Riding the High From Data Centers, the Grid Cannot Kick Its Gas Habit

Every three months, Jon Rea gets an up-close look at the possible future of the grid, and lately he’s seeing a lot more natural gas.

Rea, a senior associate with the nonprofit RMI, analyzes the latest plans put out by U.S. electricity utilities for meeting projected demand over the coming decades. 

His most recent review of all 128 plans found that utilities were looking to build twice as much natural gas capacity as they had anticipated just 18 months earlier.

The main reason for this shift: Utilities are rushing to accommodate the electricity needs of data centers, and projections of those needs keep rising. It’s a troubling trend for anyone concerned about the costs for ratepayers and the effects on the climate.

“Utilities that have updated their plans since the end of 2023 have added just a small amount of wind and solar capacity, 4 gigawatts, but a lot more gas capacity, 52 gigawatts,” said Rea, whose organization seeks to accelerate the energy transition. 

At first glance, utilities’ long-term plans seem to favor renewables overall, projecting wind and solar growth of 258 gigawatts versus natural gas additions of 102 gigawatts through 2035. But a closer look reveals the shift. 

Just one year back, these plans showed wind and solar could overtake natural gas as the nation’s biggest source of electricity generation by 2035. At the new rate, gas would keep reigning. 

AI Boosts Demand

U.S. tech giants are betting big on an AI future, but the power grid is still a relic of the past. 

Data centers—essentially warehouses for computers that form the backbone of the internet—are multiplying as companies add power-hungry servers for artificial intelligence. Some existing sites use as much energy as a small city, and new ones are even bigger.

As a result, data centers, which used less than 2 percent of total U.S. electricity prior to 2018, consumed 4.4 percent in 2023 and are on track to make up anywhere between 6.7 and 12 percent by 2028. That’s according to a congressionally mandated report by the Lawrence Berkeley National Laboratory last year.

After nearly two decades of flat demand, the power grid—much of it running on equipment that is over half a century old—is scrambling to keep up. 

“It was designed to accommodate big central power plants that sent electricity in one direction down the lines to the customers,” said Todd Olinsky-Paul, senior director of the Clean Energy Group’s Resilient Power Project. 

It was not built for a system that has much more rooftop solar and home-based batteries, with electricity going to and from the customer.

Energy companies and regulators have been working for years to modernize the grid and move toward cleaner sources of energy. But when faced with a rapid increase in electricity demand, ambitions of just a few years have faded in favor of plans to rely heavily on new natural gas power plants—with everyone bearing the costs, from higher electricity bills to harmful climate impacts.

Resorting to Natural Gas

Experts say that utilities are leaning extensively on gas due in part to the inertia of existing regulatory processes and a tendency of the power sector to hype its demand outlook.

When utilities want to raise rates, they almost always have to make their case in public proceedings before a state commission. In most states, the regulator-approved rate hikes only account for the fixed costs of building new infrastructure, including plants and power lines. The fluctuating cost of the fuel that goes into running those plants is passed through to consumers on a rolling basis year after year. 

“Often the fuel price risk is ignored, probably intentionally ignored, by utilities when they speak with their regulators,” said Rob Gramlich, president of Grid Strategies, a D.C.-based consultancy focused on transmission and power markets. 

Gramlich, who testified before a Senate committee in July about rising electric demand, previously worked with a Republican chairman of the federal energy regulator as well as with the country’s biggest grid operator, PJM Interconnection. 

Among the reasons for utilities to favor gas is the rate-setting process, which makes it more profitable for utilities to opt for power plants in their territory rather than contracting for renewables, Gramlich said. 

“Renewables have been a little bit less attractive because often they’re in a neighboring service territory or spread around the region,” he said, and “they’re usually developed and owned by independent power producers.” 

Utilities also like to err on the side of caution. To avoid blackouts, they prefer to build more rather than less, which shows up in their off-the-charts projections. Since 2006, their 10-year growth forecasts have overshot reality by 17 percent on average, according to an RMI analysis. 

That saddles customers with the bill for unneeded facilities. And it’s a particular risk in the current fast-changing environment.

Utilities are preparing to meet a 24 percent increase in electricity demand by 2035, according to another RMI analysis. 

Jeremy Ortiz, a spokesperson for the Edison Electric Institute, a utility trade group, said in a statement, “Our members are investing more than $1.1 trillion in infrastructure projects nationwide over the next 5 years to help keep costs as low as possible for families and businesses while enabling the innovation America needs to win the AI race.”

Without regulatory changes, the costs will be effectively socialized across the customer base even though much of the growth is coming from one kind of customer—data centers.

“The typical rate-making structures are not set up for this because typically electrical infrastructure—generation, transmission, distribution lines—is paid for by the entire customer base, which is a reasonable assumption when you assume that everything is growing in a similar way,” said Cathy Kunkel, a North America energy consultant with the Institute for Energy Economics and Financial Analysis. 

But today’s growth is coming from some of the world’s largest corporations, which are sparing no expense to win the AI arms race.

“Because the data centers are so enormous,” Kunkel said, “it’s a different paradigm.”

