Customers could end up paying for data centers' energy costs in the absence of reform: Experts

In some advanced economies, electricity infrastructure and cost of utilities are undergoing structural changes because of artificial intelligence-driven demand for data centers.

In the process, U.S consumers could be paying higher utility bills because of the sector shifting costs to consumers, warned a latest paper by the Harvard Electricity Law Initiative.

Meanwhile in the U.K, residents may experience higher wholesale prices in light of a proposed reform to the electricity market that would favor data centers which harness renewable energy.

As pricing concerns emerge, regulation and energy grid reform will take center stage in managing energy prices and meeting changing energy needs.

Special contracts between utilities and data center companies are one of the ways higher costs associated with data centers may transfer onto everyday consumers, identified a report by the Harvard Electricity Law Initiative in March.

Such contracts "allow an individual consumer to take service under conditions and terms not otherwise available to anyone else." In other words, they can be used to shift costs from data centers to consumers because of the subjectivity and complexity in those contracts' accounting practices, the report stated.

Moreover, special contracts are approved by the Public Utilities Commission but tend to undergo "opaque regulatory processes" that make it difficult to assess if costs have been shifted from data centers onto the consumer.

To remedy this, the report recommended regulators tighten oversight over special contracts or completely do away with them and opt for existing tariff practices.

"Unlike a one-off special contract that provides each data center with unique terms and conditions, a tariff ensures that all data centers pay under the same terms and that the impact of new customers is addressed by considering the full picture of the utility's costs and revenue," according to the report.

Jonathan Koomey, a researcher in energy and information technology, concurs with the need for data centers to pay according to their usage of the energy grid.

"The key point, in my view, is that highly profitable companies who impose costs on the grid with big new loads should pay the costs created by those new loads," Koomey told CNBC.

Beyond utility companies and regulators, "intervenors in the utility regulatory process also play a critical role," Koomey said.

Intervenors can include a specific group of constituents or a large commercial or industrial customer who partake in proceedings. They may raise issues pertaining to customer service and affordability and ultimately allow for commissions to hear from a broad group of stakeholders.

"They often can dig deeper than the overburdened regulators into the projections and technical details and reveal key issues that haven't yet surfaced in regulatory proceedings," Koomey added.

Another factor affecting utility prices is the excessive development of energy infrastructure.

Utilities and pipeline companies in the states of Virginia, North Carolina, South Carolina and Georgia are planning a "major buildout of natural gas infrastructure over the next 15 years," potentially based on an overestimation of data center load forecasts, highlighted a report by the Institute for Energy Economics and Financial Analysis in January.

Proactive decisions on the part of utilities and regulators are needed to prevent ratepayers from being "on the hook" for overbuilt infrastructure, said the IEEFA report.

Policymakers across states have adopted a slew of measures to incentivize, curb and regulate the influx of data center development, from tax breaks to legislative bills, with a focus on ensuring non-data centers consumers do not bear undue costs, according to a report by the Gibson Dunn Data Centers and Digital Infrastructure Practice Group.

In the U.K, data centers and consumers face a different pricing challenge amid government plans to transform the country's electricity market into a decarbonized, cost-effective and secure electricity system.

The zonal pricing scheme that is being explored under the government's Review of Electricity Markets Arrangements would mark a shift away from uniform pricing to a split electricity market. Under the new framework, consumers in different geographical zones would be subject to different wholesale electricity prices based on the marginal cost of meeting demand at that location.

Modeling from consulting firm Lane Clark and Peacock suggests that Northern Scotland would experience lower wholesale prices owing to their high renewable penetration and relatively low demand.

The rest of the U.K, accounting for 97% of national electricity demand, is poised to see a rise in wholesale prices from the current national pricing model.

The impact on retail prices remains murky as yet.

"It is not clear how this may impact retail prices as wholesale prices are only one part of the overall electricity bill for consumers, and DESNZ still needs to make various decisions," according to joint comments from Sam Hollister, Head of Energy Economics, Policy, and Investment and Dina Darshini, Head of Commercial and Industrial at Lane Clark Peacock's energy transition division, LCP Delta.

The DESNZ is the U.K.'s Department for Energy Security and Net Zero.

While tech firms appear onboard with the lower costs that zonal pricing stands to offer, based on think tank research supported by Amazon, OpenAI and Anthropic, whether data centers do in fact stand to benefit from zonal pricing would depend on their type of operations, according to Hollister and Darshini.

Those potentially well-suited for zonal pricing include data center facilities that handle workloads that can be shifted in time or location, they said.

AI training for deep learning models is one such example. Such workloads can be scheduled during off-peak hours when electricity prices may be lower and synchronized with periods of surplus wind or solar power, which would reduce costs and alleviate grid congestion.

Similarly, data centers that do not need to be close to major urban centers or end users — such as those supporting hyperscale AI training, cloud and large-scale data storage facilities or scientific computing hubs — could also benefit from cheaper electricity when located in regions with high renewable generation and low local demand, Hollister and Darshini said.

However, "not all AI workloads are flexible — real-time inference tasks, such as those used in chatbots, fraud detection, or autonomous vehicles, require immediate processing and would not benefit from time-shifting," they added.

Latency-sensitive applications such as financial trading and real-time streaming that require close proximity to users would also find zonal pricing "less viable."

Proponents of zonal pricing point to the benefits of reducing the need to move energy over long distances.

But with the National Energy System Operator's plans to increase network capability and connect more offshore wind, focusing on grid infrastructure is important, "and zonal pricing won't eliminate those requirements," according to Hollister and Darshini.

"It's not just data centers that are going to need this additional capacity on the grid, they're probably the most high profile ones, but EV charging is going to change the grid. National Grid as an organization have been talking about the change in the demand profile from EVs for a very long time," David Mytton, a researcher in sustainable computing, told CNBC.

The demands on the energy grid posed by the electrification of vehicles is a challenge shared across the U.S. and U.K.

In the U.S., electric vehicles will constitute over half of all new cars sold by 2030 and is set to place a considerable strain on an aging energy grid system.

While the electricity consumption of U.S. data centers is growing at an increasing pace, a report by the Lawrence Berkeley National Laboratory published in December noted that this is playing out against a "much larger electricity demand that is expected to occur over the next few decades from a combination of electric vehicle adoption, onshoring of manufacturing, hydrogen utilization, and the electrification of industry and buildings."

Given this, the infrastructural and regulatory reforms that emerge out of data center management would be helpful for an imminent era of changing electricity demand, said Mytton and fellow researchers.