As the nation’s AI infrastructure is built, project developers are increasingly relying on natural gas for their power needs. Sheppard’s Digital Infrastructure Team is at the forefront of helping clients navigate this rapidly changing landscape.
Why Data Centers Are Turning to Natural Gas
Reliability Compared to Renewable Energy Sources
Natural gas is one of the most reliable energy sources as it is consistently available and can be transported in an existing network of over 2.2 million miles of underground pipeline. In addition, 98 percent of the natural gas used in the U.S. is domestically produced, reducing fluctuations associated with geopolitical events.[1] The around-the-clock availability of natural gas makes it an attractive supply option for large consumers such as data centers that rely on steady energy flow.
Natural gas delivery provides substantial flexibility as it can be ramped up and down as demand changes, unlike more intermittent wind and solar resources. Ease of storage is another positive feature as natural gas can be injected into storage facilities during off-peak periods and withdrawn during periods of peak demand to help ensure reliability.
Cost Advantages of Natural Gas
Since the shale boom of the 2000s caused domestic natural gas production to surge, prices have been relatively stable and affordable.[2] Natural gas storage inventories also help to balance supply and demand. These features notwithstanding, price spikes have occurred due to constraints in the building of new pipeline infrastructure, particularly in infrastructure-constrained regions such as California and New England. According to a recent report from the U.S. Energy Information Administration, U.S. natural gas production, which accounted for 38% of total U.S. energy production in 2025, is projected to increase significantly over the next several decades to meet growing demand.[3]
How AI Is Driving Unprecedented Energy Demand
Hyperscale Data Centers and Power Consumption Growth
Historically, the demand for energy has been directly correlated with the Gross Domestic Product (GDP) in the United States. As the U.S. economy grew so did energy usage, and energy demand decreased during periods of economic recession. Following the implementation of energy efficiency measures in the early 2000s, energy demand and the GDP became disconnected. The expectation was that the electrification of heating and transportation would spur a large increase in the demand for energy, but such increase has yet to occur. In contrast, the forecasted energy demand from data centers, each of which can consume more energy than a small city, has far exceeded the expected growth from the electrification of heating and transportation.
What “Behind-the-Meter” Power Means for Data Centers
Benefits of On-Site Natural Gas Generation
The capacity factor and reliability of natural gas generation provide significant value to data centers that is amplified when the generation is located on-site or proximate to the data center. By locating generation close to the data center, there is an opportunity to avoid unnecessary costs and delay from upgrades to the electric system that could be required if the generation and data center were further apart. Because a lack of generation capacity has delayed the interconnection of data centers, proximate natural gas generation can accelerate the electrification of the data center.
Regulatory and Grid Implications
Regulators have expressed understandable resource adequacy concerns about taking existing generation offline to serve a new data center behind the meter. Because the existing generation would connect directly to the new data center and no longer inject power to the electric grid, that resource would no longer be available to other customers. Before an existing generator can disconnect from the electric grid to serve a data center behind the meter, a regulator may require electric grid upgrades. The time and additional cost to construct such upgrades can undercut the value of using existing generation to serve a new data center. Additionally, many data centers prefer to receive electric service directly from the grid. However, if new natural gas generation is ready to produce power before it can connect to the electric grid, that generation may be able to provide a nearby data center initial power or part of its initial power behind the meter until both the data center and the generation can interconnect fully with the electric grid.
Risks and Challenges of Gas-Powered Data Infrastructure
Capacity Constraints
Due to a variety of factors, including permitting roadblocks, the development of new interstate natural gas pipeline capacity has not kept pace with the demand. While pipeline developers are working to build additional capacity, other interim solutions will be required to meet near term needs.
Both liquefied natural gas (LNG) and compressed natural gas (CNG) delivered to a data center facility by truck can act as bridge solutions until more permanent natural gas supply arrangements can be secured.
In addition, use of the nation’s existing pipeline infrastructure, including intrastate and gathering pipelines, should be maximized to serve data center needs. Sheppard attorneys have assisted intrastate natural gas companies, including Local Distribution Companies, in obtaining the necessary rate and regulatory approvals to operate their systems to serve new data center demand.
Supply Chain
The supply chain challenges impacting the renewable energy industry have also impacted the development of natural gas infrastructure. The rapid pivot to natural gas to fuel the AI boom has resulted in long lead times for natural gas turbines and other critical equipment. Such supply chain delays and related project development obstacles underscore the importance of maximizing the use of existing natural gas infrastructure to meet the growing demand.
FOOTNOTES
[1] Frequently Asked Questions - INGAA.
[2] U.S. Natural Gas Citygate Price (Dollars per Thousand Cubic Feet).