'More Skin In The Game': 2 Power Utilities Want Data Centers To Foot The Bill For Billions In Grid Upgrades

Electric utilities across the U.S. have been spending billions to keep up with skyrocketing energy demand from data centers. Now, two of the country’s largest power providers are taking steps to ensure data center operators pay their fair share.

AEP Ohio and North Carolina-based Duke Energy this month have both proposed new electricity supply contract terms specifically for data centers.

The proposals are designed to ensure that homeowners and other ratepayers don’t get stuck holding the tab for billions of dollars in new transmission infrastructure and power plants being built to meet surging demand from data centers.

These proposed agreement structures, the first of their kind, reflect the significant risks faced by power providers contending with ballooning pipelines of demand from new data center projects amid an artificial intelligence-driven digital infrastructure boom.

Utilities have become increasingly concerned about a potential risk — that they could launch massive capital projects to deliver power to speculative data center developments that are never actually built or purchase far less power than anticipated. This outcome would drive up power prices for other customers.

To mitigate this risk, the contract terms proposed by Duke and AEP Ohio would require that data center customers pay for nearly all of their allotted power whether they use it or not. And they include other measures to ensure that the utilities are only investing in supplying power to customers who will actually use it. 

“The recent growth of data center load in AEP Ohio’s service territory is an unprecedented phenomenon,” said Matt McKenzie, AEP Ohio’s vice president of regulatory and finance, in testimony to Ohio regulators this month. “This new transmission investment to support data centers should not begin without assurances that the new data center customers will follow through with their plans.”

Like many utilities throughout the U.S., Duke Energy and AEP Ohio were caught off guard over the last year as data centers led a dramatic upsurge in requests for new connections to the power grid.

Duke, which controls more than 50,000 megawatts of total capacity, expects to provide 18,000 additional gigawatt hours for new customers by 2028, with data centers alone accounting for a quarter of that new demand.  

AEP Ohio has seen a record spike in power consumption and connection requests from emerging data center hubs near Columbus. The utility already has 5,000 megawatts of future power deliveries under contract through 2030, but now it has 30,000 megawatts of new service requests from a range of data center operators. These requests, if fulfilled, would raise the Columbus area’s electricity consumption to that of New York City, according to Business Insider. 

The issue isn't just that more data centers are being built, but that each data center now uses far more power than ever before.

While Duke Energy’s connection requests from data centers were typically between 300 and 400 megawatts, data centers are now routinely looking for between 700 megawatts and 2 gigawatts, roughly double the amount of power produced by a nuclear power plant. 

Utilities are scrambling to expand grid capacity fast enough to keep up with this unexpected demand growth, ramping up capital expenditures to build new transmission lines, substations and power generation facilities. Duke Energy indicated in February that it was adding an additional $8B to its estimated Capex in 2024, a 12% jump from its estimates just a quarter earlier. 

But there is concern that at least some of the demand driving this spending could be a mirage. 

Utility executives believe that many of the requests for power in their pipelines from data center developers are speculative, with a likelihood that some proposed campuses will never come to fruition or will use just a small fraction of the power that is being requested. Indeed, many data center in operation today use less than 60% of the grid capacity they are allotted. 

There is a risk that utilities could devote significant resources toward developing new transmission infrastructure to supply gigawatts of power for a data center campus, only to have that project canceled or dramatically scaled back. With no buyer for the electricity this new infrastructure was built to deliver, the cost of developing this now “stranded” grid capacity would fall to the utility’s other ratepayers, driving up retail electricity prices. 

“If billions of dollars of new transmission investment were built for data centers but not fully used, this would harm AEP Ohio’s other customers through higher rates,” AEP Ohio’s McKenzie told regulators. 

The new data center tariff structures from both Duke Energy and AEP Ohio are designed to prevent exactly this situation. 

Both utilities are looking to implement “minimum take” clauses, which would require data centers to pay for the vast majority of the power they are allotted regardless of whether they actually consume it. AEP’s proposed contracts would mandate that data centers purchase 90% of their allotted power and commit to at least ten years in the utility’s service territory, with a significant exit fee if contract is breached. 

In addition to minimum purchase requirements for data centers and other large industrial customers, Duke Energy is also considering contracts that would require data center operators to make upfront payments to help fund new power infrastructure projects, Reuters reports. 

Executives at both firms say these new tariffs would ensure that they are only signing contracts with data center firms that are likely to deliver a return on the utility’s investment. 

“AEP Ohio’s proposed data center tariffs will require data centers to make long-term financial commitments, to have more skin in the game, to mitigate the risk that transmission infrastructure will be built for data centers but not needed,” McKenzie said. 

It remains to be seen when, or if, these new contract structures will be implemented. AEP Ohio needs the state’s Public Utilities Commission to approve its data center tariff, and it submitted its initial filings with the regulator earlier this month. Duke Energy has been pursuing these contract terms in negotiation with data center customers directly since the start of the year, but the company has yet to sign any new data center customers in 2024, according to Reuters. 

There is a possibility that data center firms might steer clear of the service territories of utilities with these kinds of contract requirements. Relationships with power providers play a growing role in data center site selection, with some of the largest data center campuses in development today spearheaded by utilities. 

But Duke Energy Chief Financial Officer Brian Savoy says he doesn't see these new targeted tariffs pushing data centers elsewhere. Data center growth is pushing regional power grids to the brink, Savoy told Reuters, and developers now recognize that the old way of doing things just isn’t going to work.

 "A few years ago, I would say these concepts weren't embraced by data centers or large loads because the power supply was more plentiful," Savoy said. "Now, with a constrained power supply, they understand this is what it's going to take to get in the game."