Silicon Valley Town Rushes to Meet Tesla’s AI Electricity Demand

In mid-August, I pulled up behind Tesla’s office parking lot to check out the scene. There, in a dusty gravel area, workers toiled to upgrade an electrical substation for CPAU, Palo Alto‘s small utility. This is the facility that will send power to Tesla’s AI machines.

Tesla wanted so much extra electricity capacity for its AI project that the city reportedly changed its broader infrastructure plans to accommodate the company’s needs. Meanwhile, Palo Alto residents just saw their utility bills jump.

The substation upgrade costs an estimated $24 million, with Palo Alto and Tesla roughly splitting the bill. The company paid for the initial costs to get the project up and running, and the city planned to reimburse the company up to $12 million.

Tesla will also pay a monthly fee to CPAU. In return, the Palo Alto utility has agreed to reserve 9,000 kilowatts of electricity demand just for Tesla, according to a city presentation.

This unusual public-private partnership is just one example of AI’s impact on electricity demand and how utilities, cities, and companies are trying to meet this complex challenge. Billions of dollars are being spent on upgrades, with intense debate over who will pay.

In Palo Alto, one of the first real signs of AI’s impact on the grid emerged in 2022.

During a presentation about Tesla’s Dojo AI supercomputer, engineer Bill Chang said the company’s testing used so much power that it overwhelmed a nearby Palo Alto substation.

“We were able to push it over 2 MW before we tripped our substation and got a call from the city,” he added.

It’s unclear if this is the same Hanover Substation I visited in August. However, by 2023, Palo Alto was working on the upgrade project near Tesla’s office.

According to a city presentation, there was a funding review in October 2023. The city council approved the Tesla partnership in January 2024, and construction began soon after.

The substation upgrade is being done at unprecedented speed. Usually, projects like this take 3 to 4 years. Tesla wanted to finish all construction and have energy flowing to its new AI data center by April 2024, according to a Palo Alto city council staff report.

“The City cannot meet this timeline under normal City processes due to insufficient staffing to coordinate the design and construction of all facilities and the time required to complete the City public procurement process,” it stated.

That proved prescient. When I visited the Hanover Substation on August 13, the project was not finished. Another Palo Alto presentation estimated that the job would be completed by mid-September. A city spokeswoman told me this week that the project is “on track for completion by the end of 2024.” Tesla didn’t respond to requests for comment.

Tesla helped speed things up by agreeing to pay all costs related to expediting fees, which totaled about $3 million, according to the city.

“The public will need to buy into this”

One of the biggest challenges may lurk in how Palo Alto residents respond to this project. Despite Tesla’s significant upfront investment, there may be a perception that the company is benefitting most from these upgrades, not residents.

It doesn’t help that on July 1 Palo Alto increased electric bills by 9%, well ahead of inflation.

The city had a plan to upgrade electric infrastructure that initially prioritized residential neighborhoods with overhead wires. But that “pivoted” toward the Hanover Substation project when Tesla came calling, according to local publication Palo Alto Online.

“The grid modernization that we need to do, and that everyone needs to do, is very big. That needs to be paid for. The public will need to buy into this,” one Palo Alto resident told me. This person asked not to be identified discussing sensitive matters.

The Palo Alto city spokeswoman said grid upgrade work for both residential neighborhoods and the Hanover Substation project are proceeding in parallel. “The City is on track to complete its first residential neighborhood upgrades by the end of 2024,” she added.

She also stressed that Palo Alto utility rates were not increased to pay for this substation upgrade.

“The upgrade is a necessary and beneficial project for the City’s electric utility as a whole, therefore the City’s electric utility is paying for that portion of the project as it would for routine infrastructure maintenance and improvements,” she explained. “Tesla is paying for the portion of the substation upgrade necessary to meet its electricity demands for the data center.”

“Other electric utility ratepayers are not subsidizing Tesla’s project or service needs in any way,” the spokeswoman reiterated.

A chat with a project manager

During my visit to the Hanover Substation on August 13, I met a Palo Alto city project manager. I asked him when the upgrade would be finished.

He said that depended on everything going well and according to plan. He explained that putting up large physical structures was the relatively easy part. Getting all the equipment to communicate with a central hub off somewhere else in Palo Alto — that was the hard part that could potentially cause delays. However, he looked pretty relaxed about how things were going.

The project manager also noted that Tesla was only getting access to a relatively small slice of this new infrastructure. The rest is going toward sending electricity to other buildings and organizations across Palo Alto, including a nearby hospital, he explained.

He said he didn’t know what Tesla was going to use the electricity for. He was just at the site to make sure the project got built and completed.