Who Should Fund Rapid Electricity for Data Centers?
The energy demands of data centers in the U.S. are projected to rise significantly in the coming years. Current trends show a mixture of new proposals and cancellations, creating uncertainty about how many data centers will be constructed and the electricity they will require.
Who Should Fund Rapid Electricity for Data Centers?
As a researcher in energy policy, I recognize that uncertainty adds hidden costs. In the electricity sector, state utility regulators face the challenge of determining who should bear the costs associated with large electricity consumers, often termed “large load centers.” Different states are exploring various solutions, each with its own advantages and drawbacks.
Challenges with Data Center Electricity Demand
Historically, large consumers like textile mills utilized substantial electricity, with construction timelines synced to new power plant developments. However, modern data centers can be constructed in a mere nine to twelve months. In contrast, utility infrastructure may take one to two years to develop ahead of a data center’s opening.
This discrepancy poses challenges. Rapid advancements in technology may alter electricity consumption rates before data centers are operational. Consequently, utilities face uncertainty in the necessary capacity to be built.
The Financial Implications of Uncertainty
The financial risks stemming from this uncertainty are significant. If a power plant is constructed prematurely, it might lead to excess capacity. Conversely, a new data center could emerge, intensifying competition for available electricity without adequate supply.
- Utilities may bear the costs of new infrastructure.
- Data center clients may be held accountable for additional capacity.
- Existing customers could face increasing electricity costs.
Regulatory Approaches Across States
States are adopting varied regulatory strategies to address these challenges. For instance, Kentucky is conditionally approving new natural gas generators. Utilities in this state must prove the necessity and utilization of these plants, presenting difficulty given time lags and uncertainty in demand.
In Ohio, the power company AEP employs a unique rate plan for data centers. This “demand ratchet” adjusts monthly bills based on either current demand or 85% of the highest demand from the past year, protecting utilities against unpredictable consumption.
Florida’s utilities implement stringent agreements requiring data centers to cover a significant portion of their anticipated consumption, ensuring financial stability regardless of their actual usage.
Flexibility and Risk Mitigation
The adaptability of data centers in managing their electricity usage presents an opportunity. If these facilities generate profits from this flexibility, a portion can be distributed to other customers who share the associated risks. Missouri’s emerging mechanism returns 65% of excess revenue from large customers to the wider customer base.
The electricity system in the U.S. is undergoing change. While the strategies for allocating costs vary from state to state, understanding each method’s strengths and weaknesses is crucial. This insight will help in creating a fair system for all stakeholders involved.
