US Tech giants fight plan to make them pay more for electric grid upgrades

Sept. 13, 2024

Negotiations between Big Tech and an Ohio power utility could set a national precedent as communities grapple with the energy demands of the data center boom.

A regulatory dispute in Ohio may help answer one of the toughest questions hanging over the nation’s power grid: Who will pay for the huge upgrades needed to meet soaring energy demand from the data centers powering the modern internet and artificial intelligence revolution?

Google, Amazon, Microsoft and Meta are fighting a proposal by an Ohio power company to significantly increase the upfront energy costs they’ll pay for their data centers, a move the companies dubbed “unfair” and “discriminatory” in documents filed with Ohio’s Public Utility Commission last month. American Electric Power Ohio said in filings that the tariff increase was needed to prevent new infrastructure costs from being passed on to other customers such as households and businesses if the tech industry should fail to follow through on its ambitious, energy intensive plans.

The case could set a national precedent that helps determine whether and how other states force tech firms to be accountable for the costs of their growing energy consumption.

Central Ohio, a Rust Belt region that has struggled with the departure of its manufacturing industry, has rapidly emerged as a data center stronghold in the United States. The power company said projected energy demand in central Ohio forced it to stop approving new data center deals there last year while it figured out how to pay for the new transmission lines and additional infrastructure they would require.

The energy demands of data centers have created similar concerns in other hot spots such as Northern Virginia, Atlanta, and Maricopa County, Ariz., leaving experts concerned that the U.S. power grid may not be capable of dealing with the combined needs of the green energy transition and the computing boom that artificial intelligence companies say is coming.

On Thursday, the White House announced measures intended to speed up data center construction for AI projects, including by accelerating permitting.

Energy customers must sometimes make a monthly payment to a utility that is a percentage of the maximum amount of electricity they predict that they could need. In Ohio, data center companies had agreed to pay 60 percent of the projected amount. But in May, the power company proposed a new, 10-year fee structure raising the charges to 90 percent of the expected load, even if they don’t end up using that much

The major tech companies — all of whom are increasing spending on data center infrastructure to compete in AI — strenuously opposed the proposed contract in documents filed last month.

“While I acknowledge the challenges AEP Ohio faces due to the substantial increase in load requests from data centers, it is essential that any solution adopted by the Commission provides a fair and equitable solution,” wrote energy consultant Brendon Baatz in testimony submitted to the Ohio regulator on behalf of Google. “With its discriminatory focus on data centers, AEP Ohio is asking the Commission to pick winners and losers in the local economy by imposing unfavorable terms for basic electric service on a single industry.”

Amazon Web Service’s energy expert Michael Fradette said in his own testimony that asking companies to predict how much power their data centers will need over a 10-year period with a high degree of accuracy is “unreasonable,” because actual consumption will depend on factors like future technological advancement, customer demand, and “volatility of weather.”

Tech companies have good reason to fight the Ohio proposal beyond local cost increases, University of California at Berkeley economics professor Severin Borenstein said. Other utilities around the country who are also concerned about the “volatility” of data center development will be closely watching this case, he said, potentially making such fights “a much more common negotiation.”

An evidentiary hearing in the case is set for Sept. 30. A spokesperson for AEP Ohio said the company is “hopeful that a resolution is reached that keeps economic development moving forward in our service territory.” Amazon, Microsoft, Google and Meta declined to comment for this story. Amazon founder Jeff Bezos owns The Washington Post.

“Skin in the game”

Over the past five years, Central Ohio’s data center boom has been driven by the availability of plentiful water, fiber internet and, according to Meta’s comments on the proposed tariff hike, “the reliable and affordable electric service provided by AEP Ohio.”

But data centers notoriously require a lot of electricity to run the high powered computers inside and the cooling systems that prevent them from overheating. According to testimony from AEP Ohio vice president Lisa Kelso, there are 50 pending requests from data center customers seeking electrical service at more than 90 sites, a potential 30,000 megawatts of additional load — enough to power more than 20 million households. That additional demand would more than triple the utility’s previous peak load in 2023, she said.

Between 2020 and 2024, the data center energy load in central Ohio increased sixfold, from 100 to 600 megawatts, her testimony reads. By 2030, that amount will reach 5,000 megawatts, according to the utility’s signed agreements, she testified. “Central Ohio’s total load will more than double from approximately 4,000 MW to 9,000 MW over the course of a decade,” it continues, “and AEP Ohio’s Top 5 customers will all be data center customers by 2030.”

