Data Centers and the Grid: Who Pays for Power?

For data center developers, land and fiber used to be the hard part. Now it is a signed power contract, and increasingly, a political answer to the question of who pays for the wires. Three developments from the past few weeks show how fast the rules are being rewritten.

One utility, 15 gigawatts in a quarter

American Electric Power reported third-quarter results on October 28 and the headline number was not earnings. AEP said it signed 15 gigawatts of new load commitments during the quarter alone, and now expects its incremental contracted load to reach 84 GW by 2031. The company counts a project only when it is backed by a fully executed electric service agreement or letter of agreement.

To serve that demand, AEP expanded its five-year capital plan to $100 billion through 2031, including about $37 billion for transmission, $36 billion for generation and about $22 billion for distribution. Chief executive Bill Fehrman framed the plan around a principle that is quickly becoming the industry standard: new large-load customers should bear the extra system costs they create and fund the investment needed to serve them.

AEP's version of that principle is the take-or-pay contract. It said fully executed agreements of that type in its vertically integrated states are now expected to provide up to $21 billion in fixed-cost offsets for existing residential customers over the life of the contracts, up from $16 billion.

Regulators push back on the grid operator

In the mid-Atlantic and Midwest, the fight is at the federal level. In mid-October, the Federal Energy Regulatory Commission rejected one of two data center proposals from PJM Interconnection, the country's largest grid operator, WYPR reported. That plan, known as Interim Resource Adequacy Service, would have made data centers the first users cut off during a power shortage unless they brought enough new generation of their own. FERC raised concerns that the compensation piece amounted to setting retail rates, which is a state power.

FERC also postponed PJM's proposed Reliability Backstop Procurement, a special capacity auction for large loads that had been set for September 30. Chair Laura Swett called it a deeply flawed, last-minute mechanism with billion-dollar consequences for consumers. FERC did accept PJM's plan to create a Large Load Registry and its definition of a large load customer.

The stakes are visible on household bills. In PJM, capacity prices jumped 568% in summer 2024 and have set records in every auction since, according to WYPR. An October FactCheck.org review cited University of Pennsylvania researcher Sanya Carley's estimate that capacity market increases between mid-2025 and mid- 2026 added about $18 a month to the average home bill in western Maryland and $16 in Ohio, with 63% of those increases attributed to data centers.

Washington stalls, the states move

Congress has not settled the question either. On September 30, the Senate fell short of the 60 votes needed to advance a bill from Sen. Jon Husted of Ohio that would have required utility regulators to consider a federal standard charging large power users for the upgrades needed to serve them. The vote was 57 to 43, even though the House had passed it 417 to 3, the Associated Press reported. Democrats argued it was too weak and backed a mandatory alternative.

The same AP report said about 6 in 10 Americans support limiting the number of new data centers. With federal action stuck, utilities and state commissions are writing the rules contract by contract, which is exactly what AEP's earnings showed.

What it means for CRE investors and owners

Power is now the first diligence item. A data center site without a signed service agreement is a land play, not a data center. We would value powered land, with an executed contract and a delivery date, far above sites still waiting in a utility's study process.

Expect tenants to pay more of the freight. Take-or-pay terms, minimum demand charges and upfront funding of upgrades raise a hyperscaler's all-in cost. That favors the largest, best-capitalized tenants and puts pressure on speculative developers who planned to line up a tenant later.

Curtailment risk is not going away. FERC sent PJM's shutoff plan back, but it did not reject the idea that large loads may have to give way in an emergency. Leases and financing should spell out who bears the cost if a facility is ordered to cut power.

Watch the neighbors. Rising bills have turned data centers into a local issue. Industrial and flex owners near proposed campuses should expect tougher zoning hearings and more public scrutiny of who pays for new power lines and plants.