first published in Hindustan Times.