Powering America’s data center boom is getting complicated

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Like, how many data centers are actually being built? Where's the energy coming from? How will the Federal Energy Regulatory Commission, which oversees the nation's power grid, regulate these data centers so our utility bills don't skyrocket and the lights don't go out? Oh, and if one or both of those things do happen, what will be the political consequences during an election year? All those questions are still up in the air, but this week Politico did learn more about what the fur commissioners are thinking, how the average American feels now via polling, the response from the states, the rise of something called phantom projects and more. So to get into all of that, I'm bringing in two reporters, Zach Coleman and AJ Kamacho for a roundtable interview on what we learned this week, and how powering America's data center boom is getting messy. It's Friday, February 6th. All right, we've got Zach Coleman and AJ Kamacho in today. Thank you both for making the time. Thanks. Love Beyond the new and improved Politico Energy podcast. New and improved indeed. Yeah, thanks, normal. It's cool to be here and seeing all these changes and Zach. It's great to talk to you. Yeah, no, I'm excited. So, AJ, I'll start with you. A sneaky big story, at least to me this week, in the energy world was this furc hearing on Tuesday. I know there's a lot to get into there, but before we do, can you kind of just break down where things stand on this issue with furc data centers, the Trump administration kind of get into the stakes for everyone. Sure. So, the stakes are really centered around just that last bit data centers, right? So think about chat GPT coming online in 2022, and how ever since, you know, everyone's talking about AI, and pretty much everyone is using AI. But the thing is, a typical artificial intelligence search, this might be all data, but the typical figure is that it takes 10 times the electricity at then a traditional Google search used to. So, that's a lot more electricity that is being needed as we see this new technology. And that's basically where we get to our issue. In the previous 10, 15 years across the country, electricity demand was growing by maybe 0.3% every year. Now, grid operators are forecasting. It's going to grow by 3% every year for the next five years. So, that's a 10 factor increase almost overnight. And that's because of the popularity of these artificial intelligence models. And big tech companies are working to catch up to that demand by building out server farms, data centers that can host these models. Now, there's a couple of potential things at stake fair. One is affordability. It's going to take money for these utilities to build out these transmission lines, to build out these power plants. And traditionally, they pass that cost on to all electricity consumers, including residential ones. And are there going to be ways that we might be able to get around that and less than the impact of that affordability problem? And then the second is reliability. These data centers use so much electricity. They present novel engineering challenges that the grid was not built around. And besides that, is there going to be the supply to meet the demand that they are raising? So, that's leading concerns that these could cause blackouts. One former FERC commissioner simply called it grid busting numbers. Yeah, so basically, is the average joke going to have to pay more because of these data centers? And can our power grid handle them? That's exactly where we're at right now. Can the average joke pay for this? And the truth is, traditionally, this would be incredibly expensive, but there aren't pursuits of novel solutions. And yeah, is this going to create blackouts for people because of the novel and you could get very technical here? But basically, the novel engineering challenges that the companies are presenting. It feels really bad that I have this role in this process where I just create a whole bunch of goofy images and I'm going to cause blackouts. But they are getting better. No, that is a funny point. Every time you create a goofy image that is basically sending someone's electricity bill potentially in a way skyrocketing. So, yeah, then AJ, that brings us to Tuesday. What happened in this hearing? I think all the commissioners were there, I believe, to answer questions about kind of their thinking about this issue. So, what did we learn? What stood out to you? That's exactly right. We had all five commissioners there for the first time since we've had these specific five commissioners relatively boring, but that's frankly par for the course here. But there were some nuances that I think caught a lot of people's attention. And I think the big one on the data center issue is that you had David Rosner, the most senior Democrat on the commission, saying that FERC has jurisdiction to connect large loads like data centers to the transmission system. That's a big statement. Now, he's not exactly saying where the jurisdictional lines are. There could be a lot of nuances there. But that's a hotly debated issue right now because states are concerned that FERC is going to make an action on how data centers are connected. When historically, and under the Federal Power Act, usually it's the states that deal with the customers. The states say when customers are going to get connected to the grid, how they're going to pay for that, about how much they're going to pay for that. That's usually the state's prerogative. There's a question as to whether that's legally what has to be the case, but that's historically what's been done. And so you have states who are very nervous about FERC encroaching on their traditional turf. And then you have the most senior Democrat saying that. And also for that matter, Chair Laura Sweat, the most senior Republican, also saying that the commission wanted to do what it was legally allowed to do to prioritize data centers. So again, a lot of room in that language, but it's the type of stuff that raised a lot of eyebrows from state regulators and state governments. Well, and just like when you think about it, though, it's like in Asia, I don't know if this analog necessarily works. But I mean, these data centers are like prefab, you know, you just kind of throw them up. They're similar design everywhere you go. It's different than when you're building a factory and you have to get massive investment and get the use case and it takes years to get the investment online. And then you can go through this long process of getting the power, getting hooked up to the queue. And here you just have a bunch of deep pocketed companies running around town going wherever they can. And they know exactly how they need to build the thing and like, can the grid keep up? Like