Data centers can be models of affordable, clean energy

By Sam Wooden and Matthew Friedman, especially for CalMatters

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California’s sky-high electricity prices risk making monthly bills unaffordable for families and the state less economically competitive and less of a global center for technological innovation.

Last year, state leaders made progress on reforms aimed at improving energy affordability. But the expansion of energy-intensive data centers fueling the AI ​​boom is challenging those gains.

The experience of other states offers a cautionary tale: In Virginia and parts of the Northeast and Midwest, data centers have added billions of dollars in cost to payers. The reason is twofold: the construction of new transmission and distribution lines to service the load of the new data centers and higher wholesale electricity prices from the surge in demand.

The uncontrolled growth of data centers also poses key environmental risks. If powered by natural gasthese facilities could generate significant new greenhouse gas emissions. Many data centers too rely on backup diesel generators which cause local air pollution.

California now ranks third nationally in data center capacityand the California Energy Commission predicts an additional 4-6 gigawatts of demand for new data centers by 2035. Left unchecked, this expansion could increase energy costs, strain the grid and undermine the state’s environmental goals.

But with thoughtful planning, data centers can be developed in a way that actually benefits ratepayers, improves network reliability, and minimizes environmental damage. California needs to establish clear standards for affordable and clean data center development — and offer it as a model for the rest of the country.

The basis of such an approach is a framework built around three main policies.

First, data centers must pay their full cost of connecting to the network.

Transmission and distribution upgrades built to serve new data centers should not be subsidized by households and small businesses that receive few, if any, benefits. A fair share of network strengthening and wildfire mitigation costs should also be assigned to data centers.

Second, data centers must they bring clean energy and flexibility to the electrical system.

Requiring facilities to be installed on-site for generation and storage that can be dispatched by the California independent system operator and to actively reduce demand when the grid is under stress can further the state’s goals of reliable and affordable electricity. Data centers should also be incentivized to rely entirely on zero-carbon energy resources to power their facilities.

Third, data centers should face financial penalties if they close or scale back operations earlier than expected.

Without such safeguards, ratepayers risk holding the bag on long-term power purchase agreements that utilities enter into with data centers that leave early. Termination fees can ensure that investment risk remains with the entities that create it.

Data center developers value one thing above all else – speed. Incentives that reduce the lead time of their projects are key. State leaders could consider various options, such as streamlined environmental permitting, grid interconnection and judicial review.

It is encouraging that California lawmakers are already considering a data center policy of this nature. Two of State Senator Steve Padilla‘s bills — bills of the Senate 886 and 887 — will provide basic payer protection while incentivizing high-quality data center projects through expedited judicial review.

At a recent hearing, Public Utilities and Energy Committee Chair Coty Petrie-Norris emphasized a similar carrot-and-stick approach are considered in the assembly.

Data centers are an increasingly important part of the U.S. economy — but in many states, their growth comes at a cost to ratepayers and the environment. California can get ahead of this by establishing thoughtful statewide policies that could leverage the benefits of data centers and mitigate risks.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.