Key Points:

1. American residents are experiencing energy poverty, an inability to afford to keep their homes warm or cool

   
   

2. Though the cost of electricity is based on several factors, a main driver of the spike in energy prices involves the energy required to power data centres due to the demand from AI

   
   

3. Many states are pushing back (passing laws or reaching settlements with large tech companies) in order to keep the prices fair for residents

According to CBS News, the cost of electricity has increased from $0.14 per kilowatt hour in 2019 to $0.18 per kilowatt hour in 2024—this represents a change of more than 28.5 percent. The result: the average American is now paying nearly $300 a month just in utilities. This phenomenon is referred to as energy poverty.

Why is this happening? To be sure, the cost of electricity is based on several factors, including the volatile prices for natural gas, wildfire risk, electricity transmission and distribution, regulations and inflation. That being said, there is also the heat—rising temperatures fuel extreme weather events, such as heat waves in the summer and snowstorms in the winter, which then increases energy consumption as people try to keep their homes warm or cool. Climate change has only exacerbated the frequency and intensity of these extreme weather events.

But there are also data centres. In fact, data centers are projected to consume up to 12 percent of American electricity within the next three years. How is this happening? Simply put, the expansion of power-hungry data centers that is required to support the surge in AI usage is a main factor in the rising costs that Americans are experiencing.

As a consequence, American states are feeling the pressure to act. However, it us unclear that any state has a solution to the issue of data centers wreaking havoc on people’s electricity bills. Many have noted that answering this question may require taking a hard line against large tech companies that are rapidly investing in and using a large number of data centres.

To be clear, we are talking about data centres that may require more electricity than entire cities—large factories would pale in comparison. Ari Peskoe, who directs the Electricity Law Initiative at Harvard University, states:

“A lot of this infrastructure, billions of dollars of it, is being built just for a few customers and a few facilities and these happen to be the wealthiest companies in the world. I think some of the fundamental assumptions behind all this just kind of breaks down”

In fact, Peskoe suggests that there could be a can of worms that pits ratepayer classes against each other.

Moreover, Tricia Pridemore, who sits on Georgia’s Public Service Commission and is president of the National Association of Regulatory Utility Commissioners, noted that there is already a tightened electricity supply and increasing costs for power lines, utility poles, transformers and generators as utilities replace aging equipment or harden it against extreme weather. Pridemore mentioned that the data centers that are required to deal with the AI boom are still in the regulatory planning stages.

But it is important to keep in mind that unless utilities negotiate higher specialized rates, other ratepayer classes (residential, commercial and industrial) are likely paying for data center power needs.

For now, there is recent research conducted by Monitoring Analytics, the independent market watchdog for the mid-Atlantic grid, showing that 70 percent, or $9.3 billion, of last year’s increased electricity cost was the result of data center demand.

How are states responding? In short, five governors led by Pennsylvania’s Josh Shapiro began pushing back against power prices set by the mid-Atlantic grid operator, PJM Interconnection, after the amount spiked nearly sevenfold.

In response, PJM Interconnection has not yet proposed ways that would guarantee that data centres pay their fair share. On the other hand, Monitoring Analytics is floating the idea that data centers should be required to procure their own power. The company likened the residents’ payment for electricity as a “massive wealth transfer” from average people to tech companies.

In addition, at least 12 states are considering ways to make data centers pay higher local transmission costs.

For example, in Oregon, a law was passed in June that orders state utility regulators to develop new power rates for data centers. The Oregon Citizens’ Utility Board has said that there is clear evidence that costs going to serve data centers are being spread across all customers at a time when some electric bills are up 50 percent over the past four years.

By way of another example, New Jersey’s governor signed legislation last month commissioning state utility regulators to study whether ratepayers are being hit with “unreasonable rate increases” in order to connect data centers and to develop a specialized rate to charge data centers.

Some states are trying to reach settlements. For example, in Indiana, state utility regulators approved a settlement between Indiana Michigan Power Co., Amazon, Google, Microsoft and consumer advocates that set parameters for data center payments for service.

In Pennsylvania, the state utility commission is drafting a model rate structure for utilities to consider adopting.

While it is important for utilities and states to attract big customers like data centres, it is necessary to appreciate what is fair; transmission upgrades and other similar initiatives could costs millions of dollars, and it is not fair to put it all on residents.

Large AI companies will need to take the above discussion into consideration when making plans to expand and adding power-hungry data centres. They may anticipate being approached by various states in order to create fair settlements so that the cost of energy is not transferred entirely to residents.