Our Thematic and Equity Strategist Michelle Weaver and Power,
Utilities, and Clean Tech Analyst David Arcaro discuss how
investments in AI data centers are affecting electricity bills
for U.S. consumers.
Read more insights from Morgan Stanley.
----- Transcript -----
Michelle Weaver: Welcome to Thoughts on the
Market. I'm Michelle Weaver, Morgan Stanley's U.S. Thematic and
Equity Strategist.
David Arcaro: And I'm Dave Arcaro, U.S.
Power, Utilities, and Clean Tech Analyst.
Michelle Weaver: Today, a hot topic. Are
data centers’ raising your electricity bills?
It's Tuesday, December 23rd at 10am in New York.
Most of us have probably noticed our electricity bills have been
creeping up. And it's putting pressure on U.S. consumers,
especially with higher prices and paychecks not keeping pace.
More and more people are pointing to data centers as the reason
behind these rising costs, but the story isn't that simple.
Regional differences, shifting policies and local utility
responses are all at play here. Dave, there's no doubt that data
centers are becoming a much bigger part of the story when it
comes to U.S. electricity demand. For listeners who might not
follow these numbers every day, could you break down how data
centers' share of overall electricity use is expected to grow
over the next 10 years? And what does that mean for the grid and
for the average consumer?
David Arcaro: Definitely they're becoming
much bigger, much more important and more impactful across the
industry in a big way. Data centers were 6 percent of total
electricity consumption in the U.S. last year. We're actually
forecasting that to triple to 18 percent by 2030, and then hit 20
percent in the early 2030s. So very strong growth, and increasing
proportion of the overall utility, electricity use.
In aggregate, this is reflecting about 150 gigawatts of new data
centers by 2030. Just a very large amount. And this is going to
cause a major strain on the electric grid and is going to require
substantial build out and upgrading of the transmission system
along with construction of new power generation – like gas plants
and large-scale renewables, wind, solar, and battery storage
across the entire U.S.
And generally, when we see utilities investing in additional
infrastructure, they need to get that cost recovered. We would
typically expect that to lead to higher electric rates for
consumers. That's the overall pressure that we're facing right
now on the system, from all these data centers coming in.
We've got these substantial infrastructure needs. That means
utilities will need to charge higher prices to consumers to cover
the cost of those investments.
Michelle Weaver: What are the main
challenges utilities companies face in meeting this rising demand
from data centers?
David Arcaro: There are a number of
challenges. If I were to pick a few of the biggest ones that I
see, I think managing affordability is one of the biggest
challenges the industry faces right now, because this overall
data center growth is absolutely a shock to their business, and
it needs to be managed carefully given the political and
regulatory challenges that can arise when customer bills are
getting are escalating faster than expected. The utility industry
faces scrutiny and constant attention from a political and
regulatory standpoint, so it's a balance that has to be very
carefully managed. There are also reliability challenges that are
important.
Utilities have to keep the lights on, you know, that's priority
number one. The demand for electricity is growing much faster
than the supply of new generation that we're seeing; new power
plants just aren't being built fast enough. New transmission
assets are not being built, as quickly as the data centers are
coming on. So, in many areas we're seeing that leads to
essentially less of a buffer, and more risk of outages during
periods of extreme weather.
Michelle Weaver: And you mentioned,
companies are thinking about how can they insulate consumers. Can
you take us through some of the specifics of what these utility
companies are doing? And what regulators are doing to respond, to
protect existing customers from rate increases driven by data
centers?
David Arcaro: Definitely. The industry is
getting creative and trying to be proactive in addressing this
issue. Many utilities, we're seeing them isolate data centers and
charge them higher electric rates, specifically for those data
center customers to try to cover all of the grid costs that are
attributable to the data center's needs.
A couple examples. In Indiana, we're seeing that there's a
utility there who's building new power plants, specifically for a
very large data center that's coming into the state and they're
ring fencing it. They're only charging the data center itself for
those costs of the power plants. In Georgia, a utility there is
charging a higher rate for the data centers that are coming in to
the Atlanta area – such that it actually more than covers the
costs and compensates other consumers in the form of bill credits
or even bill reductions as those data centers come on.
Similarly, then, in Pennsylvania, there's a utility that has
excess transmission infrastructure than the state’s
[infrastructure]. They're better able to absorb data center
activity. They're able to lower customer bills as the data
centers come on, as they spread their costs over a larger
customer base in that case. So, this isn't universal though.