every state asked to make this decision in a way these factors can the grid actually keep up with demand? It seems like such a different animal when we talked about these data centers is using power that some of the other large power users that get hooked up to the grid. Yeah, that's exactly right. I mean, data centers are comparatively quick and easy to build. And also you make a very good point that a lot of the states are saying, which is every part of the country is different. And, you know, I mentioned 3% growth year over year. That's a wildly different picture in different parts of the country. Virginia and the Mid-Atlantic eats much bigger than that. If you go to, you know, the Pacific Northwest, it's a lot smaller than that. So the idea of creating a centralized federal system over something like this, that's this type of thing that is giving a lot of these states concern. Added to the fact, like you said, that they can just get built so much faster than like an advanced manufacturing facility, where you have more time to build that energy infrastructure. So there's a lot to figure out there. What is the timeline prefer to figure this all out? Like what? Isn't it like yesterday? Yes, especially if costs are already being pushed on to consumers. And they absolutely are. I mean, you know, that's that I would say exactly what you said, Zach is the consensus. This should have been done yesterday. And, you know, particularly in the Mid-Atlantic region, it's, you know, there's a lot of sentiment that this is like imminent, whereas other parts of the country might have a little bit more time. But as far as sort of, Firk timeline goes, they have a proposal from Secretary Wright that kind of precipitated this conversation about state and federal rights in the area. That was submitted in October, and it asks Firk to lay out sort of ground rules for the interconnection of data centers to the grid. That's one of the reasons why states are concerned. Now, Firk in theory has discretion to do nothing or to do sort of anything in between on these issues. So it remains to be seen what they'll do, but Secretary Wright did ask Firk to deliver something by April of this year. It's very impossible that we could see that at the same time. I'll note that in the Tuesday hearing, Laura Sweat did not the chair did not answer whether they would meet that deadline. And she instead pointed out that this is a historic monumental task. So there's also reason to think that it might take a bit longer for FERC to come up with a solution here. And again, that presumes they come up with a solution versus mostly saying, actually, this should be a state thing. Okay. So the timeline is pretty TBD and Zach, I want to bring you in now on some of your reporting. That's pretty relevant to this data center conversation. I mean, essentially, if I read this right, all the data center announcements we've seen, all the data center hype might not be real. Is that a good way to put it? Well, I mean, I would say the ceiling case is maybe a little bit lower than what we've been led to believe. So there's certainly a lot of demand driven by data centers and other large loads, but there's a question as to how much of this is actually real. Because like I mentioned earlier, like this is a vast growing sector with deep pocketed companies that are throwing up pretty much the same thing everywhere that they can. So there's a there's a rubric attempt for what you need, what the size is, the specs. So you can go around to any number of service territories and unlike a manufacturer that might have to prove their bottom line on a certain investment and get investors lined up and take it to the board on any specific expansion. Like this is there's endless amounts of demand for data centers. So these companies go around to different utility service territories and kind of seek out prospect for the best conditions and see what kind of power rates they get, whether they can get access to the land quickly, how fast permitting will be. So they go and propose across a number of different sites and it's not clear whether one company is proposing for different projects, but that or if they're proposing for different projects that are really all the same, they're just going to build one. I mean, yeah, I feel like that's a key detail to know. I think the term you use was phantom projects, right? The phantom menace. I think that was in the headlight. Are you a star or is that? I didn't know that about you know. I was at home. My source is I didn't write the headline. Okay. That's that's people are getting a peak behind the curtain. Zach Coleman did not write that headline. I did not know. No. Uh, but no, I mean, to your point, like if we have hundreds of phantom projects, who would that be a problem for now and moving forward? Well, I mean, it would be a problem for residential ratepayers for people like you and me. If you end up going out and procuring the power because you have a developer saying, I want to build a data center here. What they do, the data center developers say, Hey, I want to build this 500 megawatt facility in your utility service territory. And if you're the utility, you have to take that seriously because God forbid they build their data center center and then you don't have the power to provide them that they contract or they said they need. So what happens though is let's say, okay, the utility forecast there, they have this 500 megawatt facility coming on. They then the go tell the grid regulators that gets rolled up into grid forecast and then all this stuff gets rate based, which is basically the utility goes out and says we need to we have this load coming on into the system. We will be able to pay it back through customer service fees and we take those terms and get that ROI. We take it to the banks. They give us money. We build the infrastructure. But if then no one comes on and uses that power after all that infrastructure is built after all those customers have been build, then they're going to have to carry that cost as well. So you have this 500 megawatt gap in what you thought you were going to be earning revenue for. But now you have to spread it across everybody else because that customer never showed up. So I think that's one of the things that people are worried about is, are we going to build too much power that then people get overcharged for? And the flip side is that if you don't get the actual number right and you under build, then do you run out of power to provide all these other residential customers the big utility, the big power customers that are coming onto the system? Do you basically just run out of electrons? Right. And I got a sec. I don't know. Are you watching any like specific utilities or different like folks and how they are approaching this? Like I know that some kind of like assume any proposed data