Data center construction is booming, and it could affect utility rates

A build-out of new data centers — the often-gargantuan warehouses of power-gobbling microchips that power cloud computing, artificial intelligence and social media — is capturing the attention of utilities and states, which, anticipating potential profits, are compelled to satisfy the energy needs of tech companies.

Giants like Amazon, Google, Meta and Microsoft are contracting nationally with utilities, which face a resulting boom in power demand. In 2023, data centers accounted for nearly 4.5% of U.S. electricity consumption, a figure that is expected to balloon up to 12% by 2028. 

Wisconsin has seen a handful of new data center proposals, including projects in Beaver Dam, Wisconsin Rapids, Port Washington and Kenosha. Microsoft broke ground in 2023 on a 450-megawatt, $3.3 billion campus in Mount Pleasant at the former Foxconn site, although work on the data center has since paused twice.

Utilities generally operate under state-granted monopolies that enable the companies to cover service costs and earn a return on their infrastructure investments. The public is a “captive ratepayer,” meaning they lack other options.  

Normally, this ensures utilities grow in line with societal energy demands, but when a few choice customers add significant load to the grid, priorities can change.

To attract investment, states compete to woo Big Tech with competitive incentives, including discounted power rates. More than 30 states, including Wisconsin, exempt data centers from the sales tax on information technology equipment.

But the courtship can become a race to the bottom.

Companies often promise billion-dollar investments, high-tech jobs and property tax revenue, marketed as zero-cost to states — arguing communities would be passed over if not for the incentives. 

Less discussed, however, are the impacts of the new electric loads and the ways utilities can spread energy costs to the public.

At worst, construction of new power facilities could prove unneeded if a data center project fails to come to fruition or its power needs change, potentially leaving the public to foot the bill.

Those are some of the issues discussed in a recent white paper produced by Harvard University researchers, who express skepticism that consumers won’t absorb data center energy costs. 

Ari Peskoe, who directs Harvard’s Electricity Law Initiative, and legal fellow Eliza Martin reviewed almost 50 utility proceedings, documenting how utilities can subsidize the electricity demands of trillion-dollar corporations and simultaneously capture a profit by passing on costs to ratepayers.

Wisconsin Watch environmental reporter Bennet Goldstein recently spoke to Peskoe. Their interview has been edited for length and clarity.

Where is the United States headed with respect to electricity use?

Our electricity use had been basically flat for the past 15 years, and now suddenly that’s projected to change pretty dramatically and pretty quickly. And it’s data center growth that’s really leading that charge.

These data centers are just massive, massive energy users. A single facility can use as much energy as a large city. There’s a facility in Louisiana that’s being built now that may be as much as two gigawatts. The city of New Orleans is one gigawatt. The rate-setting process just isn’t designed for these massive new facilities.

Can you describe the ways in which data center companies receive subsidies to site a project?

The simplest way that this can happen is just that the utility builds a piece of infrastructure — a new power line, a new power plant — and it’s designed primarily to meet the needs of one of these large data centers, and the utility would spread the costs across to all consumers. 

But we think that doesn’t really make sense when, in some cases, there are billions of dollars of infrastructure being built for a single wealthy consumer. Utilities benefit from it a lot.

Your paper noted that utility contracts with data centers are treated as confidential agreements, not subject to public evaluation. Why does this matter and what other trends did you notice in the proceedings you reviewed?

A rate case is how the utility sets rates for everyone, and that’s a very public process.

Most of the proceedings we looked at were about these, sort of, “side deals” between a data center and a utility. Very few parties participate in these proceedings, so that’s a problem for regulators because regulators have to make decisions based on the evidence that’s before them. Here, there’s often only one party. It’s the utility, and it makes it very hard for regulators to rule against the utility when there’s not any competing evidence.

In some states, regulators are supposed to evaluate, for example, whether there are economic development benefits of the contract that make it in the public interest even if it is shifting some costs to other ratepayers. In some states, regulators do have to find that their contract does not burden other ratepayers. 

These sorts of issues about cost allocation are generally heavily disputed when there are other parties participating, so we don’t put a lot of stock in the claims that these secret contracts are not burdening other ratepayers.

Are new data centers and accompanying infrastructure to power them good investments for the public?

When you hear one of these facilities being announced, sometimes they are being announced with great fanfare. Elected officials like to announce big projects. Some of these facilities get big press releases and press conferences, and the governor is up there smiling about it. 

But, there ought to be some mechanism to ensure that the potentially very expensive infrastructure being built for these facilities is not being paid for by the public, but by the data center. We can’t make a specific claim about a confidential deal, but we’re skeptical that these deals are not shifting costs.

They’re a bad deal for ratepayers, looking at electricity costs — not considering the wider societal effects of these facilities and the construction jobs.

What are alternatives that would spare customers these costs?

These confidential contracts: Let’s get rid of them. Let’s do a more public, transparent process that encourages and allows for more participation. Let’s include these data centers in rate cases and figure out what terms and conditions make sense for them.

Allow the data centers to contract for infrastructure with developers who are not the utility. You have companies that are not utilities competing in markets to build power plants to sell that power. If you can have a contract just between a data center and a power plant developer, the utility is not part of it, and therefore, there’s no danger that those costs might somehow trickle through to other consumers’ bills.

How can ratepayers advocate for themselves?

Public utility commissions do have some public processes, particularly for the construction of new projects. Even if that contract is secret, if they’re going to build a new power plant, there’s typically a public process around that. Those processes can often attract attention and have public hearings and opportunities for the public to weigh in.

How about creating special rates for very large customers like a recent southeast Wisconsin proposal from We Energies for “very large customers”?

It makes a lot of sense to establish separate terms and conditions for utility service for these very, very large energy consumers. It’s billions of dollars of costs, and it makes sense to put some contractual system or a tariff system in place that makes sure those entities are responsible for those costs. 

There’s a risk that the utility starts to build this infrastructure and potentially invest hundreds of millions, even billions of dollars. The market changes — as maybe we’re seeing right now — and suddenly that data center developer doesn’t want to complete their facility for any number of reasons. Now who’s going to be left bearing the billion-dollar cost that the utility just spent? You want to make sure it’s on the data center.

What does the construction of more data centers mean for curbing greenhouse gas emissions?

A lot of the new growth is going to be met by natural gas power plants. We’re seeing that in Louisiana, for example. A lot of states have strong clean energy goals. About 20 or so states have committed to 100% clean power by some future date. (Wisconsin’s goal: that all electricity consumed within the state be 100% carbon-free by 2050.) Those goals are premised on how much energy is going to be sold in that state. If there’s more energy sold, that means we have to build more clean energy to meet those goals. It’s already a challenge to meet the goals as it is.

This article first appeared on Wisconsin Watch and is republished here under a Creative Commons Attribution-NoDerivatives 4.0 International License.