A backlog of equipment deliveries, project approval delays, trade barriers, and years-long queues for grid interconnection are all driving up construction costs.
In Fairfield, Texas, the Pinoak Creek Energy Center, a natural gas power plant, is a prime example of this trend.
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Driven by surging electricity demand and equipment supply backlogs, the construction costs of various types of power plants in the US have risen by over 10% compared to last year.
The scale of power generation capacity under construction in the US has reached a historic high, but the costs of building these plants have increased significantly.
A surge in electricity demand from AI data centers, combined with delayed equipment deliveries, protracted approval processes, rising trade costs, and grid interconnection queues that can last for years, is pushing up the construction costs of all types of power stations.
According to the annual power generation cost report from Lazard, the construction costs of natural gas plants, large-scale solar, and wind power projects have all increased by more than 10% since last year.
Rising electricity bills for consumers are already causing widespread discontent, and this upward pressure on costs further intensifies the burden on households.
The cost of building power plants is ultimately passed on to monthly electricity bills, with power companies recovering infrastructure investments over the long term. Data from the US Bureau of Labor Statistics shows that electricity prices in June were 4% higher year-on-year, outpacing overall inflation.
"Demand growth is the single most dominant factor in the energy industry right now," said George Bilicic, Vice Chairman of Lazard and head of the firm's global power, energy, and infrastructure business. "Oil and gas exploration and production companies, pipeline companies, utilities, and infrastructure service providers are all affected. Demand is genuinely pushing up costs."
The US is experiencing a grid infrastructure boom not seen in decades, primarily driven by a rush of companies building AI training data centers, which consume as much electricity as entire cities. In addition, increased industrial electricity use, building electrification for heating, the adoption of electric vehicles, and population growth are all contributing to higher electricity demand.
Power Lines, a consumer education organization, estimates that the total capital expenditure plans for 51 private US electric utility companies over the next five years will reach $1.4 trillion, an increase of over 20% from last year’s estimate.
In Oakland, California, a cooling system sits on the roof of a Digital Realty data center.
Most of the new grid capacity in the US in the short term comes from renewable energy and battery storage projects. According to the US Energy Information Administration, solar, wind, and storage account for about 90% of the projects under construction expected to be commissioned this year.
Lazard data shows that the average levelized cost of construction for large-scale solar has risen to $69 per megawatt-hour, up from $58 last year. When solar is paired with battery storage, the cost increases to about $109 per megawatt-hour, compared to $91 previously.
The surge in electricity demand is also boosting the popularity of natural gas plants, which remain the largest source of electricity in the US. Gas turbines, which are essentially large jet engines modified for power generation, are now facing order backlogs, with customers waiting years for delivery.
Scott Strazik, CEO of GE Vernova, a leading gas turbine supplier, said on Wednesday that a large number of customers have orders with delivery dates scheduled for the 2030s, and the company is working to expand production to catch up. He expects that by the end of this year, half of the gas turbine capacity for 2031 will be locked in by long-term orders.
"This demand cycle is longer and the market is larger," Strazik said.
Combined-cycle power plants, which are the backbone of the grid and the most efficient type of natural gas plant, recovering waste heat from the gas turbine to generate additional power, have seen their construction costs rise to a nearly 15-year high. According to Lazard, the cost per megawatt-hour has increased from $79 last year to $90.
Bilicic noted, "The trend of rising costs is very difficult to reverse. Just from a supply and demand perspective, price increases are an inevitable outcome."
This year, there has been widespread political criticism of rising electricity prices, with President Trump being the most vocal. The White House has facilitated voluntary commitments from tech companies and several electric utilities not to pass on the construction costs of new grid infrastructure for data centers to ordinary residents and small businesses.
The effectiveness of these voluntary commitments remains unclear. Electricity pricing is typically regulated by state agencies, and some grid upgrades benefit all users. Traditionally, costs are shared among all consumers, making it difficult to precisely separate expenses specifically attributable to data centers.
A construction site of the St. Vrain gas power plant in Platteville, Colorado.
AI firm Halcyon has compiled data from utility filings across the US, revealing over 190 power disputes nationwide, focusing on contract terms, exclusive tariffs, and billing rules for large electricity customers.
The most intense electricity price disputes are in the region served by the PJM Interconnection, which supplies power to about 67 million people from the Mid-Atlantic to the Midwest. PJM acts as a grid air traffic controller, balancing power supply and demand. With a large number of data centers in Virginia, the supply gap is widening, and regional electricity prices are rising.
PJM pays power plants to ensure they can be available for the grid during peak demand. The latest capacity auction for reserve power did not meet expectations. The organization plans to hold another capacity auction this fall to supplement power resources, but has not yet submitted a detailed plan to regulators.
The independent market monitor for PJM, Monitoring Analytics, recommends that the new electricity load from data centers be separated from the capacity auction market and procured separately. The firm's president, Joe Bowring, stated that the total cost of the capacity market is about $16.4 billion, with $6.3 billion of that attributed to data center electricity demand.
Peter Gardett, CEO of data platform Noreva, pointed out that while the auction hit the price cap, the resulting electricity prices were still insufficient to stimulate developers to build essential power plants, such as new natural gas plants.
"No one was satisfied with the outcome of this auction," Gardett concluded.
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