A new model in Minnesota: Google and Xcel Energy’s utility partnership model for affordable hyperscale load

Key takeaways A new model lets hyperscalers fund the grid upgrades their data centres need, while seeking to protect regular customers from higher bills and giving tech companies faster speed-to-power and potentially a better public image. Long‑duration storage can help firm-up intermittent renewable power, which improves the ability of renewables to back large inflexible loads.

Xcel Energy*, Google* and Form Energy* are taking steps to provide 1.9 gigawatt (GW) of low-carbon power for a data centre at Pine Island in Minnesota. With Xcel Energy supplying energy for the new data centre, Google will pay all costs associated with the provision of electricity, ensuring costs are not shifted to customers, which is expected to benefit affordability. We see this as an instructive blueprint for hyperscalers on developing data centres responsibly.

L&G’s Climate Action Strategy identifies companies where climate-positive actions can be robustly linked to shareholder value creation. We invest in and engage with companies to help accelerate or catalyse those actions, implementing what we describe as a ‘speak to the wallet’ playbook for climate action. Xcel is one such company and we are very supportive of the innovation which it has shown in meeting data centre load with renewable solutions. 

US power systems challenges

North American data centre power demand is expected to increase by two to three times by 2030, reaching 7–9% of total US electricity consumption, with up to 17% of demand in PJM.[1] ,[2],[3] Meeting this demand will require significant AI-related capex, which Morgan Stanley has estimated could provide a Keynesian stimulus, adding 2 percentage points to US GDP growth.  At this scale, if capital investment in the grid is not deployed efficiently, US rate payers could face further affordability pressures in a time of inflation.

Data centre load requires a rapid expansion of firm dispatchable capacity, much of which will be met by natural gas. Gas turbine manufacturers, such as GE Vernova* and Siemens Energy* have order books that stretch out to 2030 and that additional gas capacity locks the system into significant future emissions. 

If data centres wish to be connected faster, more creative ways to power are required. Much of the industry is resorting to temporary fossil fuel solutions; diesel generators, marine engines or in the best-case batteries or fuel cells as bridge power. Many are reliant on bridging to nuclear or gas in the longer-term as the long-term reliable baseload power solution.

Fortunately for the climate and bill payers, there is another arguably even more innovative route – using what has already been built.  There is plenty of spare or underutilised capacity on the US grid which can be unlocked. 

We expect another lever to become more common as ‘speed-to-power’ continues to dominate in this phase of the data centre buildout: introducing modest levels of data centre load flexibility, which can dramatically reduce system costs. 4 

We believe that in the data centre gold rush, planners have ignored a suite of technologies that could, in the right conditions, deliver equivalent power faster, at lower cost, and lower carbon through renewables, batteries, demand response and grid enhancing technologies. 

But this is changing, evidenced by this deal between Xcel Energy and Google as the industry finds ways to satisfy data centre demand, in a sustainable way for the long-term. 

The new partnership 

The recently announced partnership between Xcel Energy and Google, involving Form Energy, an iron-air battery company, provides a practical illustration of how innovative technologies can back data centres with renewable power at scale. As part of the new model, “Google will pay all costs associated with {their} electric service {and} accelerate clean energy deployment without shifting costs to local customers”.[4]

At the heart of the agreement is the addition of 1.9 GW of new clean energy capacity to the Minnesota grid, developed to serve a new Google data centre while remaining fully integrated into the wider system. The package includes 1.4 GW of wind, 200 MW of solar, and 300 MW of long duration energy storage, anchored by a 100-hour iron air battery supplied by Form Energy.  

Without careful system design, large load additions risk driving expensive grid reinforcement, which could ultimately be socialised to customers. In our view, the Minnesota model demonstrates a different approach, one in which new load directly facilitates investment in generation and flexibility that benefits the broader system and ratepayers.

A critical feature of the arrangement is Google funding all incremental costs. Under Minnesota’s regulatory framework for large loads, Google will fund the build out of generation and grid infrastructure required to serve the data centre, including a $50 million contribution to Xcel’s grid reliability programme. Existing residential customers will not see higher rates as a result. Importantly, this is not a behind the meter solution that bypasses the grid; it is an on-grid model that strengthens it.

The inclusion of long duration storage is central to the economics of the project. Iron-air is an innovative new long-duration storage technology, Google’s willingness to cover the capital cost of a new technology has helped derisk this option for Xcel, allowing them to innovate.

Wind and solar are already among the lowest cost sources of electricity in the US, but without flexibility they can increase system costs. By pairing renewables with multi-day storage capable of shifting energy across extended weather events, the Minnesota project improves asset utilisation, avoids long-waiting lists for high-cost peaking capacity, and lowers the need for redundant generation that sits idle for much of the year.

Pioneering innovative rates

This Pine Island deal was facilitated by a new contract structure developed between Google and Xcel Energy in Minnesota, the Clean Energy Accelerator Charge (CEAC), a model that uses the same structure as the Clean Transition Tariff (CTT) Google developed with NV Energy. Crucially, this is not a one-off solution. It provides a replicable framework for future data centre development. Hyperscale demand can be structured to support investment in clean capacity, flexibility, and resilience on the shared grid, turning what might otherwise be an affordability challenge into a system level asset.

The fact this occurred in Minnesota is no accident, the state has abundant renewable resource potential and has taken significant steps to lean into renewable energy build out, such as setting a Renewable Portfolio Standard, a Solar Energy Standard and a Carbon-Free Standard to support the transition from fossil fuels to renewables. This history and legislation, alongside a forward-looking regulated utility in Xcel Energy, all contributed. 

From a regulatory perspective, the implications are equally significant. The bespoke tariff structure developed by Google and Xcel shows how regulated utilities can accommodate large new loads while remaining aligned with least cost principles and consumer protection mandates. If replicated, this approach could play an important role as states respond to AI driven electricity demand growth.

For the US power system, we believe the lesson is clear: backing data centre with new clean, firmed power at scale is feasible, when conditions align. With the right mix of renewables, long duration storage, and regulatory design, it is possible to expand the grid in a way that is cleaner, more reliable, and more affordable. These are precisely the types of system level outcomes that the Climate Action Strategy seeks to support and to scale.

After nearly two years of engagement on meeting load growth affordably, we were delighted to see this development by Xcel Energy. We see this new tariff structure and technology innovation as illustrating a practical pathway for meeting data centre load growth in a manner that supports affordability, system resilience, and positive climate outcomes.

 

* For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an L&G portfolio. The above information does not constitute a recommendation to buy or sell any security. Assumptions, opinions, and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

Sources:

Google’s new data center in Pine Island, Minnesota 

Xcel Energy to power new Google data center in Minnesota | Xcel Energy Newsroom

https://www.eei.org/-/media/Project/EEI/Documents/Issues-and-Policy/Finance-And-Tax/IndustryCapexReport.pdf;

Lawrence Berkeley National Laboratory (LBNL), 2024

https://nicholasinstitute.duke.edu/publications/rethinking-load-growth

 

[1] Bloomberg New Energy Finance (BNEF) - Data Centres and AI Outlook 2026
[2] Bloomberg New Energy Finance (BNEF) - Data Centres and AI Outlook 2026
[3] PJM Interconnection is the largest power grid operator in the US
[4] https://blog.google/innovation-and-ai/infrastructure-and-cloud/global-network/data-center-pine-island/