Tech companies building massive AI data centers should pay to power them
Appreciation for the sheer magnitude of that challenge has gotten lost as forecast after forecast projects massive growth in electric demand over the coming decade.
The idea of building a data center that will draw 1 gigawatt of power or more, an amount sufficient to serve over 875,000 homes, is in the plans of so many data center developers and so routinely discussed that it no longer seems extraordinary.
The challenge, when viewed in the aggregate, may be overwhelming.
A recent Wood Mackenzie report identified 64 gigawatts of confirmed data center related power projects currently on the books with another 132 gigawatts potentially to be developed. 64 gigawatts are enough to power 56 million homes — more than twice the population of the 15 largest cities in America.
The U.S. electric utility system is struggling to meet the projected energy needs of the AI industry. The problem is that many utilities do not have the financial and organizational resources to build new generating and transmission facilities at the scale and on the data center developers' desired timeline.
The public policy question now on the table is who should pay for and bear the risk for these massive mega-energy projects.
Will it be the AI developers such as Amazon, Microsoft, Meta and Alphabet — whose combined market value is seven times that of the entire S&P 500 Utility Sector — or the residential and other customers of local electric utilities?
The process to answer this and related questions is underway in the hallways of the U.S. Congress, at the Federal Energy Regulatory Commission and other federal agencies, in tariff proceedings before state regulatory authorities and in public debate at the national, state and local levels.
Whether they are developed at the federal, state or local level, the following values and objectives should form the core of public policy in this area:
Data centers developers that require massive amounts of electric power (e.g. above 500MW or another specified level) should be required to pay for building new generating and transmission facilities. The State of Texas recently enacted legislation that requires data centers and other new large users to fund the infrastructure necessary to serve their needs. Although it is customary to spread the cost of new facilities across the user base of a utility, the demands that data center developers are placing on utility systems across the country are sufficiently extraordinary to justify allocating the costs of new facilities to those developers. Moreover, data center developers have the financial resources to cover those costs and incorporate them into the rates charged to users of their AI services.
The developers of large data centers should bear the risk associated with new utility-built generating and transmission facilities, not the utility. As an example of such a policy, the Public Utility Commission of Ohio just approved a compromise proposed by American Electric Power of Ohio that would require data centers with loads greater than 1 gigawatt and mobile data centers over 25 megawatts to commit to 10-year electric service contracts and pay minimum demand charges based on 85 percent of their contract capacity, up from 60 percent under the utility's current general service tariff. Another option included in the Texas legislation requires significant up-front payments early in the planning process and mandates that data center developers disclose where they may have simultaneously placed demands for power. It is not unusual for data center requests for service to be withdrawn once they decide on the best location and package of incentives. Data center developers have the financial capacity and ability to manage this risk, utilities do not.
Generating facilities that are co-located at large data centers should be integrated with the local utility electric grid, with appropriate cost allocation. Although a few projects have examined the option of a co-located power generation 'island' fully independent of the grid, most projects intend to interconnect with the grid system for back-up power and related purposes. Properly managed, this interconnection could be advantageous for both the data center and the utility system, provided that costs are appropriately allocated across the system.
The U.S. government should continue to support the development of nuclear technology, including small modular reactors. U.S. utilities do not have the financial resources to assume the risk of building new nuclear-powered generating facilities. The emergence of a new set of customers, data center developers with enormous needs for electric power and deep pockets, changes the equation. The U.S. government has provided billions of dollars of support for new nuclear technologies and should continue to do so for the purpose of bringing their costs down.
The U.S. government should continue to support energy efficiency improvements at data centers. Data centers use massive amounts of power for running servers, cooling systems, storage systems, networking equipment, backup systems, security systems and lighting. The National Renewable Energy Laboratory has developed a 'handbook' of measures that data centers can implement to reduce energy usage and achieve savings. In addition, there now are strong market forces to develop new super-efficient chips that will lower the unit costs of training and using AI models. The U.S. government should help accelerate the development of these chips given their leverage on U.S. electricity demand.
The stakes in this public policy debate over our energy future could not be higher. If we get these policies right, AI has the potential to remake the U.S. economy and the energy infrastructure of this country.
If we get it wrong, the push to build new generating and transmission facilities to provide gigawatts of power has the potential to overwhelm the financial and operational capacity our electric utility system, impose burdensome rate increases on homeowners and businesses, undercut efforts to reduce the use of fossil fuels to meet climate-related goals and compromise the reliability of our electricity grid for years to come.
David M. Klaus is a consultant on energy issues who served as deputy undersecretary of the U.S. Department of Energy during the Obama administration and as a political appointee to two other Democratic presidents. Mark MacCarthy is the author of 'Regulating Digital Industries' (Brookings, 2023), an adjunct professor at Georgetown University's Communication, Culture & Technology Program, a nonresident senior fellow at the Institute for Technology Law and Policy at Georgetown Law and a nonresident senior fellow at the Brookings Institution.
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