There are some areas around the country where there are costs
related to data center growth that get socialized across all
consumers.
One approach I also wanted to mention that we're seeing data
centers pursue more and more actively is to power themselves.
Essentially bring their own power, and they're using gas
turbines, engines, and fuel cells that they're deploying right on
site. This is actually in many cases faster than connecting to
the grid, but it also avoids any consumer impact. Companies like
Solaris Energy and Bloom Energy are two providers of that type of
solution. And we're also seeing at a broader industry level.
Another approach is the idea of data centers being flexible or
turning off and not consuming power from the grid at certain
times when the grid is facing stress, in an extreme weather
scenario in the winter or summer. And that idea is gaining
traction as well. So, we think the industry is looking for
approaches that could ease the pressure on the system and on
reliability, manage the affordability issues while continuing to
enable and build data centers.
Michelle Weaver: You mentioned what a few
different states are doing on this front. But data centers are
not evenly distributed through states or evenly distributed
across regions. Are there regional differences in how data center
growth is impacting electricity prices?
David Arcaro: There are a couple of key
differences that we're seeing around the country. Some areas just
aren't getting that many data centers, you know, so I'd point out
the northeast – in New England, in New York, we're just not
seeing that much data center growth. So, it's less of an issue,
the impact of data center power demand impacting customer bills
in those areas. And then in some regions around the country, the
utility structure is important to be aware of. There are some
regions where the price of electricity fluctuates based on the
supply and demand of power, rather than being directly set and
controlled by a regulator. In those markets, data centers can
actually more directly impact the price of electricity and there
just isn't an easy way in that case to ring fence them and
protect consumers from the impact of price increases.
So that's where we think unique challenges can arise. And over
time, we would expect to see the most meaningful rate impacts to
consumers in those areas specifically. And examples would be New
Jersey, Maryland, Illinois, Pennsylvania, Ohio. Those are a
couple of the states where we're seeing those more volatile and
directly impacted prices.
So, as we look at utilities, we think the state exposure is going
to be more and more important. And so, a few companies like
NextEra, Sempra and AEP are a few utilities that are in states
that have less affordability concerns and less direct exposure to
rate impacts from data centers. And then several power companies
like Vistra and Talen have more of their power plants that are in
states that have excess infrastructure; and as a result,
potentially less affordability concerns.
So, clearly the energy sector is facing real challenges and
changes. So, Michelle, how are rising electricity bills actually
affecting U.S. households?
Michelle Weaver: It's putting even more
pressure on a consumer that's already being stretched thin by
multiple years of inflation and elevated price levels, and
electricity is a really different type of good. It's very
different from gasoline or other consumer goods or staples – in
that it's an essential good. You need to have it. And it's a
network service that households are structurally locked into.
Unlike gas where you could adjust your trip frequency or take a
different type of transport, there really aren't good substitutes
for electricity.
And so this dynamic weighs on consumers. They have to continue
paying these bills, and it weighs particularly heavily on lower
income consumers where utility bills make up a much larger
portion of their household budget.
So, it crowds out some of that other potential spending.
David Arcaro: That makes a lot of sense.
It's an important expense to consider in terms of the impact on
consumers. And, you know, as a result, are consumers blaming data
center electricity demand for this rise that we're seeing in
bills or are they pushing back?
Michelle Weaver: Yeah. Data center
development is quickly becoming a NIMBY or “not in my backyard”
issue with communities pushing back and even getting projects
canceled. Companies really need to find ways to address local
concerns about environmental and water related externalities. And
message that they're able to insulate consumers, or do something
to mitigate these potentially higher electricity bills.
A recent poll of around 2200 voters found that just over half of
respondents attribute overall electricity price increases to AI
data centers, at least somewhat. While around another third,
consider them very responsible. And these responses are
consistent across all regions and across political affiliations.
And I think this consistency across regions is really
interesting. As we're talking about before, data centers are not
impacting bills in every region. But consumers are still blaming
them and still attributing bill increases there.
It’s clear that both the energy sector and U.S. consumers are
navigating a complex landscape with data center growth at the
center of the conversation. As policy responses evolve and the
U.S. midterm elections approach, this issue is only going to gain
more attention. And we'll be sure to bring you the latest. Dave,
thanks for taking the time to talk.
David Arcaro: Great speaking with you,
Michelle.
Michelle Weaver: And thanks for listening.
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