In the January 2025 issue of Climate and Energy, NERA Senior Managing Director Jeff D. Makholm, Director Laura T. W. Olive, and Senior Analyst Emily Beiser offer a second installment in their ongoing series addressing critical issues surrounding data centers. This article delves into the outcomes of the 1 November 2024 Federal Energy Regulatory Commission (FERC) Technical Conference on "Co-Located Load" and highlights the significant regulatory and economic challenges in the data center industry.
The authors draw attention to how a split-decision FERC order the same day as the Technical Conference had the effect of erasing $12 billion in common equity value for nuclear plant owners, both active and shuttered, who hopefully anticipate the co-location of hyperscale data centers at their sites. FERC's decision underscores their urgent need to have a broader understanding and economic analysis of geography and investment risks associated with data centers, particularly with artificial intelligence (AI) growth. Notably, some participants at the conference questioned the relevance of the focus on co-location amid the more pressing issues of grid access and a backlog of generation projects awaiting interconnection.
The article emphasizes two critical aspects that have not been adequately addressed by FERC: economic geography and investment risk in transmission infrastructure. The authors argue that the current regulatory framework inadequately recognizes the geographical imperatives that influence data center development, particularly the proximity to fiber optic capacity and low-cost electricity—both of which appear in abundance in the United States but only at specific locations. FERC's inability to deal with geography in any systematic or competitive way in the regulation of transmission charges is a major and time-consuming barrier for those who would invest in such technology.
The article concludes with recommendations for addressing the challenges in the data center industry, including the need for FERC to recognize the highly unique nature of data centers compared with other industrial energy uses. Furthermore, there is an urgency to resolve the years-long backlog facing new generating facilities to preserve international AI competitiveness. Finally, FERC administrative procedures should be reevaluated, including prohibitions on discrimination and normal due process in federal regulatory action, when it comes to supplying capital for AI electricity needs so that it will be possible to leverage existing capital market sources. FERC can certainly play a role in convening the areas of its historical experience and those of other agencies and particularly sovereign states, to address how to connect AI to America's uniquely competitive and flexible capital markets. The authors think that FERC's first task is to recognize its evident limitations in providing the solutions AI needs. By doing so, FERC can better support the rapid growth of data centers necessary for maintaining US leadership in AI technology.
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