Who Pays for Data Centers’ Power Needs? It’s a Growing Challenge for States
The amount of electricity data centers use in the U.S. in the coming years is expected to be significant. But regular reports of proposals for new ones and cancellations of planned ones mean that it’s arduous to know exactly how many data centers will actually be built and how much electricity might be required to run them.
As a researcher of energy policy who has studied the cost challenges associated with new utility infrastructure, I know that uncertainty comes with a cost. In the electricity sector, it is the challenge of state utility regulators to decide who pays what shares of the costs associated with generating and serving these types of operations, sometimes broadly called “large load centers.”
States are exploring different approaches, each with strengths, weaknesses and potential drawbacks.
A new type of customer?
For years, large electricity customers such as textile mills and refineries have used enough electricity to power a small city.
Moreover,their construction timelines were more aligned with the advancement time of new electricity infrastructure. If a company wanted to build a new textile mill and the utility needed to build a new gas-fired power plant to serve it,the construction on both could start around the same time. Both could be ready in two and a half to three years, and the textile mill could start paying for the costs necesary to serve it.
Modern data centers use a similar amount of electricity but can be built in nine to 12 months. To meet that projected demand,construction of a new gas-fired power plant,or a solar farm with battery storage,must begin a year – maybe two – before the data center breaks ground.
During the time spent building the electrical supply, computing technology advances, including both the capabilities and the efficiency of the kinds of calculations artificial intelligence systems require. Both factors affect how much electricity these facilities ultimately consume.
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Data Centers and the Risk to Electricity Consumers
Published: 2025/12/15 17:30:10
The Growing Demand for Power
The rapid growth of artificial intelligence (AI) is fueling a massive increase in demand for data centers. These facilities, which house the computers that power AI and cloud computing, require enormous amounts of electricity. This surge in demand is creating challenges for power companies and, potentially, for electricity consumers.
The Scale of the Problem
Data centers are not just large energy consumers; they are growing rapidly.New data centers are being proposed and built across the country, notably in states like Ohio, Texas, and North Carolina. this growth is outpacing the ability of power grids to adapt, leading to concerns about reliability and affordability.
Ohio’s ‘Demand Ratchet’ and Credit Guarantee
In ohio, the major power company AEP has a unique mechanism called a “demand ratchet.” This system allows AEP to charge all customers for the peak power demand, even if that demand is driven by a few large users like data centers. AEP is also seeking a credit guarantee from the state, essentially asking taxpayers to cover the cost if a data center doesn’t materialize or uses less power than projected. This is a significant risk transfer from the company to consumers.
How the Demand Ratchet Works
The demand ratchet works by setting a baseline for peak demand. If a new large user, like a data center, causes peak demand to exceed that baseline, all customers will pay higher rates for a period of years, even if their own usage doesn’t change. This means residential and small business customers could be subsidizing the power needs of large tech companies.
The Risks to Consumers
The core issue is that utilities are being asked to invest heavily in infrastructure to support data centers, but the financial risk isn’t solely borne by the data center companies. If a data center project falls through, or if it doesn’t consume as much power as anticipated, regular electricity consumers could be left footing the bill. This is particularly concerning because utilities often bill data center companies based on actual usage, not projected usage.
Potential Consequences
- Higher Electricity Bills: Consumers could see a significant increase in their monthly electricity bills due to the demand ratchet and infrastructure investments.
- Reduced Grid Reliability: If investments aren’t made strategically, the grid could become less reliable, leading to more frequent outages.
- Unfair Burden: Regular consumers are effectively subsidizing the growth of a highly profitable industry.
What
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