Electricity rates across the country have increased by 30% since 2020 and are rising at twice the rate of inflation, particularly in areas with large data centers. In Virginia, Dominion Energy has petitioned to raise base rates by 15% over the next two years, with projections indicating a 50% increase in average residential utility bills by 2039 due to new data center openings. In Columbus, Ohio, residential rates are set to increase by $27 per month, and in Chicago, Commonwealth Edison is raising rates by 11%. Wholesale electricity costs have surged by as much as 267% in areas near data centers, which is being passed on to customers.
The data center boom is causing electric utility bills to rise for residential customers due to the unprecedented scale of power demand. Currently, there are as many as five data centers under construction in the U.S. that will consume at least one gigawatt (GW) of power, enough to power 750,000 homes. A proposed Meta data center in Louisiana will cover an area equal to 70 football fields, require a $3 billion upgrade to the region’s electricity infrastructure, and consume up to 2.2 GW of power. Data center developers are asking utilities to provide power within two to three years, a timeline that is highly challenging given the typical decade-long process for planning, permitting, and constructing new power plants and transmission lines.
The unprecedented increase in data center demand for electric power poses three significant challenges. First, the sheer magnitude of power required and its concentration in specific geographic locations make it difficult to manage and sustain. Bloomberg projected that U.S. power demand from data centers might grow fourfold by 2032. The International Energy Administration estimated that data center demand for energy in the U.S. will increase from 180 terawatt-hours (TWh) in 2024 to 420 TWh by 2030, a 130% increase. A Wood Mackenzie report identified 64 gigawatts of confirmed data-center-related power projects, with another 132 gigawatts potentially to be developed, enough to power 56 million homes.
Second, the timing of data center developer demand for power is inconsistent with the pace at which utilities can supply it. Data center developers are asking for power to be delivered in two to three years, while the construction of new large generating and transmission facilities typically takes eight to 10 years. For example, OpenAI’s Stargate initiative aims to construct data centers devoted to AI over the next four years at a cost of $500 billion, with the first data center complex planned to be completed by mid-2026 with a capacity of 1.2 gigawatts of power.
Third, the demand for electric power is challenging due to its uncertainty. Utilities see a massive opportunity in AI but realize that many proposed data-center projects will never be built. Developers are simultaneously filing power demands with multiple utilities as they negotiate for tax and other incentives, leading to a potential for utilities to be stuck with cancelled projects. There is also speculation that the AI boom could be an economic bubble that has the potential to burst, with ripple effects across the U.S. economy. Additionally, utilities are constructing large and expensive gas-generating plants that typically operate for 30 years to supply data centers that have 10- or 15-year contracts to purchase that power.
Separate Tariff Structure for Data Center Users
To protect non-data center ratepayers from massive electric rate increases, utilities need to establish a separate tariff structure for data center users. Currently, the costs for new power plants and transmission, including the wires to the data centers’ buildings, are paid for collectively by all customers of the respective host utilities. A new separate tariff paid for by data center users would address this problem by incorporating and isolating the costs associated with serving data centers, including new generating facilities, high-power transmission links, and necessary upgrades to the distribution infrastructure. Non-data center residential and business consumers would pay rates based upon a separate tariff that does not include the costs associated with the growth in data-center-related power consumption.
Data center developers are turning to natural gas generating facilities because they are faster to build and easier to locate than other types of energy generation facilities. For example, Entergy, a Louisiana-based utility, will spend $3.2 billion to construct three gas plants totaling 2.3 GW to serve Meta’s new $10 billion AI data center program. However, the cost of new combined cycle gas-generating facilities is the highest by megawatt-hour ($115 to $221 per MWh) compared to other utility-scale alternatives. These gas-generating facilities cost more than double utility-scale solar ($24 to $96 per MWh), onshore wind ($24 to $75 per MWh), offshore wind ($72 to $140 per MWh), nuclear ($141 to $221 per MWh), and coal ($68 to $166 per MWh). The price of natural gas necessary to operate these plants is also on the rise, reflecting the cost of upgrading natural gas pipelines and increased demand.
Transmission lines are a second major cost of serving data centers that are currently paid for by all users of the system. The Union of Concerned Scientists estimated $4.3 billion of utility costs in 2024 alone to extend existing transmission lines to serve data centers, with many costing between $25 million and $100 million. Substations are another cost of expanding the grid to serve data centers. Dominion Energy, which historically built about two new substations a year, currently has 50 under construction to accommodate its 53 discrete data center customers in northern Virginia. These transmission-related costs are key drivers behind Dominion Energy’s petition to raise base rates by 15% over the next two years and the projected 50% increase in average residential bills by 2039.
Rather than provide data centers with discounted “industrial” rates for electricity as a location incentive, state regulatory commissions need to structure separate tariffs for large data center users that fully reflect the generation, transmission, and related costs of providing the service.
Protecting Utilities from Financial Risk
In addition to establishing separate tariff structures for data center users, policymakers need to consider a range of options to protect utilities from the financial risk related to the uncertainty of data center demand. One option would be to require data center users to prepay or frontload the costs for the infrastructure they require. Utilities do not have the resources necessary to finance upfront the $1.4 trillion cost of building the data-center-related generation and transmission infrastructure that will be required by 2030. Unlike utilities, data center developers have the balance sheets and economic incentives to finance this new generating and transmission capacity. Instead of raising rates on all utility users, these costs can be factored into the cost of AI services to be provided, and the competitive need to build new data centers as quickly as possible provides the economic incentive for tech companies to pay the cost and assume the risk that comes with a new technology.
Financial Risk for Utilities
The financial risk for utilities includes the likelihood that some of the companies seeking energy to power their data centers will not succeed and so will be unable to pay ongoing costs of the facilities constructed to meet their demand. This means other policy measures beyond separate tariffs and upfront capital contributions by developers will be needed to insulate utilities and residential ratepayers from the uncertainty risk associated with data center development. Additional measures can include the use of take-or-pay contracts and long-term commitments.
Examples of Successful Policies
For example, the Public Utilities Commission of Ohio approved a compromise tariff proposed by American Electric Power (AEP) that would require data centers with loads over one GW and mobile data centers over 25 MW to commit to 10-year electric service contracts and pay minimum demand charges based on 85% of their contract capacity. 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. While it is customary to spread the cost of new facilities across the user base of a utility, Texas legislators determined that the demands data center developers are placing on utility systems across the country are sufficiently extraordinary to justify tariffs that fully allocate the costs of new facilities to those developers. A similar effort is underway in Virginia, which has already seen the start of residential rate increases because of data center development. One new initiative is to require data centers to pay the full cost of new distribution infrastructure, including substations and transmission lines, within the first four years of service.
Protecting Residential and Non-Data Center Customers
It is crucial to understand the driving forces behind the unprecedented increase in demand for electric power. More importantly, policymakers and regulators at the federal, state, and local levels need to figure out how to protect residential and other non-data center customers from footing the bill on behalf of the world’s richest corporations. Ohio, Texas, and Virginia are among the leaders in establishing policies designed to protect non-data center consumers. However, most jurisdictions are only at the start of this process, and much needs to be done.
