Data Center Electricity Costs Face Scrutiny Over Fair Share

The escalating electricity needs of large data centers across the United States are creating considerable cost burdens for existing ratepayers. Despite pledges from major tech companies to cover their share, consumers are concerned about potential price hikes due to the complex methods used to calculate the cost of energy for these facilities.

A recent report from the PJM market, covering 14 mid-Atlantic and Midwest states, indicated that expected data center power demand could be a primary driver of $23 billion in customer price increases lasting until at least 2028. The core issue lies in determining how the costs of grid upgrades and new energy sources necessitated by data centers are allocated.

Electricity pricing is intricate. Regulators must identify utility costs, allocate them to customer groups like residential, commercial, and industrial, and then set rates to recover these expenses. Costs are ideally allocated to the customers causing them, but when investments like substation upgrades benefit the entire grid, these costs often become shared among all users.

Data centers can potentially exploit pricing mechanisms, particularly those based on "coincident peak demand"—when all customers collectively use the most electricity. Due to their ability to finely tune consumption, data centers may be able to reduce their usage during peak times, thereby avoiding a proportional share of costs associated with peak load management, even if their overall energy consumption is substantial.

While utility companies and large customer groups, including data centers, submit proposals for cost allocation, ensuring the voices of residential customers are adequately represented is a challenge. State consumer advocates aim to represent all customers but may be legally barred from advocating for outcomes that disproportionately favor one group over another, leaving ordinary ratepayers vulnerable to cost increases.