Why Utility Customers Are Paying Big Tech’s Power Bill

In several states, public utilities are asking power-hungry data centers to cover more of their mounting electricity costs.

Utilities have long enforced special terms and conditions, called tariffs, on their largest customers, to ensure they are paying their fair share.

Facing a historic surge in electricity demand amid Big Tech’s AI race, utilities in states like Indiana and Ohio are now turning to tariffs to protect residents and small businesses from higher power bills as more data centers come online.

Data centers consumed about 4.4% of all electricity in the US in 2023, according to research from the US Department of Energy. That amount could triple by 2028.

That level of demand growth hasn’t been seen since the 1960s, when gains in efficiency tempered the power industry’s costs of growth, protecting consumers from hefty rate hikes.

Now, power plants are more expensive to build, especially the natural gas plants that some utilities are proposing to serve new data centers.

Ratepayer advocates and regulatory experts say that using tariffs for data centers is a good start, but they may not be enough to prevent the full costs of the AI boom from hitting consumer wallets.

The demand surge coming from a handful of very large customers, combined with the rising costs of building new infrastructure, could mean the old rules of utility pricing don’t apply in the age of AI.

“Data center growth is overwhelming long-standing approaches to approving utility rates,” researchers at Harvard Law School’s Electricity Law Initiative wrote in a paper earlier this year, “causing the public to subsidize Big Tech’s power bills.”

Earlier this month, Ohio regulators approved American Electric Power’s plan to create a tariff specifically for its data center customers. In February, regulators in Indiana approved changes to Indiana Michigan Power’s large customer tariffs, aimed at shielding the utility’s individual and small business customers from higher costs associated with data centers.

Several other states, including Virginia, Texas, Kansas, and California, are considering or have proposed implementing special tariffs for data centers.

The tariffs are a response to the unprecedented demand for electricity coming from Big Tech’s AI data centers.

Investor-owned utilities in the US are on track to build $1.1 trillion in new infrastructure over the next five years, largely to keep pace with that demand, according to industry group Edison Electric Institute. About 72% of electricity customers in the US are served by investor-owned utilities, which profit by building new infrastructure.

This business model was born when population growth and economic development drove electricity demand, and everyone was thought to benefit from system-wide upgrades.

With Big Tech companies driving most of today’s electricity demand, some are questioning which customers exactly should pay for upgrades.

“We really need to think about who should pay for this stuff,” Ari Peskoe, Director of Harvard Law School’s Electricity Law Initiative, told Business Insider.

“I don’t think it’s fair to just have these very wealthy corporations come in and force utilities to build more infrastructure and then just socialize the costs the way we normally do.”

Why am I subsidizing Big Tech’s power bill?

Historically, state regulators have allowed public utilities to recover the cost of investment, plus a rate of return, of new transmission lines and power plants by raising rates for all customers.

The utility business model was based on the assumption that society benefited from the grid’s expansion; therefore, “we should all pay for the infrastructure needed to allow for its growth,” said Peskoe.

Staggering data center power demand has flipped this assumption on its head. At a time when residential electricity use is going down, Big Tech companies stand to gain the most from major utility expansion. Under the old rules of cost allocation, everyone else might have to pay for it.

In Louisiana, customers of the state’s major public utility could be responsible for $5 billion in costs associated with new natural gas plants and transmission lines needed to serve a Meta data center.

Wisconsin ratepayers could pay for a $2 million transmission project for Microsoft’s data center campus outside Milwaukee. In Colorado, Xcel Energy customers could end up paying $1.7 billion for new transmission lines to serve the state’s growing data center load.

What are states doing about it?

In February, Indiana regulators approved changes to Indiana Michigan Power Company’s tariff for large industrial customers, setting the terms for connecting data center customers to the grid.

The changes were part of a settlement agreement between I&M, its three largest data center customers — Amazon, Microsoft, and Google — consumer advocacy groups, and the Data Center Coalition.

The revised tariff requires “large load” customers that use a lot of electricity to make “long-term financial commitments proportional to their size,” I&M said in a press release.

Data centers are driving record load growth in the utility’s Indiana service territory. Peak load — the highest amount of electricity used by customers at a time — is on track to more than double by 2030.

Ben Inskeep, program director at Citizens Action Coalition Indiana, a participant in the IMP settlement, said the revised tariff will help protect ratepayers from the cost of “stranded assets” — infrastructure that gets built, but ultimately doesn’t get used. But it doesn’t address several other aspects of data center growth that could show up in consumer electricity bills, he said.

Many factors account for the final number that customers see on a monthly electric bill, and the cost of new infrastructure is just one of them.

“We’re seeing really high load growth from data centers driving the cost of capacity super high and driving the cost of building new resources super high, and those costs could still end up in consumer bills,” said Inskeep.

For its part, Big Tech is fighting to keep its own electric bills from rising.

In Ohio, a lawyer for Amazon told regulators that AEP had “singled out” data centers for a “discriminatory tariff.” A lawyer for Google called the tariff a “departure from the fundamental rules” of utility regulation.

That’s exactly the point, said Peskoe.

“What we really need is a new approach to allocating the utilities’ costs,” said Peskoe. “That’s what a lot of this comes down to — making sure that the data centers are paying for infrastructure that’s serving them, that’s being built for them.”