New report examines electricity contracts for data centers and other mega-load or large-load facilities

Utilities across the country are receiving requests to supply vast amounts of electricity for new data centers and crypto mines. Utilities — and the state public utility commissions that regulate them — have begun proposing and reviewing new rate structures for these “mega-“ or “large-loads” to protect residential and small business customers from rising costs associated with data centers’ energy use. The immense projected energy demand of data centers and crypto mining — with costly infrastructure investments and discounted rates offered to those digital loads — threaten higher utility bills for households and small businesses unless utilities and regulators implement important protections.

Data centers and other large loads — some of which use as much power as a small city — may require significant investment in the electric system, both in generation and transmission. Investments of that size are riskier given the magnitude of the expense and the presumed life of the infrastructure required to serve them, meaning generations of customers could be on the hook for paying off those balances.

Earthjustice retained Energy Futures Group (EFG) to review existing and emerging pricing structures for mega- or large-load customers. EFG examined a multitude of tariffs and special contracts and selected ten tariffs and special contracts from different states for deeper analysis. The report identifies common and emerging provisions in these new tariffs and special contracts, as well as specific provisions that can serve as safeguards for ratepayers and/or climate and environmental goals.  The existing and emerging tariff structures examined in the report seek to ensure that large loads contribute fairly to the costs of maintaining a stable and sustainable grid, while safeguarding the interests of other ratepayers.

This is a rapidly evolving landscape. This report was drafted based upon information available throughout the latter half of 2024. In addition to federal administrative changes impacting this subject area, new proposals are being considered in many states, and public utility commission dockets can move quickly. The report identifies five current ongoing proceedings that may have a persuasive impact on other large-load tariffs. This includes large-load tariff proceedings in Ohio and in Indiana. In the latter, the parties have agreed to a landmark settlement with many terms discussed below and in the EFG report, including minimum contract length, a demand ratchet, and the assignment of certain costs, with additional provisions regarding low-to-middle income customers.

Several common elements that aim to protect existing customers have emerged recently, including:

Contract Length

For data centers, the full operating capacity does not typically occur for the first few years of a utility service contract, which impacts the timing of cost recovery and cash flow from servicing the load for the utility. Some large-load tariffs are proposing 10-to-20-year minimums, with penalties for termination. A longer contract term helps ensure the facility pays its fair share of the utility investment over the years of the contract.

• Example: Kentucky Power Company’s New Tariff Industrial General Service

Investments and Cost Allocation

Utilities should assess whether they can accommodate the increased or new load proposed by the large-load facility without compromising service to existing customers. One way to avoid existing customers from subsidizing new large-load facilities (or any facility) is to evaluate if the revenues from the large-load facility will exceed the cost to serve that customer. Additionally, the customer proposing a large-load facility should pay for the feasibility study, which is conducted to understand what system upgrades may be needed to accommodate the load safely, depending on size thresholds, including transmission and distribution upgrades.

Utilities can lessen the risk to ratepayers with provisions that ensure the facility remains invested in the location. Utilities should require surety bonds or minimum bills to avoid the risk of stranded assets.  This is especially important where forecasted new load may not materialize, leaving other ratepayers to foot the bill.

• Example: Evergy Missouri Metro’s Special High-Load Factor Market Rate (“Schedule MKT”)

Tariffs and special contracts also may establish a minimum load factor or a range for power factor to encourage consistent monthly energy usage. Encouraging consistent energy usage will ensure that utilities can cover the fixed cost to serve the load.

• Example: Montana-Dakota Utilities Company’s High Density Contracted Demand Response Rate

Demand Management

Instituting flexible interruptible tariffs allows utilities to accommodate new customers while accounting for risk and available system capacity. Pricing of interruptible and demand response efforts must be done with enough incentive to offset the inconvenience of reducing activity, but not so high as to incentivize high profitability from shedding load which can be costly to other ratepayers. In Texas, there have been grid issues when an interruptible service client does not consistently respond as expected.

• Example: Entergy Arkansas’s Large Power High Load Density Service Rate Schedule

Rate Design

Some utilities are using a demand charge, based on a facility’s peak use of electricity, to help cover fixed costs associated with new large loads. This charge allows the utility to recover the cost of providing a reliable service during times of peak demand. Demand ratchets are another method of ensuring fixed costs are covered.

Affordable, Clean Energy

As mentioned in a previous post, new clean energy is most often the most affordable option and can be fastest to energize. Data centers should invest in renewable energy in the surrounding community, such as solar, wind, rooftop solar, and storage. Otherwise, adding significant levels of electricity load in communities can derail clean energy progress and result in increased harmful pollution. Most tariffs related to crypto mining and data centers do not have renewable energy or clean energy procurement requirements. Existing efforts to require clean energy are often achieved through renewable energy credits or carbon offsets that are rife with accountability issues. Of the tariffs and proceedings reviewed, only one had an explicit clean energy provision.

Renewable energy requirements or clean energy tariffs should be designed to ensure the procurement of clean energy that is “new, now, and near” — a new supply of clean energy (additionality), with power consumption not exceeding production (ideally, hourly-matching), and that it be easily delivered in the same region (deliverability).

• Example: Evergy Missouri Metro’s Schedule MKT

Balancing Growth and Fairness

Data centers and crypto mining operations are often falsely touted as providing economic development. While utilities and local governments may offer discounted rates and tax credits to attract these businesses, the actual economic benefits do not often align with the size of the load being added to the grid. For instance, crypto mining operations and data centers may not contribute significantly to job creation compared to the level of electricity they consume, and may crowd out local or small businesses seeking to grow. Requiring a certain number of jobs for economic development rates helps ensure that economic development truly benefits the community, and by incorporating safeguards for existing ratepayers, utilities can create a fairer and more sustainable tariff structure.

• Example: Indiana Michigan Power’s Economic Development Rider 2

With the largest public-interest clean energy litigation program in the U.S, Earthjustice attorneys appear before Public Utility Commissions across the country to protect residential and small business owners and to ensure that clean energy remains a key consideration in regulators’ decisions. Many regulatory tools exist to mitigate the impact of load growth on the grid, protect other customers, and help us address load growth. The tariff provisions described will have legal or persuasive precedent. Elements of a rate structure can safeguard existing ratepayers, ensure new customers pay their fair share of system costs, promote more efficient electricity usage, and minimize adverse impacts to clean energy and climate goals.