Feeding AI’s appetite: Who pays the price for power-hungry data centers?

Feeding artificial intelligence's growing appetite for electricity is no small task. But it raises an important question: Who should pay for the infrastructure needed to keep these AI ventures afloat, and what happens when the tech giants behind them try to bypass the usual costs?

In a Nov. 1 ruling, the Federal Energy Regulatory Commission voted two-to-one against Amazon’s attempt to sidestep energy grid fees associated with a 960-megawatt Amazon data center campus co-located with Talen Energy’s Susquehanna nuclear power plant.

In a sharply worded dissent, Chairman Willie Phillips called the decision a potential threat to “our continued economic prosperity and national security.” But others argue that exempting Amazon from the standard grid fees would set an economically risky precedent for future deals.

The policy at the center of the ruling is the designation of Amazon’s data center as “non-networked load,” which would expand the permissible power transfer from the nuclear plant to the data center. A non-networked load designation avoids transmission charges typically associated with the load on the power grid, thereby reducing the price consumers pay for power.

Amazon isn’t the only tech giant to turn to nuclear power for its data centers. Microsoft has inked a deal to reopen the infamous Three Mile Island nuclear facility. Transmission charges in that case are estimated to amount to $30 per megawatt-hour. For the Amazon data center campus at the center of this ruling, a $30 per megawatt-hour charge would translate to about $250 million in annual transmission costs. But this lost revenue from grid fees may force utilities to pass costs on to general ratepayers.

Responses to the filing argue that the data center uses the grid for backup power and load stabilization and that “the co-located load should not be allowed to operate as a free rider, making use of, and receiving the benefits of, a transmission system paid for by transmission ratepayers”. McKinsey estimates that by 2030, data centers will account for over 11 percent of U.S. power demand, and unchecked “free-riding” could saddle consumers with staggering costs.

Without opining directly on the validity of the responses, FERC Commissioners Mark Christie and Lindsay See ruled that the filing failed to demonstrate a need to amend the service agreement between Amazon and Talen. As evident in his dissent, the chairman in opposition fears that the ruling sets a precedent on data center colocation that could slow the pace of future deals.

There is tremendous economic potential at stake.

Between 2013 and 2021, operators decommissioned nearly 10 gigawatts of nuclear capacity due to financial challenges. However, as the economic outlook for nuclear energy improves, an opportunity exists to reopen these plants.

In addition to the Microsoft and Amazon deals, there are further reasons for optimism: During its Q3 earnings call, NextEra indicated strong interest from data center companies that may lead it to recommission the Duane Arnold nuclear facility which was shuttered in 2020.

The scope of the opportunity notwithstanding, FERC appears cautious about setting precedents that could lead to increased costs for consumers and unintended financial burdens on existing customers. We agree with the majority that Chairman Phillips’ claim of economic harm and a national security threat lacks substantiation for the following reasons:

First, data centers are not location agnostic. Low latency is essential for users, and data localization policies can require regional infrastructure. Offshoring data centers usually isn’t an option, and in today’s competitive environment, companies cannot afford to delay building them. Amazon’s decision to push ahead with the Talen deal illustrates this dual necessity.

Second, many companies that are building data centers have pledged to reduce carbon emissions and seek to power their operations with non-emitting generation. Neither solar nor wind power are suited for this purpose, because they are intermittent sources of energy, and data centers require consistent and reliable energy access.

Companies have begun investing in power sources that have not yet achieved commercial scale, such as geothermal power, small modular fission reactors and even fusion power. With its Three Mile Island deal, Microsoft has shown that reliable, clean energy is worth the cost premium of grid-tied nuclear power. The demand for reliable, clean energy is evidently urgent.

Finally, in his concurring opinion, Commissioner Christie emphasizes that the filing has been rejected without prejudice, leaving the door open to refile the motion, an option Talen Energy has indicated it may pursue. The financial magnitude of this ruling ensures that the question will be revisited before lasting harm is done.

The opportunity is compelling: recommissioning 10 gigawatts of clean, domestically sourced power for AI infrastructure. But it must come with fair contributions to grid infrastructure costs.

With the grid facing strain and more energy-hungry giants sitting down at the table, ensuring fair contribution isn’t just sound policy — it’s absolutely essential.

David Kozak is the founder and CEO of Distill Energy. He has been in the power markets for 15 years as a strategist, researcher, consultant and trader. Isaac Fry is a McBride Scholar at the Colorado School of Mines conducting research on public affairs in the energy space.