Data center energy demand is testing the limits of the grid

AI, cloud computing, and digital products continue to grow at breakneck speed, projected to double in power consumption from 2022 to 2026. Behind nearly every digital product is the invisible infrastructure that powers it: data centers. These facilities are resource-intensive, requiring massive amounts of electricity to power servers, substantial water for cooling, and extensive new grid infrastructure. 

In the race to decarbonize the grid, data centers are emerging as a critical pressure point. This infrastructure sits at the intersection of digital growth and climate action, forcing a difficult question: who pays to power the cloud?

Legacy utility models weren’t built for this growth

Utilities must upgrade aging grid infrastructure to meet this new surge in electricity demand, while maintaining reliability. Under legacy utility frameworks, it’s often ratepayers who foot the bill for those upgrades. And the costs are not distributed equitably.

Traditional utility planning assumes that increased demand justifies expanded investment in generation and transmission infrastructure. When a new type of large customer, like a tech company, moves into a utility’s service territory, utilities plan new infrastructure to meet that projected demand. 

Utilities typically recover the cost of new infrastructure through a process called rate base cost recovery. This allows utilities to charge all customers in the “rate base” for the expenses incurred, including thousands of individuals, families, and small businesses, even when those costs stem from the demands of just a few large users.   

This legacy model struggles to keep pace in the AI boom era, where massive new electricity demand can double within a few years—a scale of exponential growth that used to take decades. Additionally, while data centers create short-term construction jobs, there are almost no lasting employment benefits for local communities.

It’s clearly inequitable for all ratepayers to bear the costs of upgrading the grid to benefit just a small number of massive data centers. But that’s not the only problem. If utilities decide to meet new power demand from large data centers with new fossil fuel generation, such as gas peaker plants, they risk creating stranded assets: infrastructure that becomes obsolete or uneconomical as climate targets, clean energy mandates, or the cost-effectiveness of renewables accelerates. Once built, ratepayers will have to continue paying for these long-lived investments for years, even if they are underutilized or retired early due to policy shifts.

If utilities are locking in decades of new fossil-fuel generation to meet short-term data center growth, ratepayers may be left holding the bag for infrastructure that contradicts their climate goals and state mandates, with little ratepayer or community input into the decision. Effectively, local communities may be subsidizing a technology that they did not directly ask for in the first place and has little to no direct community benefits. The result is a long-term misalignment between utility investment strategy and the public interest. 

Ratepayers bear the cost of private digital expansion

The economic burden of data center expansion can fall disproportionately on households and small businesses. But data centers, as the largest and fastest-growing users, often negotiate bespoke contracts, subsidized rates, or fixed-price electricity agreements that shield them from long-term cost volatility.

This can result in other customers, especially residential and low-income ratepayers, bearing a disproportionate share of the infrastructure and maintenance costs. In many states, residential and low-income customers already experience energy cost burdens that exceed affordability thresholds. Adding the weight of infrastructure investments to serve energy-intensive data centers, without sharing those costs equitably, exacerbates an already regressive utility cost allocation system.

In Georgia, for example, ratepayers are facing rate hikes as Georgia Power builds capacity to serve hyperscalers’ power needs. In Virginia, Dominion Energy forecasts that data center growth will trigger rate increases and delay coal plant retirements. 

These examples are not anomalies. They signal a systemic shift in energy demand, one that places a growing burden on communities and lacks clear public benefits.

Environmental and community impacts are mounting

Beyond economic impacts, the geography of data center development reveals another layer of inequity: environmental justice. Data center siting often prioritizes affordable land, low resource costs (e.g., electricity, water), and climate considerations like heat variability. They also rely on proximity to pre-existing fossil fuel generation and transmission infrastructure. This relationship could exacerbate patterns where developers build in historically marginalized, rural, or low-income communities where land and permitting come cheaper. 

These communities often absorb the negative externalities beyond their electricity bills, including increased air pollution from peaker plants and on-site diesel or gas backup generators, traffic and construction noise, water stress, and land use changes. Simultaneously, they do not receive direct net positive benefits. Frontline communities are paying attention to this trend, and are beginning to organize against new data centers and the disproportionate impacts to their communities. 

According to local reports, data center developers may be bypassing standard permitting processes and installing potentially unregulated on-site generators. On-site power can help reduce demand on the grid, which can be a benefit. However, this on-site power may not always be regulated or permitted, and may not comply with environmental health and climate regulations. If this piecemeal and inconsistently-regulated approach were to become standard, data centers could be blending grid power with carbon-intensive and unhealthy private power. Without oversight, this may result in unforeseen and disproportionate environmental and health impacts on proximate communities from hazardous emissions. 

To date, data centers developers do not appear to have maximized potential community benefits or engagement. Data centers have not typically employed many local residents beyond construction phases, resulting in limited economic benefits, particularly when facility ownership is distant from the local community or has few local ties. When these same communities already experience high pollution burden or economic precarity, the cumulative impact of a new data center can deepen existing vulnerabilities.

Water use is also an emerging environmental justice concern. Many data centers rely on evaporative cooling systems that draw millions of gallons of water per day. In drought-prone regions, this can stress already-depleted aquifers and heighten tensions over water access. 

The result is a high-stakes tradeoff between digital infrastructure and local resource resilience, one that communities should be a part of deciding.

Some states are waking up to the risks, but slowly

Some states are beginning to respond. Virginia, the “Data Center Capital of the World,” is home to approximately 575 data centers that consume an estimated 25% of the state’s electricity. 

Legislators in the last session considered bills that would have required assessments of data center impacts on nearby residences and schools, examined whether non-data center customers were subsidizing data center costs, and put requirements on data center development to try and limit their negative externalities. While none of these bills were enacted this session, these efforts demonstrate the complexities of data center siting and regulation and reflect growing concern about unchecked expansion. 

Other states may follow suit as data centers seek new jurisdictions for growth, and state energy officials are beginning to proactively plan for data center expansions.