How will building a Data Center affect utility rates?

Bottom Line Up Front

 

The evidence strongly indicates that, without proper safeguards, data centers typically raise rates for existing customers, while tech companies often receive favorable terms.

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How Data Centers Drive Up Rates

 

Cost Shifting to Ratepayers 

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Data centers are driving dramatic rate increases across the country, with residential rates in some areas climbing 8 cents per kilowatt-hour, compared to just 2 cents for large users, over the past decade, even though nearly all load growth has come from commercial customers. In Maryland, utility customers saw a 20% rate jump from August to September as data center costs were embedded in electricity supply charges rather than appearing as line items.

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Infrastructure Costs 

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Analysis shows $4.3 billion in costs for just seven states in 2024 related to data center grid connections, spread to all utility customers, even though the infrastructure primarily serves data centers. In PJM's territory, $5.1 billion in transmission costs have been proposed to support data center growth in Northern Virginia, with Maryland ratepayers expected to pay $551 million for upgrades primarily serving Virginia-based facilities.

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Capacity Market Impacts

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In the PJM capacity auction, data centers were responsible for 63% of the 800% price increase, adding $9.3 billion in costs that are passed on to consumers. Wholesale electricity costs are 267% higher than they were five years ago in areas near data centers.

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Why Will Utility Rates for Other Customers Increase?

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Outdated Rate Structures

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The utility business model, designed over 100 years ago to spread electricity service, socializes infrastructure costs to all ratepayers who have no choice but to take that utility's service. Current utility rate structures are not designed to account for sudden, significant cost increases from the construction of new infrastructure to serve a relatively small number of huge customers.

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Hidden Costs

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Higher costs for customers don't show up as line items on bills but are tucked into electricity supply charges, making them less visible.

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Mitigation Strategies Being Implemented

 

New Rate Structures Several utilities are implementing specific tariffs for data centers:

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• Dominion Energy has proposed a dedicated rate category for customers ≥25 MW with minimum demand charges covering 85% of contracted capacity and 14-year commitments

• Requirements include exit fees, collateral of $1.5M per MW of contracted capacity, and minimum contract durations

• Indiana's updated industrial tariff requires strict rules for customers with 70 MW at a single site, including upfront financial commitments.

 

Legislative Actions

 

Oregon passed the POWER Act, designed to help utilities strike fairer deals with data centers and crypto miners. California's SB 57 proposes special rate structures that require data centers to prepay for anticipated energy consumption.

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Potential Benefits (Under Specific Conditions)

 

Suppose utilities have spare capacity and can serve new data centers without major infrastructure investments. In that case, the additional load can spread fixed costs across more users, potentially creating downward pressure on rates. However, most utilities that had spare capacity are now running into capacity constraints, requiring new investments that increase costs.

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Key Concerns for Communities

 

Stranded Asset Risk: If expected energy demand from data centers doesn't materialize or is drawn from the system earlier than anticipated, consumers could be stuck with excess costs from overbuilt, unnecessary, or underutilized infrastructure.

Environmental Impacts Plans to expand natural gas generation and delay coal plant retirement to support data center demand could lock in greenhouse gas emissions for decades.

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