How data center power demand could help lower electricity prices

Geoff Bennett:

We're taking another look now at increasing electricity prices. A few weeks ago, we examined the impact of artificial intelligence and the data centers needed to power it.

Now John Yang explores new findings that break down the issue and point to other factors behind the rising costs.

John Yang:

Geoff, the latest Consumer Price Index showed that the average electric bill went up a little more than 5 percent from September 2024 to September 2025. That's more than the overall rate of inflation for the same period.

The conventional wisdom is that greater demand for power from the explosive growth of data centers is the reason. But a new analysis by Lawrence Berkeley National Laboratory and the consulting group Brattle concludes that it's not that simple.

Ryan Hledik is a principal at Brattle. He was a member of the research team.

Ryan, it's not only not that simple, but it's a little counterintuitive because you say the research suggests that greater demand for electricity can actually bring rates down. How does that work?

Ryan Hledik, Principal, The Brattle Group:

Yes, it can.

And I think the important thing to understand about the power sector is, a big portion of the cost that you're paying in your electricity bill is a fixed cost. It's the poles and wires and power plants and substations that power companies have already gone out and invested in. And they're recovering those costs from you based on how much you and your neighbors and other customers are consuming, how much electricity you're consuming.

And so if utilities can bring in a new large customer like a data center that's going to consume a lot of energy, if they can do that without needing to make big additional investments in infrastructure because they already have capacity on their system to accommodate that new customer, it actually can bring more energy into the system that you can spread those fixed costs out across, and that can actually have downward pressure on rates.

John Yang:

So is there any other way that data centers have an effect on electricity rates?

Ryan Hledik:

There is.

What we're starting to see is that a lot of utilities that did have spare capacity are starting to run into capacity constraints because of all of this increase in demand for electricity. And so when you run into that situation, then there is the potential that utilities are going to need to go out and make new investments to accommodate a new data center or another new large customer.

And those investments could increase costs and would have the potential to increase rates for other customers.

But even in that situation, it's not as simple as to say a new data center means rates are going up, because a lot of utilities around the country are starting to introduce new rate structures specifically for large customers like data centers that are intended to recover those incremental costs that are being introduced by the data centers from those customers and to avoid having those costs shifted to other customers.

John Yang:

So what are the forces or the effects that are pushing rates up?

Ryan Hledik:

There are portions of the electricity distribution system that are 80 years old at this point. And so we have really reached a point at a lot of locations, a lot of regions across the country where utilities are needing to go out and invest to simply replace aging transmission and distribution infrastructure.

And we're needing to do that at a time when the cost of that equipment has been increasing pretty rapidly pretty much ever since the pandemic.

John Yang:

Is the work on that infrastructure also being affected by severe weather, by hurricanes, storms and the like?

Ryan Hledik:

Absolutely.

And there are really two effects to consider there. One is what happens after a hurricane blows through or a winter storm happens and knocks out a significant portion of your power infrastructure. There can be a pretty significant price tag associated with needing to go in and repair or replace those damaged portions of the grid.

The other piece of this is preparing to mitigate some of those risks. And this is a big issue for the Western states right now, particularly California, where there are a lot of preparations that are being made to mitigate the risk of wildfires.

And so when we have looked at the rate changes in California recently, we have found that the single biggest driver of rate increases in California over the last five years has been risk mitigation as a result of wildfires.

John Yang:

What about — there's some places that you have policies to encourage renewable energy. Are they having an effect?

Ryan Hledik:

They are. And that effect — we found that effect can go both ways.

In regions that have access to low-cost wind and solar, which are some of the cheapest sources of energy available, what we found is that in those regions we haven't seen a price increase associated with increased deployment of wind and solar resources. And, if anything, there's a — the relationship is that we have seen some prices decreasing as a result of increased market-based procurement of renewables.

When we see there being the potential for renewables to apply upward pressure on rates is when there's a policy in place called a renewable portfolio standard that would require utilities to go out and procure renewable energy above and beyond what the market would select on its own.

In that case, because you're essentially paying a premium for energy, there can be upward pressure on rates. But that's not really a surprise because the policymakers that are in those states that are making the decision to introduce those policies are doing the math and saying, look, climate change itself can have a very significant cost to society.

And so we're willing to go out and spend a little more on energy to try and mitigate that risk and avoid that broader cost to society. Ryan

John Yang:

Ryan Hledik of the consulting group Brattle, thank you very much.

Ryan Hledik:

Thank you.