center is going to be built. Others have different metrics for their forecasting. And I believe that Indiana and Ohio, some of one of the utilities there has an agreement with some of them that's like, okay, you're going to actually put a certain amount of money into a pop. And so if you back out, then we still have this as kind of like a collateral that can take some of the pressure off consumers. Exactly. And this is what's really fascinating. So a lot of this uncertainty is starting to get paired back a little bit because of interesting rate designs like what AJ just mentioned here, which is, yeah, Ohio has it where American electric power has actually told any data center developer if you propose something, you have to buy 80% of the generation, even if you never use it. So it's basically saying, all right, you want this? We'll go out and get it for you. But if you still don't come here, you're still going to pay for it. So it's trying to create some skin in the game. And you're seeing that in a lot of different service territories where there is more of a request to put in some financing. And again, these are big, big tech companies that have the money to do this. So in Texas, there's a proposal that there's a certain amount of money put down per megawatt of electricity as a security deposit. So this is like big financial commitments to show that, yes, we will show up. And even if we don't, we're going to try to find a way to protect rate payers if your project is not materialized. I just want to add some like political context of this. I mean, you kept, we've all said overcharge costs go to consumers. I mean, this is an election year. People are already thinking about high prices. And so I'm sure this is going to be something lawmakers are going to have to deal with on the campaign trail. Didn't we do like a poll or political poll about data centers recently? I mean, what are the people saying about this? Yeah, it's kind of like a jump ball, which given how much we write about it, sorry, media narrative, whatever. But you would think that maybe it's a little more certain that people are against them. But no, it seems as if it's pretty split. People don't really know how to feel. I think what was one of the interesting findings of our polling was essentially if you support a data center in your neighborhood, which was defined as within three miles, is there any amount of money if it increased your electricity bills that you would start to oppose it? And it was only, I believe, $25 to $50 a month, an additional electricity cost with the people who originally supported a data center start to oppose it. And in the inverse, those who opposed it initially said only if there was an arrangement in which their electricity bills decreased $50 would they be able to say they support a data center. So I think the cost issue does make a lot of sense here to talk about because, you know, again, this is, most people don't have a data center in their backyard. But if they start to wrestle with the costs, then that is something that can change their opinion. And I think it's really a jump ball too as to whether these actually do increase electricity bills. There's a lot of reasons that electricity bills are on the rise. The first being that we just haven't been able to build enough. And we are electrifying our auto fleet. We are bringing back manufacturing to the country. There are a whole lot of reasons why we are producing that we are consuming more electricity. So I mean, the timing here is a huge issue, right? Like the industry, the country got caught flat-footed. We weren't building electricity when demands are to rise. So AJ, I just wonder from you, like, are there near-term things that Fert can do within its authority to at least work with the margins here before a real boom puts us on a back hill? Yeah, to be honest, this is something where it's hard to see Fert making a big difference in the near-term based off of its traditional authority. And this goes back to the question of, are they going to go beyond where they traditionally have and that legally might be permissible and get more involved in this? Because mostly this is going to be a state issue. It's going to be a utility issue. States are the ones who mostly have their say in how much electricity generation is being made, how much is being needed. You know, there are nuclear plants getting restarted across the country. Fert's not really involved in that. That's being the decision of local and federal officials. It's being the decision of local utilities. And sometimes the big tech companies that, you know, like you pointed out, Zach, don't really care about the money. They mostly care about the time. So from Fert's angle, to be honest, I don't think that there is that much that they can do in the near-term about all that they can do. And nearly this is something that seemingly everyone wants is the rules of the road. Fert wants it to be clear, how can you do something like co-locate a data center with a power plant? That has been done, but there isn't a federal sort of guidance as to what is considered appropriate there. And Fert has taken some action on that recently in the Mid-Atlantic region. That's expected to be a template nation. wide. So things like that that just give a little bit more regulatory clarity. You know, I don't expect that that's going to make a difference of years in terms of when things get built and when solutions occur, but it might make the difference when you kind of get out onto the margins as a matter of weeks or maybe even a matter of months. Well, I don't mean to cut us off, but we are at the end of time there. But there's a lot to, you know, data centers are not going away. I'm sure this is going to be something we talk about for many months here. So I'll definitely have to have you both back on. Zach Coleman and AJ Kamacho. Thank you for joining the show. Appreciate your time. Thank you, Dermal. And I'm going to be using Fenton Medisol at the time. Thanks a lot, Zach. Thank you. Data Center Strike Back. All right, that's it for Politico Energy. For more news on energy and the environment, subscribe to our free newsletter, Power Switch, and subscribe to Politico Pro to read our Morning Energy Newsletter. Stuff in Tadorovic is the show's video producer. I'm the show's executive producer and co-host. Our theme music was made by Pran Bandi. Debra Khan, Matt Daly, Sais and Eski and Alex Keeney are the editors of the show. Please subscribe to Politico's YouTube page if you like our content and follow our show on Apple, Spotify, or wherever you get your podcasts. I'm Nirmal Mollikal. Thanks for listening and we'll see you back here on Monday. A nation isn't just built. It's powered by people like us. In 2024, Chevron increased its U.S. production nearly 20% to help keep energy reliable. Learn more at chevron.com/america.