Rulemakers play catch-up as data centers multiply

E&E News

3 days ago

As tech companies flood the electric grid with new data centers, some states and utilities are crafting new rules to keep the artificial intelligence boom from outstripping power supply.
In Texas, regulators are working on new requirements for data centers to better share costs and ramp down their power use if ordered by the state. Ohio regulators will force data centers in some areas to pay for their connection costs. And one of the nation's largest grid operators is offering faster connection studies for data centers in exchange for demand response programs.
The flurry of moves reflect attempts to respond quickly to an unprecedented load growth without stifling an industry that has attracted billions of dollars in investment. Just this week, President Donald Trump announced more than $90 billion in data center investments at a summit in Pennsylvania and reiterated his pledge that the U.S. would lead the world in AI development.
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Dan Diorio, vice president of state policy for the Data Center Coalition, said the industry is working with regulators and lawmakers, stressing AI's benefits and the role that large loads can play on the grid.
'We continue to emphasize that this is an industry that drives innovation, and this is an industry that is innovating every day because it has to,' Diorio said. 'And so what you don't want to do is ultimately create something that ends up imposing a one size fits all solution, or an inflexible solution. You don't want to create something where you try to push a square peg into a round hole.'
A July report from the Clean Energy States Alliance noted that 'dramatic load growth' led by data centers, electrification and new manufacturing has put states on the back foot for electricity planning. Electricity demand nationally is forecast to rise 25 percent between 2023 and 2030, according to consulting firm ICF, and some states may see even more impact.
State lawmakers have offered a range of bills this year to boost generation, add fees to data centers or otherwise protect the grid. But as the CESA report chronicles, the approaches have been varied and results remain mixed.
'More work is needed to advance these ideas and to formulate best practices,' the report found.
Diorio said the data center industry's message to regulators this year was that they are 'one end user on a system experiencing a significant amount of load growth from a variety of different sources.'
'I think we were able to sort of shed some light on what some of the concerns are and what the best approaches are,' Diorio said. 'We'll continue those conversations through the remainder of the year and into 2026 and beyond.'
Texas' 'kill switch'
One of the most closely watched efforts is in the Lone Star State, where a milestone law will put up new barriers for data centers operating on the state's main electric grid. S.B. 6, which passed with bipartisan support, was written in response to forecasts that the Electric Reliability Council of Texas (ERCOT) grid could see peak demand as much as double between 2024 and 2031.
The law could shake up how tech companies build in one of the nation's hottest markets for data centers and could offer a model to other regulators.
The new rules will require developers to pay an up-front study fee to interconnect to the system and provide more transparency about whether the project will materialize. Grid operators and utilities have long complained about 'interconnection shopping,' where developers will apply in multiple places for projects that may not materialize. The law also sets new rules for data centers that bring their own power generation.
Notably, it contains a so-called kill switch provision, a demand response program that will allow ERCOT operators to order large load customers to curtail their load or switch to backup generation during a grid emergency. That language was heatedly debated among lawmakers, but the bill's passage reflects a growing interest in making sure data centers don't hog power at the expense of households.
'The industry ultimately understands the reasoning behind that provision, though we have deep concerns about the potential for it being used without due consideration,' said Diorio. 'Data centers are 24/7, always-on facilities that are the backbone of our daily lives and the 21st-century economy, so it's important that any decision to temporarily restrict power to data centers is not taken lightly.'
Implementation of the state bill — which now must go through state regulators and the ERCOT board — will be closely watched to see how it affects data center development.
Maria Faconti, a partner with K&L Gates who works with energy market clients, said that developers are 'still very eager' to locate in Texas. The state has long been attractive for its relatively low electricity prices and its hands-off regulatory environment.
'Even when SB 6 was being considered, there was no stall in their interest,' Faconti said. 'The sentiment is still that Texas is pro-business and pro-data center. The biggest concern is whether this will impact their timelines.'
New tariffs
The ability of Texas lawmakers to change rules for data centers is somewhat unique, since ERCOT operates only within the state and is subject to oversight by the legislature.
But there is growing interest among utilities in bringing demand response to the data center industry. An influential study from Duke University found that there is sufficient 'headroom' on the grid to bring online new data centers without new generation — if data centers curtail their electricity use during the handful of hours each year when the grid is most stressed.
One example comes from Southwest Power Pool, the grid operator covering parts of 14 states in the center of the country. SPP's board is set to vote next month on a new policy that would shrink the interconnection study timeline for new data centers and large loads to just 90 days, as long as the entities agree to reduce demand when the grid needs it.
The proposal also grants quicker studies for loads bringing their own generation. Casey Cathey, SPP's vice president of engineering, said the proposal reflected the speed to construction that tech companies wanted, while also tackling the main reasons the grid might fail.
What's also notable, Cathey said, is the speed the proposal had to come together. The rules were released earlier this month in response to a May directive from SPP's board of directors.
'We came at this to be innovative, but still in the art of the possible,' Cathey said in an interview. 'We don't have time for a three-year study or even an 18-month study. There is an urgent need now.'
In Ohio, regulators granted utility AEP Ohio's request to create a new class of tariff specifically for large loads like data centers that will force them to handle much of the costs they would add to the system. Under the tariff, data centers will pay a minimum monthly fee — set to 85 percent of the electricity requested or of the highest monthly bill in the past year — regardless of how much power is actually used. The tariff also adds financial requirements and an exit fee if a project is canceled.
The new rules will only apply in AEP Ohio territory, covering approximately 1.5 million customers, but the move could offer a model as utilities find ways to handle load growth.
Indiana has crafted a similar tariff and lawmakers in Oregon and Maryland passed bills this year directing their states to create new service categories for large loads. Other tariff-related bills are still pending in the open legislative sessions in New Jersey and California.
Lawmakers in Virginia and Georgia, however, failed to move any legislation to regulate data centers this session, despite bipartisan concerns about electricity prices and reliability.
In Georgia, consumer groups and environmental advocates had hoped the state Legislature would advance a bill from state Sen. Chuck Hufstetler (R) that would require data center owners to pay any new costs related to their facilities. The bill, however, never reached the floor.
Other bills that would require more transparency also stalled, although they could be revived next year under the rules of Georgia's legislature.
Bob Sherrier, an Atlanta-based attorney for the Southern Environmental Law Center, said that with tech ambitions only growing, there is urgency to enact some rules.
'Things are happening fast,' Sherrier said. 'These are big projects with real impacts on Georgians, and we need safeguards to protect them. The sooner we get them in place, the better.'