Electric utility bills are expected to dramatically rise across the country, particularly in states with large data centers: California, Florida, Virginia, Texas, to name a few. In one year, the national average for electric rates has risen at double the rate of the consumer price index (5.5% versus 2.7%). Why? If you listen to President Trump, the blame is all on renewable energy technologies. The truth is more involved. Five drivers are causing electrical utilities to seek massive rate hikes.
1. Demand after Covid. From 2020-2023, demand was repressed by the pandemic and its lingering effects. A simple supply/demand answer: When demand is outstripped by supply, energy costs stay low. Now that the pandemic is in the rearview, demand is outstripping supply.
2. Demand from New Technologies. In my May 26th, July 13th, and August 17th Substacks, I wrote of the dramatic new demands for water and energy resulting from data centers, AI, and cryptocurrencies. A single data center can use the electricity of a city of 750,000 people. Data centers are populating like dandelions on your new lawn. And the surge of AI is expected to increase the electrical demands of data centers by s much as 10 times. Electrical demand is now expected to rise 60% in the next five years, when the US population is expected to remain static or even drop.
3. Wholesale Energy Costs. Electrical generation requires power. Wholesale energy costs have risen in the last year, largely driven by natural gas prices which increased by 13.8%, far above the CPI 2.7%.
4. Interferences in the Marketplace. Capitalism and markets hate interference and artificial barriers. Renewable energy, wind and solar have made huge inroads into traditional power generation particularly on the micro-level (if a home has solar, the home’s demand to purchase energy decreases, resulting in less pressure on utilities to generate centralized power). The current administration’s war against renewables is increasing, not decreasing, electrical demands and prices. Again, its simple economics. When demand increases over supply, prices rise. Add in the tariffs, and it's a double hit. The price of natural gas turbines has dramatically increased in the past few months due to increased steel and aluminum costs and supply disruptions.
5. The Grid. Transmission is falling behind generation. Add to that, the state of the grid (the infrastructure the transmits electricity) is not good. The Grid is old and has been in need if upgrades for decades. Add in the demands that data centers and AI are placing on generation, and you have a recipe for either power disruptions or a monumental upgrade of the system (and you don’t have to guess who pays for that). Some studies have pegged the costs of infrastructure upgrades to mean utility costs could rise by as much as 18% in the next three years.
So here is the two questions of the day:
1) Is it wise to discourage renewable energy? and
2) When a single user (a data center) uses the electricity of a city, forces new or expanded generating plants, and wholesale replacement of the grid, is it fair for all customers to pay? That is the battle now beginning in many states as public utility commissions seek to revisit traditional rate setting theory which was predicated on costs being shared equally between users. Taking a cue from municipal land use theory, many now argue growth must pay its own way, not be subsidized by existing users.