California’s data centers should be models of affordable, clean electricity

California’s sky-high electricity rates risk making monthly bills unaffordable for families and the state less economically competitive and less of a global hub for technological innovation.

Last year, state leaders made progress on reforms aimed at improving energy affordability.  But the expansion of energy-intensive data centers to fuel the boom in artificial intelligence is challenging those gains.

Other states’ experience offers a cautionary tale: In Virginia and across parts of the Northeast and Midwest, data centers have added billions of dollars to costs for ratepayers. The cause is twofold: the build-out of new transmission and distribution lines to serve the new data centers’ load and the higher wholesale power prices from the surge in demand.

Unmanaged data center growth also creates key environmental risks. If powered by natural gas, these facilities could generate significant new greenhouse gas emissions. Many data centers also rely on diesel backup generators that cause localized air pollution.

California already ranks third nationally in data center capacity, and the California Energy Commission forecasts an additional 4-6 gigawatts of new data center demand by 2035. Left unchecked, this expansion could drive up energy costs, strain the grid and undermine the state’s environmental goals.

But with thoughtful planning, data centers can be developed in a manner that actually benefits ratepayers, improves grid reliability and minimizes environmental harms. California should establish clear standards for affordable and clean data center development — and offer it as a model for the rest of the country. 

The foundation of such an approach is a framework built around three core policies.

First, data centers should pay their full costs of connecting to the grid. 

Transmission and distribution upgrades built to serve new data centers should not be subsidized by households and small businesses that receive little, if any, benefit. A fair share of grid hardening and wildfire mitigation costs should also be assigned to data centers.

Second, data centers should bring clean energy and flexibility to the electricity system.

Requiring facilities to install on-site generation and storage that can be dispatched by the California independent system operator, and to actively reduce demand when the grid is stressed can support the state’s goals for reliable and affordable electricity. Data centers should also be incentivized to rely entirely on zero carbon energy resources to power their facilities.

Third, data centers should face financial penalties if they shut down or scale back their operations earlier than expected. 

Without such safeguards, ratepayers risk holding the bag on long-term power purchase agreements utilities reach with data centers that depart early. Termination fees can ensure that investment risk stays with the entities creating it.

Data center developers value one thing above all else — speed. Incentives that reduce lead times for their projects are key. State leaders could consider a variety of options, such as streamlined environmental permitting, grid interconnection and judicial review. 

Encouragingly, California lawmakers already are contemplating a data center policy of this nature. Two of State Sen. Steve Padilla’s bills — Senate bills 886 and 887 — would provide core ratepayer protections while incentivizing high-quality data center projects via expedited judicial review. 

At a recent hearing, Assembly Utilities and Energy Committee Chair Cottie Petrie-Norris highlighted a similar carrot-and-stick approach being considered in the Assembly.

Data centers are an increasingly important piece of the US economy — yet in many states their growth has come at a cost for ratepayers and the environment. California can get ahead of this by establishing thoughtful in-state policies that could harness the benefits of data centers and reduce the risks.