To handle data centers, the electricity system may need new rules. Here is a proposal

Inside Clean Energy by Dan Gearino

There are not many desirable options for accommodating the electricity needs of data centers.

And some of the possibilities are especially bad—bad for consumers, bad for the environment and even bad for data centers.

Alexandra Klass, a professor at the University of Michigan Law School, and Dave Owen, a professor at UC Law San Francisco, have been thinking about whether there’s a better way, and they wrote about it in an article forthcoming in the George Washington Law Review.

Their proposal calls for moving away from the idea that the grid needs to have enough power plant capacity to accommodate all users at all times, and instead take an approach in which data centers and other superusers are treated as a separate customer class with special rules and added flexibility.

The principles of this approach come from the way regulators and government officials have managed the supply of natural gas and Western U.S. water at times of scarcity. The specifics are complicated, but they boil down to the idea that data centers would need to be flexible with their electricity demand and could enter into contracts to trade electricity capacity with other businesses.

Data centers “are going to be disruptive,” Klass said in an interview this week. “The question is, is it going to be a positive disruption or a negative disruption?”

ICF, a research firm, stated in May that U.S. electricity demand is projected to increase by 25 percent from 2023 to 2030, and by 78 percent by 2050, with much of the growth tied to data centers. That’s a considerable increase, which contrasts with a prior period of more than a decade with almost no growth in demand.

When Klass and Owen see these kinds of forecasts, they worry that the country may be setting itself up for a harmful scenario: Utilities and regulators would go through a building boom for power plants to accommodate projections of rising demand, but demand doesn’t fully materialize and other consumers spend decades covering the costs of expensive, underutilized assets.

The growth of data centers, some of which provide the computing muscle for artificial intelligence, could upend the transition to cleaner energy sources. Even though many of the leading companies behind data centers—such as Apple, Google and Meta—have made commitments to use carbon-free electricity, their desire for rapid deployment often conflicts with efforts to limit carbon emissions.

“We have operated our electricity systems with the assumption that we needed to build enough capacity to meet demand at all times,” Owen said, during a video call that also included Klass. “That assumption has not always served us well in the past, and it’s really not looking like it's going to work for massive new data centers that might or might not be built, might or might not use all the electricity they say they're going to need, but could lead to very costly changes in transmission and generation. We don't need to do it that way.”

He has a background studying the laws for allocating water in Western states, and he thinks Southern California’s approach to managing water offers insight about what to do when demand exceeds supply.

The key point is that water providers in areas where water is scarce find ways to reduce usage when resources are low. Residents may complain about aspects of these rules, but the results are often pretty good considering the many challenges, Owen said.

Natural gas markets also provide inspiration for managing the grid and data centers, Klass said.

The main idea is that gas markets developed ways for large consumers to get a lower price if they agreed that their gas supply could be interrupted at times of high demand. Companies worked out contracts for gas supply and later for pipeline capacity to deliver the gas. This was made possible because of actions taken by Congress and federal regulators over several decades to deregulate gas markets.

In today’s electricity market, Klass suggests that regulators could adopt rules that say data centers can get connected to the grid more quickly if their owners are required to be flexible in their power usage. She thinks data centers are well-suited to operate flexibly because their owners are some of the world’s most sophisticated tech companies and electricity consumers.

Even a bit of flexibility could have substantial ramifications for reducing the need to build new power plants, as demonstrated by a variety of studies, including one I wrote about in February from researchers at Duke University.

There are glimmers of Klass’ and Owen’s ideas in action, including the decision by Ohio regulators in July to create a special rate category for data centers with rules designed to limit harmful effects on other customers.

In Nevada, Google entered an agreement with the utility NV Energy to supply its data centers with electricity from a geothermal power plant. This shows how a company with a commitment to reducing carbon emissions can negotiate a deal with a utility that could meet the needs of data centers without compromising its climate goals.

But for every encouraging sign, there are plenty that are discouraging, including utilities’ plans to rely heavily on natural gas power plants to accommodate data centers, which is expensive and bad for the climate. This is happening in Florida, North Carolina and other states.

Without changes in regulations, Owne said, the results could go like this:

“The data center boom doesn't turn out to be everything we thought it was going to be, or the technology gets more efficient, and we're left with this army of dirty white elephants,” he said, adding that consumers would be left to pay for “dirtier and more expensive energy.”