Electric utilities across the country are forecasting higher than normal power demands in their service territories, driven in large part by the power needs of data centers. The US Department of Energy’s (DOE’s) Lawrence Berkeley National Laboratory estimates that data center load growth has tripled over the past decade and is projected to double or triple by 2028. These rates of growth are increasingly placing pressures on utilities, transmission planners, and grid operators to respond quickly to ensure there is sufficient infrastructure to meet the demand for power.
Regulators, too, are caught in a bind, as data center development is introducing high concentrations of large power customers in areas that have had relatively flat demand. This rapid growth is catching some regions flat-footed and raising stakeholder concerns about socialized costs, grid reliability, energy access, and more. Energy regulators at both the state level, such as public service commissions, and the federal level, including the Federal Energy Regulatory Commission (FERC or the Commission), are racing to address those concerns, as discussed below.
FERC Takes a Hard Look at Co-Location
FERC is an independent agency within the DOE tasked with regulating the interstate transmission of electricity. FERC’s authority also includes the oversight of generator interconnections to the transmission system, a process that requires a generator to enter a queue, undergo technical studies, and implement costly grid upgrades and can take years to complete.
As an alternative to purchasing all electric supply from a local utility’s distribution system, some data center customers have been pursuing a “co-location” alternative. Under a co-location arrangement, large loads, such as data centers, are sited alongside power generation and arranged for power delivery “behind the meter” with direct delivery of the generated energy. These configurations can avoid lengthy interconnection processes but have also raised challenges from a variety of stakeholders that claim co-location arrangements must pay a fair share for the benefits they receive from the transmission and distribution systems.
In response to those concerns, FERC recently initiated a show cause proceeding to review co-location issues in the PJM Interconnection LLC (PJM) region. FERC has made clear that issues of co-location of large loads, specifically in the context of AI-enabled data centers, must be addressed swiftly and correctly. “We have to get these issues right because there are tremendous implications for reliability customers,” Chairman Mark C. Christie remarked. The key issues under review in the show cause proceeding include the following:
- Jurisdictional boundaries: FERC’s jurisdiction is primarily over the wholesale sale and transmission of electricity in interstate commerce. However, the Federal Power Act (FPA) reserves authority over retail sales and generation facilities to the states. Co-location arrangements directly implicate both sides of this jurisdictional divide. Under the FPA, states have the power to determine which entities can provide electricity to retail customers in co-location arrangements and how wholesale costs are recovered through retail rates.
- Transmission service: The Commission is examining whether existing transmission services adequately address the unique characteristics of co-location arrangements. Questions arise about whether these arrangements should procure point-to-point or network integration transmission services, or if a new category of service is needed.
- Interconnection procedures: FERC is evaluating whether existing processes address potential impacts caused by co-location arrangements, or whether additional studies are needed. FERC is also interested in feedback on whether changes are needed to accommodate flexible co-located loads, which can rely on backup generation and temporarily suspend their reliance on grid power sources.
- Reliability and resource adequacy concerns: Some challengers have claimed that the rapid addition of co-location arrangements can pose potential risks to grid reliability and resource adequacy. FERC is also concerned that co-located loads rely on reliability services from the grid, such as black start service, but may not be appropriately allocating their portion of those costs.
- Market impacts and capacity: FERC is seeking input on whether additional rules are necessary to govern how co-located load and generation participate in the PJM capacity market and whether existing rules are sufficient to ensure resource adequacy.
PJM, various transmission owners, and other interested parties have provided their initial responses to FERC’s show cause orders. Although the show cause proceeding is limited to PJM, FERC’s action is expected to inform its general approach to other regions as well. Separately, FERC plans to convene a technical conference in June 2025 on resource adequacy to explore the challenges of resource adequacy in regional transmission organization and independent system operator regions.
Role of State Regulators
One of the key themes that emerged from FERC proceedings on generator co-location is the central role of state regulators. State legislators have primary siting authority over the generation facilities that will be required to power data centers. They also have oversight authority over rates for retail sales of electricity and many aspects of utility operation that are required to deliver safe and reliable electricity service. As large data center loads proliferate, state authorities have become increasingly sensitive to the rate and environmental impacts of these projects in their regulated jurisdictions and are seeking to exert more control.
Within the last year, various states have proposed legislation that seeks to curb data center energy usage, manage energy efficiency standards, and restrict the types of power that can be used to supply data centers. State authorities have also sought to address stakeholder concerns about the use of water, which data centers require for cooling. Finally, state commissions and utilities are proposing new tariff structures and programs to mitigate the cost impact of data center development on retail customers while simultaneously supporting the development of distribution infrastructure needed to serve those facilities.
The Path Forward
The rapid growth of data centers is significantly impacting power demand and transmission and distribution system planning, challenging energy regulators to adapt swiftly. The importance of these issues has also captured the attention of authorities at the highest levels of government, transcending party lines. Just before leaving office, President Joseph Biden issued an executive order directing the US Departments of Defense and Energy to lease sites for gigawatt-scale data centers and new zero- or low-carbon power facilities, with a focus on expedited permitting and interconnection processes. Similarly, President Donald Trump has announced ambitious investment targets for data center infrastructure and expressed a willingness to utilize emergency authorities to expedite development.
Against this backdrop, FERC and states are actively addressing on-the-ground challenges. FERC will continue to examine co-location arrangements and their implications on grid reliability and market dynamics. Meanwhile, state officials and regulators are focusing on managing the environmental and economic impacts through legislation and new tariff structures. Balancing infrastructure development with stakeholder concerns is crucial to addressing safety and reliability while keeping pace with new development. As these efforts continue, collaboration between federal and state entities will be key to navigating the evolving energy landscape.