Tesla CEO Elon Musk is building a supercomputer that uses advanced AI to teach his company's cars to drive themselves.
One of these massive new AI data centers is being built inside Tesla's offices in Palo Alto, Silicon Valley.
Walking down a small hill at the back of the parking lot, a tough reality of AI projects emerges: AI data centers consume far more electricity than traditional cloud facilities, causing spikes in demand that are disrupting the entire power grid.
In mid-August, I parked behind the Tesla office parking lot for a look at the site: a dusty, gravel area where workers were upgrading a substation for CPAU, a small Palo Alto utility that will power Tesla's AI machines.
Workers at a Palo Alto substation. Alistair Barr/Business Insider
Tesla needed so much additional power capacity for its AI projects that the city reportedly shifted broader infrastructure plans to accommodate the company's needs, while Palo Alto residents just saw their utility bills soar.
The substation upgrade is estimated to cost $24 million, a cost split roughly between Palo Alto and Tesla: Tesla will pay an upfront fee to get the project up and running, and the city will compensate Tesla up to $12 million.
Tesla will also pay a monthly fee to CPAU, and in return, Palo Alto's utility company has agreed to reserve 9,000 kilowatts of power demand exclusively for Tesla, according to a city announcement.
This unusual public-private partnership is just one example of how AI will affect electricity demand and how utilities, cities and companies are trying to meet this complex challenge. Billions of dollars are being spent on upgrades, and fierce debate is being waged over who will pay for them.
Palo Alto's Hanover Substation Alistair Barr/Business Insider
In Palo Alto, one of the first real signs of AI’s impact on the power grid emerged in 2022.
During a presentation about Tesla's Dojo AI supercomputer, engineer Bill Chang said the company's tests used so much power that they overwhelmed the nearby Palo Alto substation.
“We were able to put out more than 2MW before the substation tripped and we got a call from the city,” he added.
It's unclear if this is the same Hanover substation that Tesla visited in August, but by 2023 Palo Alto was working on an upgrade project near its offices.
According to a city announcement, funding would be reviewed in October 2023. The City Council would approve the partnership with Tesla in January 2024, with construction beginning soon thereafter.
City of Palo Alto Presentation Slides City of Palo Alto
The substation upgrade is happening at unprecedented speed: projects like this typically take three to four years, and Tesla hoped to have all construction finished and powering its new AI data center by April 2024, according to a Palo Alto City Council staff report.
“The City is unable to meet this timeline through normal City procedures due to insufficient staffing to coordinate the design and construction of all facilities, as well as the time required to complete the City's public procurement process,” the statement said.
That proved prescient. When I visited the Hanover substation on August 13, the project wasn't finished yet; a separate presentation in Palo Alto estimated the work would be finished by mid-September. A city spokesman told me this week that the project “is on track to be completed by the end of 2024.” Tesla did not respond to a request for comment.
According to the city, Tesla agreed to pay all costs associated with the expedited fees, totaling about $3 million, to help speed things along.
“The public needs to accept this.”
A Palo Alto substation Alistair Baer/Business Insider
One of the biggest challenges may lie in how Palo Alto residents will react to the project. Despite Tesla's significant upfront investment, there may be a perception that it is the company, not the residents, that benefits most from the upgrades.
The situation isn't helped by Palo Alto's July 1 decision to raise electricity rates by 9%, well above the rate of inflation.
The city had originally planned to upgrade its power infrastructure by prioritizing residential areas with overhead power lines, but Tesla's invitation caused the plan to “pivot” toward the Hanover substation project, according to Palo Alto Online.
“The grid modernization that we have to do, that everybody has to do, is huge. It's going to cost money. The public has to buy into it,” one Palo Alto resident told me, requesting anonymity to discuss a sensitive issue.
A Palo Alto spokesperson said work on the grid upgrades in residential neighborhoods and at the Hanover substation is progressing in parallel. “The city is on track to complete the first residential upgrades by the end of 2024,” he added.
She also emphasized that Palo Alto utility rates were not increased to cover the costs of the substation upgrade.
“Because this upgrade is a necessary and beneficial project for the city's overall utility, the city's utility will cover the costs of this project, as well as regular infrastructure maintenance and improvements,” she explained. “Tesla will cover the costs of the substation upgrades necessary to meet the power needs of the data center.”
“Other utility ratepayers do not subsidize Tesla's projects or service needs in any way,” the spokesperson reiterated.
Chat with a Project Manager
During my visit to the Hanover substation on August 13, I met with the project manager for the City of Palo Alto. I asked him when the upgrades would be completed.
That depends on everything going smoothly and according to plan, he said. He explained that getting the big physical structures in place was the relatively easy part. Getting all the equipment in place to communicate with a central hub somewhere else in Palo Alto was the harder part, which could cause delays. But he seemed pretty calm about how things were going.
The project manager also noted that Tesla will only have access to a relatively small portion of this new infrastructure, explaining that the rest will be used to send power to other buildings and organizations in Palo Alto, including the nearby hospital.
He said he didn't know what Tesla planned to use the electricity for, and that he was just there to see the project being built and completed.
