Rising Plug Prices Are Causing Anxiety (And a Little Craziness…)

Our last Quarterly installment focused on domestic oil supply and the importance of stable affordable gasoline prices for the economy and public sentiment. Over the summer, Bloomberg columnist Liam Denning, offered a different perspective on how energy prices are contributing to the optimism (or surliness) of the nation given the growing consumer dependence on electricity – the largest share of residential demand is tied to electricity use (44%), electricity prices really predates the rise in data with natural gas dependency a close second (41%) and petroleum consumption a far third (9%). It appears to be Liam’s opinion – and, for that matter, a growing chorus of energy journalists – that “plug prices are emerging as the new pump prices for economic anxiety.”

Denning examined rising residential electricity prices in his August opinion piece by breaking down the consumer power bill into the three primary components: generation, transmission and distribution. Of the three, distribution – the lower-voltage networks delivering power locally – has accounted for roughly two-thirds of the increase in average prices over the past decade, according to Jim Murchie, co-founder of Energy Income Partners LLC. Denning laments, “given the complexities behind power bills, everyday Americans can understandably struggle to properly assign responsibility for inflation.”

Under the “assignment of fault” category, a competing number of energy-related news articles would squarely pin the blame for rising electricity bills on data centers. A recent Bloomberg News analysis of wholesale electricity prices found that electricity now costs up to 267% more for a single month than it did five years ago in areas located near significant data center activity. However, the Bloomberg study appears to have cherry-picked its baseline year of 2020 – a year that marked the largest annual decrease in U.S. energy consumption in both percentage and absolute terms for EIA’s consumption data series dating back to 1949. That is not to say that the inability to build power plants fast enough to satisfy growing data center demand won’t impact consumer electricity bills.

Last December, the energy consultancy Energy + Environmental Economics (E3) rigorously quantified the grid and customer impacts of continued data center growth in Virginia. They readily acknowledge that the potential impacts of data centers will be profound and transformative but point out that current electricity rates appropriately allocate costs to the customer classes responsible for incurring those costs. Or to put it another way, Virginia’s utilities have done a pretty good job in ensuring that data centers pay their fair share of the bill. Yet, down the road, E3 points out that secondary impacts upstream from distribution systems, such as increasing tightness in energy and capacity markets, will eventually lead to upward pressure on rates for all ratepayers. The question is whether this moment has already arrived.

In PJM’s territory, the epicenter of Big Tech data center expansion, rising power demand is now at odds with years of declining electricity supply across that region, resulting in a capacity shortage and increased auction prices. Concerns about cost allocation for system capacity have even prompted 11 of the 13 PJM coordination states to form a “governors’ collaborative” to work on reforms to address upstream cost-shifting related to the large-loads. That said, the North American Electric Reliability Corporation has long warned of supply shortfalls – making it clear that the problem of rising electricity prices pre-dates the rise of data center demand. What’s more, regulatory misalignment or the mis-apportionment of system costs could deter the timely beneficial load growth that these large-load consumers bring that might fix the rising plug price problem for the rest of us.

Indeed, it is possible that the data center investment splurge underway could be the catalyst for modernizing the U.S. electric grid and ultimately help lower rates for all customers. Just how, you ask? These emerging big electricity consumers increase utility revenues that can in turn be reinvested to shore up scarce supplies. Is there still work to be done by the industry to ensure that data centers and other large customers pay their equitable share and that the revenues are re-invested appropriately?

Sure, but let’s not lose something valuable (beneficial load) while trying to get rid of something undesirable (cost shifting). Data centers might very well add to immediate cost pressure for electricity consumers but will ultimately aid in the infrastructure investment required to keep prices down over the long run.