While this is playing out around the country, the most acute impacts are regionally concentrated. Northern Virginia is the world’s largest hub of data centers—and the utility that serves them, Dominion Energy, raised its capital expenditure by a fifth to $12 billion last year, the largest jump for any investor-owned electric utility in the nation. 

Soaring electricity prices in Virginia, and throughout the wider Mid-Atlantic region, have been attributed in large part to data centers. 

As Virginia strains to accommodate that growth, “we’re seeing data center companies right now seek out anywhere that they see perceived headroom or ability to power their load throughout the country,” said Lauren Shwisberg, a principal at RMI’s Carbon-Free Electricity Practice. 

Against this backdrop, many other states are courting data centers and their tax revenue, following in Virginia’s footsteps. 

But data centers don’t produce a lot of permanent local jobs, and they “may be effectively crowding out other forms of economic development” by siphoning large portions of the region’s available electricity away from other types of industrial and manufacturing investments, Kunkel noted.

Meanwhile, sparse information disclosed by data-center developers—and the speculative nature of many proposals on the cutting edge of tech—makes it harder to effectively plan the grid of the near future.

“It is worrisome that we’re going to end up overbuilding generation, particularly overbuilding fossil-fuel generation, which no one wants to see,” Kunkel said.

Blow to Clean Energy

Clean energy is literally waiting in line to help the grid out—and waiting, and waiting. 

Another report from Lawrence Berkeley National Laboratory last year found that 95 percent of energy projects queued up at the end of 2023 for permission from grid operators to get connected were either solar, batteries or wind. The report noted that wait times are rising, from less than two years for projects completed in 2008 to nearly five years for those finished in 2023. Historically, just about one in five projects in the queue get completed. 

With all these projects in the pipeline, “we can meet the vast majority of the requirements for many of these data centers with pretty close to exclusively clean energy, if we had both the political apparatus and will to be able to do so,” said Jeremy Fisher, principal advisor on climate and energy with the Sierra Club’s environmental law program, who co-authored a report last September about leveraging growing electric demand for a cleaner grid.

At a federal level, with a president who has made no secret of his disdain for renewables, the will is now entirely absent. 

“The cancellation of permits, the difficulty of getting federal permits and the uncertainty and loss of tax credits are all very likely to reduce renewable energy growth in the next few years,” Grid Strategies’ Gramlich said, referring to Trump administration moves to discourage wind and solar. All of that compounds the effects of burgeoning demand, he said, “making clean energy targets more difficult to meet in a number of places.”

Take Virginia’s example. The state passed the Virginia Clean Economy Act in 2020, setting staggered targets, under financial penalty, for investor-owned utilities to keep raising the share of carbon-free electricity in their statewide power sales, topping out at 100 percent in 2045 for Dominion. 

But Dominion’s long-term planning indicates that it might miss those targets. In 2023, its modeling showed it might not meet the statutory requirement to retire all carbon-emitting power generation by 2045, citing “an increasing load forecast.” Last year’s plan said it was getting ready to collect fines for some of the years through 2040 when it expects to fall short of the targets. Those fines would pass to customers.

Dominion did not respond to requests for comment.

Even if compliance with the law was possible and compatible with high levels of data center growth, it would require “unprecedented investment in an ‘all-of-the-above’ strategy” on energy. That was the finding of a study released in December by the state legislature’s Joint Legislative Audit and Review Commission, which also said the state’s current regulatory practices “were not designed to account for this level and continued pace of large load growth from essentially a single customer type.”

In neighboring North Carolina, where data center construction is exploding, the Republican-led state legislature last month dropped a 2030 deadline for utility Duke Energy to slash its carbon emissions by 70 percent. 

Risks to Consumers

Already, utility bills are rising as climate change drives more extreme weather and grid hardening costs. Deepening dependence on gas further piles on risks for ratepayers, and not only because gas worsens climate change. 

“When [gas prices] spike, that’s an instant rate increase outside the rate-case process that flows directly to your bill,” said Ted Thomas, founder of consultancy Energize Strategies and former chair of the Arkansas Public Service Commission. “If you’re a regulator, your consumers are twisting in the wind if they’re just sitting there eating those costs on both electricity and natural-gas home heating.”

Then there’s the possibility of the political pendulum swinging back. Make energy investment decisions assuming the current federal policy environment won’t change, and “you’re probably going to get hammered,” Thomas said.

“The people that think the only reason to do renewables is environmental, they get it wrong,” Thomas said. His guidance for utility commissioners: “You’ve got to leave your ideology at home. … We can’t pretend that natural gas prices don’t spike because if they do, our constituents are going to have to pay for it.”

Some states are taking a hard look at the other major grid issue posed by data centers: Everyone bearing the costs of that development. In July, utility American Electric Power got buy-in from state regulators in Ohio to make large data centers pay for at least 85 percent of their projected energy use each month, even if they end up needing less. A report that same month from the Clean Energy States Alliance details other ways that officials are trying to make data centers pick up the tab—and stay the course on the clean-energy transition. 

“The momentum was always at the state level,” said Olinsky-Paul, a co-author of that report. “States have a very good, effective ability to institute new policy and regulations and new programs to accelerate the deployment of clean energy resources. They know how to do it. They’ve been doing it for decades.”