Meeting that demand will require AEP Ohio to build new transmission lines, an expensive and time-consuming process. According to testimony by AEP vice president Kamran Ali, building that infrastructure is a “big undertaking and a major construction project” that could take between seven and 10 years to complete.

Chief among the power company’s concerns, according to the documents, is what will happen if it invests billions of dollars into new grid infrastructure only for the data centers to leave for greener pastures, or for the AI bubble to burst and the facilities to need much less power than initially projected. If the power company spends big on new infrastructure but the power demand it was built to serve doesn’t materialize, other customers — including business and residential payers — will be stuck with the bill, the utility said.

AEP Ohio’s proposed tariff hike is an attempt to “require data centers to make long-term financial commitments — to have more skin in the game,” AEP vice president Matthew S. McKenzie said.

Melissa Lott, a professor at Columbia University’s Climate School, said it’s reasonable for utilities to worry that data centers may not stick around. Compared to more conventional energy-hungry facilities like auto factories, data centers are more mobile, she said. “It’s much easier to relocate those services than it is to relocate a manufacturing facility that needs cooling water from a local river or a workforce of hundreds of thousands of people.”

AEP Ohio’s testimony in the case also questions whether data centers bring as much to local communities as factories or other high-energy load businesses. Since 2019, non-data center businesses have created approximately 25 jobs for every megawatt of power requested, while data centers have created less than one job per megawatt, according to Kelso’s testimony.

The tech companies rejected this criticism, saying the number of jobs they create is not relevant to how much power they have a right to purchase, and highlighted their other contributions to local economies. Google said it had created more than 1,000 jobs in Ohio in the past year, investing $6.7 billion since 2019. Amazon said its cloud computing division had created more than 4,500 jobs in the state with an investment of $10.3 billion over eight years, and plans to spend $7.8 billion more in coming years. Meta, meanwhile, said it had spent $1.5 billion on data center projects in the state.

Microsoft, which recently created a “Livable Licking County” fund of undisclosed size for workforce development near its data centers in one Central Ohio hot spot for the facilities, said in its testimony that the power company should treat all of its customers “equally” and “not discriminate based on factors that are irrelevant.”

Finding a compromise

Central Ohio is not the only place in the United States where utilities are reevaluating how to charge their biggest customers. This year in Virginia, the power company proposed a new rule that would allow it to negotiate custom contracts with any businesses using more than 200 megawatts of power, not just data centers, according to public filings. And in July, Indiana proposed a tariff aimed at funding new infrastructure that would extend contracts, introduce fees for backing out, and raise minimum payments for any customers using more than 150 megawatts.

South Carolina is considering new rules that would prohibit utilities from offering data centers lower rates, while in May, southeast power company Duke Energy signed a new tariff deal with individual data center companies aimed at paying for renewable energy generation.

But Google argues that Ohio’s proposal stands out in “singling out a specific industry.” Amazon said in filings that it pays fees as high as 75 percent of projected demand in some states but that Ohio’s proposal to bill it 90 percent goes too far.

Stanford Climate and Energy Policy Program director Michael Wara said AEP Ohio’s move to treat data centers differently from other customers is “extremely unusual,” and could set a national precedent. “If Ohio does this and it gains traction as an idea, you can see other state commissions copying them,” he said.

But Columbia’s Lott said that some states could still feel the need to attract data center developments that bring utilities new business that helps pay for routine electrical grid upgrades. “We are going to get some kind of idea of where the compromise is between the long time frames of electric utilities and the short time frames of tech companies,” she said.

Should the Ohio tariff be approved, Microsoft and Google both threatened in their testimony to leave Ohio. “If AEP Ohio’s proposal is adopted,” wrote Google’s Baatz, “it would create an unfavorable environment for data center development in the state, potentially causing companies to reconsider their investment plans.”

But while the tech companies can technically take their power-hungry data centers elsewhere, pressure on the electrical grid is mounting all over the country, and many communities are already grappling with how to accommodate it, making it incumbent on the big tech companies to find a way to work with utilities in Ohio and elsewhere.

After all, as Amazon’s Fradette wrote, “Without a reliable source of power, our business would not exist.”

[Top photo: An Amazon Web Services data center sits next to soccer fields in Dublin, Ohio. (Bloomberg/Getty Images)]