Boom in AI data centers fuels a power struggle
Technology firms searching across the nation for electricity to fuel artificial intelligence are discovering an escalating backlog. In numerous regions, the nation’s high-voltage electric wires are reaching capacity, their connection points congested by data centers for artificial intelligence, emerging manufacturing facilities, or infrastructure for electric vehicle charging. A frantic scramble to secure accessible energy resources has commenced.
The technology sector is rapidly shifting between markets in search of locations capable of supporting campuses that would require up to a gigawatt of power—approximately the same amount consumed by San Francisco. Certain requests can be four to five times larger than that figure. However, the increasing congestion of wires has led to a situation where certain potential data center clients—who demand significantly more power than typical users—are being informed that they might have to postpone their power requirements until the next decade. Some individuals are obtaining a lower level of power than anticipated.
Salt Lake City has imposed a moratorium on requests for larger power allocations. The data center industry deems itself effectively out of operation. In Santa Clara, California, Silicon Valley Power, a key utility in the tech sector, has ceased accepting applications for electric service for new data centers. SVP has indicated that it is confronted with limitations in transmission and power generation that will remain unresolved until the early 2030s. In Virginia, the preeminent hub for data centers globally, Dominion Energy has announced a temporary power rationing for certain new facilities until the completion of new transmission lines, despite the utility’s ongoing addition of approximately 15 data centers annually.
The challenges of expansion are igniting disputes regarding the financing of potentially billions of dollars in grid enhancements. In central Ohio, the largest power line in the Midwest is projected to reach its transmission capacity limits by 2028. American Electric Power, the owner of the line, has put forward a proposal for a new, elevated electricity rate aimed at data centers and cryptocurrency miners, which would secure their status as customers for a period of ten years. The firms are hesitating. “The scale of infrastructure necessary to achieve that is substantial,” remarked Marc Reitter, president and chief operating officer of AEP Ohio. “Certainty is essential.”
Artificial intelligence represents a rapidly expanding area of expenditure for technology firms, which assert that they stand on the brink of the most significant surge since the advent of the internet, carrying profound implications for both national security and the broader economy. However, a query on a generative AI platform like ChatGPT can consume at least ten times more energy than a standard Google search. According to the Electric Power Research Institute, data centers may consume up to 9% of U.S. electricity by the year 2030.
The advent of AI coincides with various emerging pressures on the grid, including manufacturing facilities incentivized by tax measures under the Inflation Reduction Act, alongside a growing movement in certain states advocating for increased electric power to support transportation, heating, and heavy industry. This marks the first significant demand growth for the electricity sector in this century. Phoenix has emerged as a pivotal data center market and is currently experiencing a manufacturing surge. Arizona Public Service, a utility provider, has put forth a plan to construct or upgrade 800 miles of transmission lines over the next ten years, citing that its current transmission capacity will be fully utilized prior to 2030.
Transmission constraints represent the initial bottleneck that numerous utilities are highlighting, as such upgrades may require several years to implement. However, there are demands for increased power generation. Goldman Sachs projects that approximately 47 gigawatts of additional power generation capacity will be necessary to accommodate the growth in power demand from U.S. data centers by 2030. Fitch Ratings analysts caution that utilities may be prone to overestimating demand from data centers, potentially leading to overbuilding, due to the varied methodologies employed within the industry for forecasting future demand.
In Ohio, American Electric Power’s 765-kilovolt bulk transmission system serves as a robust foundation of dependable electricity, attracting a wave of new data centers. Electricity consumption in the region is projected to approximately double by 2028, a demand that AEP is well-positioned to meet. Following 2028, AEP reports an influx of data centers in New York City seeking grid connections. However, the challenge lies in distinguishing between genuine customers and those merely exploring various markets. It suspended new service requests from data centers over a year ago. AEP’s Reitter indicated that long-term contracts and elevated rates would safeguard customers, including homeowners and various businesses, should the technology firms decide to exit in the future.
Various enterprises are contesting the notion. The Ohio Manufacturers’ Association is advocating for a comprehensive study on transmission constraints and is opposed to the AEP request, arguing that it circumvents the standard rate-making process, which typically includes analyses of the costs associated with providing new services. In its regulatory submissions, Google contended that it has allocated $6.7 billion towards data centers in central Ohio. The company is urging state regulators to explore optimal strategies for managing growth and to address any adjustments to rates through a formal rate case. The Data Center Coalition, comprising members such as Google and other technology firms, proposed a minimum commitment of eight years, falling short of AEP’s decade-long request. The Ohio Consumers’ Counsel contends that residential customers ought not to bear the financial burden of utility investments aimed at supporting data centers run by multibillion and trillion-dollar corporations.
Akshat Kasliwal of PA Consulting Group, who provides counsel to technology and energy firms, noted that AEP faces a dilemma: it must allocate resources to transmission infrastructure to accommodate the expansion of data centers. However, should it impose elevated rates to recuperate that expenditure, data centers may seek alternatives post-investment, potentially leaving other clients to bear the consequences.
Other utilities are exploring strategies to protect customers from expensive grid investments that data centers may ultimately deem unnecessary. Xcel Energy experiences a peak demand of approximately 22 gigawatts throughout its multistate system, alongside about 6.7 gigawatts in new data center requests, predominantly located in Colorado and Minnesota. Executives assert that the system will require enhancements to transmission infrastructure and additional power generation capacity, alongside mechanisms to ensure equitable treatment for all customers. During an earnings call in August, Chief Financial Officer Brian Van Abel indicated that the company would explore options like “take-or-pay” contracts, which mandate that data centers pay for a minimum quantity of power irrespective of actual consumption.
Arizona Public Service evaluates the commitment of prospective large customers by imposing minimum billing thresholds designed to offset the expenses associated with necessary investments. “Certain customers might hesitate to engage in those commitments,” remarked Ted Geisler, president of APS, “which serves as a clear signal to us that they may not yet exhibit the same level of commitment as others.” Andy Cvengros, managing director at the real-estate services firm JLL, noted that utilities are becoming increasingly astute regarding speculative power requests from various stakeholders, including farmers situated along transmission lines and private-equity investors. Proposals often lack robust projects supported by committed tenants.
