Understanding Data Centers: How They Work, Why They’re Expanding, and the Risks Ahead

Artificial intelligence and cloud computing are driving a surge in data center construction. Investors, utilities, and policymakers will grapple with the infrastructure, energy, and regulatory challenges shaping the next phase of digital infrastructure.

Data centers have grown rapidly from niche information technology (IT) assets to one of the most consequential stories of our time. Their development touches nearly every sector, from utilities and real estate to public policy and environmental regulation. They have become the critical infrastructure for today’s digital economy.

This recent surge is tied to artificial intelligence (AI), which requires significantly more computing power and energy than traditional cloud services. By decade’s end, data centers are up to 9.1 percent of total US electricity consumption. But as the facilities continue to grow in both size and power demands, commensurate controversy has grown around them.

Here’s what to know about how data centers work, why they are expanding so rapidly, and the risks and opportunities shaping their future.

What Is a Data Center?

A data center is a secure facility that houses computing infrastructure, including servers, storage systems, and the networking and power equipment to keep them operating continuously. These facilities run around the clock and incorporate layers of redundancy, such as backup generators, advanced cooling systems, and robust security protections, to minimize downtime and ensure reliability.

Although data centers recently have drawn heightened attention, the concept is not new. Computing systems in the mid-twentieth century required dedicated rooms to house large mainframe computers. As computing power expanded and the internet emerged, those early server rooms evolved into the large, specialized facilities that support today’s digital services.

Below are key terms that regularly appear in discussions of data center development:

• Megawatt (MW): a unit used to measure the electrical capacity of a facility. Large data centers can require hundreds of megawatts, with gigawatt (1,000 megawatt) data centers in development.
• Power usage effectiveness (PUE): a metric used to measure energy efficiency in a data center.
• Load (or power load): the electricity demand a facility places on the power grid. Large data centers are often considered “large load customers,” with some hyperscale facilities requiring as much power as a small city.
• Latency: the time it takes for data to travel across a network between users and servers. Lower latency improves performance, which is why some data centers are located closer to population centers or network hubs.
• Grid interconnection: the process of connecting a facility to the power grid to draw electricity. For hyperscale data centers, interconnection approvals can take years in regions facing grid-capacity constraints.

What Are the Different Types of Data Centers?

While discussion largely focuses on hyperscale facilities built to support cloud computing and AI, data centers take many forms depending on how they are owned, operated, and used. Common categories include:

• Enterprise data centers owned and operated by a single company to support its internal IT operations.
• Managed services data centers where third-party providers operate and manage computing infrastructure on behalf of corporate clients.
• Co-location facilities where multiple organizations lease space, power, and connectivity while installing and operating their own servers and equipment.
• Edge data centers, which are smaller facilities located closer to end users or devices to reduce latency and support applications such as streaming, gaming, and connected devices.
• Hyperscale data centers operated by major cloud providers and technology companies. Development of these campuses has accelerated as demand for cloud services and AI has expanded.

How Big Is the Market for Data Centers?

Demand is driven by long-term trends including the expansion of cloud computing, rising use of AI, high-performance computing, continued growth of digital services and streaming, and enterprise digital transformation. The numbers help illustrate the scale of the industry:

• The global data center market is valued at about $430 billion in 2026 and could reach $1.1 trillion by 2035.
• North America has the largest concentration of data centers and accounts for 41 percent of the global market.
• Global data center capacity could reach around 200 gigawatts by 2030—double current levels.
• Data center construction is expected to account for more than 6 percent of all nonresidential building construction in 2026.
• Capital expenditures on a single data center facility can exceed $1 billion.

What Factors Determine Where Data Centers Are Built?

Not every location is suitable for a data center. Development requirements are highly specific, and even established markets can face hard limits. Projects tend to cluster in regions where those conditions already exist. 

Successful development typically depends on several key factors:

• Power: Reliable electricity is the single most important factor in site selection. Data centers must operate continuously and need access to a stable and scalable power supply. As facilities grow larger and more energy intensive—particularly with AI workloads—power procurement and grid interconnection have become major challenges.
• Connectivity and proximity: High-capacity fiber networks move massive volumes of data between users, cloud platforms, and global internet exchanges. Developers often favor locations near major population centers or existing network hubs. For example, Reno, Nevada, has emerged as a key data center market partly because of its proximity to both San Francisco and Las Vegas.
• Water: Cooling systems often rely on water to dissipate heat generated by servers. In some markets, water availability has become a key constraint on development.
• Space: Large facilities require substantial land parcels, often with room for expansion. Industrial zoning and supportive local policies can influence where development occurs.

What Are the Biggest Risks and Challenges Facing Data Center Development?

As investment has accelerated, so has scrutiny of the industry. Rapid growth has sparked new questions about sustainability, infrastructure capacity, and local impacts.

• Community pushback and zoning disputes: Local residents and planning boards increasingly question the impacts of large facilities. Concerns include land use, noise from backup generators, and traffic. At least twenty-five data centers were canceled in 2025 because of local opposition.
• Energy use and grid strain: Large data centers consume enormous amounts of electricity, raising concerns about grid capacity and reliability. Utilities in some regions have reported delays in connecting new facilities due to infrastructure constraints.
• Environmental and resource concerns: Cooling systems can require substantial water resources, particularly in warmer climates or water-stressed regions. Simultaneously, industry faces pressure to reduce its broader environmental footprint, including carbon emissions tied to electricity consumption.
• Regulatory scrutiny and disputes: As development accelerates, governments are revisiting zoning rules, environmental standards, and energy policies. The scale and complexity of projects can lead to disputes involving construction contracts, power agreements, permitting decisions, and environmental approvals.

What Does the Future of Data Centers Look Like?

Despite challenges, demand for data center capacity continues to grow. AI and cloud computing will remain major drivers of infrastructure expansion. Operators will explore new ways to manage rising energy demands through renewable power agreements, advanced cooling technologies, and more efficient facility design.

The geography of development also may begin to shift. Virginia, home of “Data Center Alley,” the world’s largest hub of data centers, illustrates both the scale of the industry and pressures from rapid growth. Rising construction costs, tightening power supplies, and increased regulatory scrutiny are prompting developers to look toward alternative markets, from Texas and Ohio to smaller or more rural regions seeking new digital infrastructure investment.

The scale of investment has sparked debate about whether the wave of AI-driven construction could eventually lead to periods of overcapacity. While most forecasts point to continued growth in computing demand, the pace of expansion likely will face increasing scrutiny amid concerns that a potential “AI bubble” might burst.

Policymakers, utilities, investors, and communities face a shared challenge as data centers become more central to the global economy: how to expand digital infrastructure while managing its energy, environmental, and economic impacts.