Data Center Politics Get Messy. Billions in Tech Investments Are on the Line.

*** ONE-TIME USE *** In an aerial view, high voltage power lines run along the electrical power grid on May 16, 2024, in West Palm Beach, Florida. (Joe Raedle/Getty Images)

Key Points

• Artificial intelligence data centers are causing electricity prices to rise for nearby communities, creating regulatory challenges.
• PJM, a major electricity grid operator, expects 30 gigawatts of new peak demand from data centers between 2024 and 2030.
• Proposals to regulate new data centers failed to achieve a two-thirds majority vote, leaving PJM’s board with mixed guidance.

The nation’s biggest economic engine—artificial intelligence—is linked to one of its biggest economic anxieties—rising electricity prices.

AI data centers use so much electricity that they’re causing prices to rise for nearby communities. That is creating headaches for regulators who want to encourage companies to build AI data centers without saddling normal consumers with higher utility bills.

Nowhere was that tension more evident this week than at a meeting on data centers by PJM, the nation’s largest electricity grid operator. PJM, a nonprofit, sets rules on how to connect resources to the grid and manage transmission for 13 states and Washington, D.C., covering more than 65 million customers. Its coverage area includes some of the world’s largest data center markets, including Virginia and Pennsylvania. Decisions that PJM makes about who pays for growing electricity needs will have a major impact on tech companies like Microsoft, power producers like Constellation Energy, and consumers.

In August, PJM asked for proposals on how to regulate new data centers so they don’t hurt grid reliability or cause costs to shoot up even more than they already have. Some residents in the region have seen their power prices rise by more than 20% in the past year, partially due to data centers’ power needs. Rising electricity prices are one reason data centers are facing a growing wave of local opposition, which has delayed or scuttled tens of billions of dollars worth of projects.

Things will only get tougher from here. PJM expects there will be 32 gigawatts of new peak demand added in its jurisdiction between 2024 and 2030, with 30 of those gigawatts due to data centers. A gigawatt is roughly the capacity of a large nuclear reactor.

On Wednesday, PJM’s hundreds of members—including electricity-generators and users—had a chance to vote on 12 of those proposals. To “pass” and be officially recommended to PJM’s board, the proposals needed a two-thirds majority. None of them got it, and the voting results sent a very mixed message, according to one academic who was involved in the process. The top proposals were “radically different,” said Abe Silverman, a research scholar at Johns Hopkins who worked on a proposal that wasn’t one of the top vote-getters.

“We’re talking about billions of dollars on the line [for consumers and data centers], and whether PJM continues to hook up data centers even if it reduces reliability for the region,” Silverman said. “That is literally on the ballot right now.”

Among the most popular proposals was one backed by governors including Pennsylvania’s Josh Shapiro and Maryland’s Wes Moore, along with utilities Exelon and PPL and the business trade group Data Center Coalition. It would offer expedited approvals for data centers that were willing to arrange for their own electricity generation, such as natural gas turbines. Silverman considers this a “carrot” approach that looks to reward operators that take strain off the grid.

Another proposal that got significant support was from PJM’s market monitor, an independent organization that oversees the nonprofit to ensure reliability and fair competition. The monitor’s proposal took more of a “stick” approach, Silverman noted. It recommended “that new data center load be required to bring their own new generation.” It also floated the idea that data centers could be temporarily forced off of grid power in the event that the grid was strained—such as on extremely hot days when people are using air conditioning.

These PJM proposals weren’t expected to result in binding commitments—they are advisory opinions for PJM’s nine-member board of managers, which will make a final decision and present their proposal to their federal regulator, the Federal Energy Regulatory Commission. But the fact that none of the proposals passed means the board has a consequential decision to make over the next few weeks, with very mixed guidance from its members.

“It’s really not clear what the members are trying to tell you,” Silverman said.

The method PJM uses to deal with data centers could serve as a model for much of the country, Silverman says. It will be important for the economic fortunes of tech companies—and hundreds of millions of people.

Write to Avi Salzman at avi.salzman@barrons.com