Electric utilities are raising electricity rates and adding deposit requirements to screen out which data center projects are real.
The surge in artificial intelligence has created demand for building massive hyperscale data centers. Here is a quick overview: power companies are raising rates and collecting deposits to filter out speculative "phantom data centers" from the pile of project applications, keeping only those that are genuinely going to be built. Data center developers are submitting electricity requests to utilities and grid operators on an unprecedented scale. Yet the power industry is raising a pointed question in return: are your projects actually going to be built?
The AI construction boom has brought a once-in-a-generation surge in electricity demand, which should have been a golden era for the electric utility industry. But projects are moving forward so quickly that power companies are finding it increasingly difficult to tell which ones will break ground and which will remain only on paper. To plan grid investment sensibly and protect the interests of ordinary ratepayers, power companies have rolled out a series of screening measures: raising rates, requiring long-term contracts, collecting deposits, and charging hefty engineering assessment fees to separate real projects from wishful ones.
Utilities find themselves in a dilemma: if they underinvest in grid infrastructure, they risk missing out on a massive business opportunity; but if they overbuild, that also creates trouble. The cost of grid construction is shared among all electricity users, and if a data center project falls apart midway, other ratepayers have to foot the bill, helping the utility recover its upfront investment.
Jenny Jones, Executive Vice President of Finance and Strategy at Exelon, said the company distinguishes between "growth that will actually materialize" and "growth that is merely speculative" before making grid expansion investments. "This is obviously critical for our ordinary customers," Jones said. "If we expand the grid and then the data center project falls through, someone has to bear that cost, and that's not fair to other users."
When developers select sites across the country to build data centers, they often simultaneously apply for power supply from multiple utilities. The electricity demand of the same project gets counted two to four times by different suppliers. In some cases, the grid interconnection queue is so long that many data center projects simply choose to build their own power plants. According to research firm Wood Mackenzie, of all the electricity applications data centers submit to power companies, only 23% are "high-certainty projects," while the rest are "phantom data centers." Whether a project will be built and where it will be located are full of uncertainty, which is where the name "phantom data center" comes from.
Jones said that since 2024, the volume of data center electricity inquiries received by power companies has exploded. The typical power scale of a new data center has surged from about 50 megawatts (roughly enough to power 50 Walmart stores) to 1,000 megawatts or even higher, approximately equivalent to the output of a large nuclear reactor. Exelon serves the Mid-Atlantic and Midwest regions of the United States, and initially conducted engineering assessments on each project individually. But the total electricity applications from large customers tripled to 18,000 megawatts, so the company shifted to assessing projects in clusters, studying the combined impact they would have on the grid.
Even after power companies have spent money completing grid upgrades, they still bear the risk of projects falling through midway. "Both internally and externally, people ask us: how do you tell which projects are real?" Jones said. Exelon began requiring that project developers provide binding financial commitments and deposits before the company would conduct in-depth engineering calculations and supporting construction. After screening, the power scale of high-certainty projects dropped to 11,000 megawatts, and these projects collectively paid the company about $1 billion in deposits.
"This approach has indeed filtered out quite a few speculative projects," Jones said. "It doesn't look glamorous. Our project pipeline dropped from 18,000 megawatts to 11,000 megawatts, and investors wonder what happened. But it's the smart thing to do."
State regulators and ordinary ratepayers alike want assurances: data centers that apply for grid infrastructure resources must bear the corresponding investment costs. Otherwise the costs get passed on to ordinary users, pushing up residential electricity bills. The power pressure brought by the AI construction wave has now become a hot political issue. "When I report capital plans to investors, I have to be certain this is real, sustainable business growth," Jones said.
The enormous electricity demand of data centers has put power companies in a bind. Image source: Brian Snyder | Reuters
Many power companies are raising rates for data centers, requiring minimum-term contracts, and setting early termination penalties. According to filings compiled by AI startup Halcyon from various power companies, after 2024, the average minimum contract term for large electricity customers lengthened from 4.6 years to 10.8 years. Cleanview, an organization that tracks data center projects, says Texas has become the hottest data center construction market in the country, with about 12,800 megawatts under construction. But the scale of grid interconnection queue applications has ballooned even more dramatically, exceeding 400,000 megawatts. Although Texas Governor Greg Abbott has paused grid interconnection approval and environmental permitting for some data centers, analysts believe interconnection and other approvals could resume before the end of this year. The state recently introduced new rules: large electricity customers seeking complex grid impact engineering assessments must pay a deposit of $50,000 per megawatt. For example, a 500-megawatt data center would need to pay $25 million.
Jim Burke, CEO of Texas-based power producer Vistra, recently told investors that despite the overwhelming volume of applications, only about 12,000 to 15,000 megawatts of new data center capacity will actually connect to the Texas grid by 2030. "The reported numbers are exaggerated by more than twenty times, which creates enormous confusion for policymakers," Burke said. "So we support streamlining the queue list, making more realistic decisions, and moving the industry forward as a whole."
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