Allocating Electricity

Discover how rising data center demand is straining the US grid and explore new approaches to manage electricity allocation.

The biggest bottleneck in the AI revolution is no longer the shortage of GPU chips—it’s the shortage of electricity. Modern data centers are now measured by how many gigawatts of power they consume, not how many servers they hold. As AI demand surges, even previously closed nuclear power plants on Three mile island will be reopening just to feed the energy needs of AI data centers. That really surprised me. what are the main problems, and what solutions are emerging?

Paper reviewed: Klass, Alexandra B. and Owen, Dave, Allocating Electricity (August 20, 2025). 94 George Washington Law Review (forthcoming 2026), UC Law San Francisco Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=5399325 or http://dx.doi.org/10.2139/ssrn.5399325

Summary

The rapid growth of data centers driven by AI and cryptocurrency is pushing US electricity demand to new heights, challenging traditional utility models and risk allocation. This paper examines the implications and potential solutions.

Key Findings

• The U.S. electricity demand is rising rapidly due to increased electrification and data center growth driven by artificial intelligence (AI) and cryptocurrency.
• Data centers are expected to account for a significant portion of the projected growth in electricity demand, with some estimates suggesting they could consume up to 12% of nationwide electricity demand by 2028.
• Utilities are struggling to keep up with the demand, with interconnection requests from data centers often exceeding available capacity, leading to delays of four to eight years or more for grid connections.
• The traditional "duty to serve" model, where utilities must meet peak demand, is being challenged by the rapid growth in data center demand, raising questions about risk allocation and innovative contracting approaches.
• Alternative approaches, such as interruptible contracts and demand-response programs, are being explored to manage the increased demand and allocate risks more effectively.

Implications

Business and Policy Implications

• Utilities and regulators need to adapt to the changing landscape by exploring new contracting approaches and risk allocation strategies to manage data center demand.
• Policymakers should consider implementing policies that encourage innovation, such as demand-response programs and interruptible contracts, to manage peak demand and reduce the strain on the grid.
• Companies investing in data centers should be prepared to bear some of the risks associated with their demand, potentially through innovative contracting arrangements that reflect their specific needs and circumstances.
• Regulators should prioritize transparency and fairness in allocating risks and costs associated with data center demand, ensuring that existing consumers are protected and that data centers are incentivized to manage their demand effectively.

Introduction

The U.S. electricity system is facing unprecedented challenges due to rapidly growing demand driven by data centers, electrification, and other factors. After decades of relatively flat demand, electricity consumption is rising, with significant implications for utilities, regulators, and consumers. The increasing demand is driven primarily by data centers powering artificial intelligence and cryptocurrency, as well as electrification of vehicles and industries. This surge in demand is stressing the electricity grid, raising concerns about capacity, reliability, and the environmental impact of meeting this new demand.

Background and Context

Historically, the U.S. electricity system has been based on the principles that utilities have a duty to serve all customers within their service territories and that electricity supply should always meet demand. However, the rapid growth in data center demand is challenging these foundational principles. The electricity grid is facing significant strain, with utilities struggling to keep up with interconnection requests from data centers. The situation is further complicated by the long lead times required to build new generation and transmission infrastructure, as well as regulatory and political hurdles to expanding the grid.

The growth in data center demand is not only a U.S. phenomenon but is also being observed in other countries, such as Ireland, where large data centers are putting pressure on the grid. The increasing demand for electricity is driven by the expanding use of AI and cryptocurrency, which require significant computational power and, consequently, large amounts of electricity.

In response to these challenges, utilities, regulators, and tech companies are exploring new approaches to managing data center demand. These include innovative contracting strategies, such as interruptible contracts and demand-response programs, which aim to allocate risks more effectively and encourage innovation in managing electricity demand. The experience of other resources, such as natural gas and water, which have faced similar challenges of scarcity and variability, offers valuable lessons for managing the growth in electricity demand.

The natural gas industry has dealt with similar issues in the past, particularly during the 1970s when natural gas shortages led to the implementation of curtailment policies. The industry eventually transitioned to a more market-based approach, with the use of interruptible contracts and capacity release programs becoming more prevalent. Similarly, water law in the western United States, particularly the doctrine of prior appropriation, provides insights into managing scarce resources through a system of prioritized water rights and trading mechanisms.

These analogies suggest that a combination of contractual arrangements and market mechanisms could be effective in managing the growth in electricity demand. By allowing for interruptible or curtailable service for large consumers like data centers, utilities can better manage peak demand and reduce the strain on the grid. Secondary markets can also play a crucial role in allowing companies to hedge against the risks associated with curtailment, promoting more efficient use of electricity resources.

As the U.S. electricity system navigates these challenges, it is clear that a one-size-fits-all approach will not be sufficient. Instead, a nuanced strategy that incorporates elements of contracting, regulation, and market mechanisms will be necessary to ensure a reliable, efficient, and sustainable electricity supply. By drawing on lessons from other industries and resources, policymakers and industry stakeholders can develop innovative solutions to the challenges posed by the rapid growth in data center demand.

Main Results

The rapid growth in data center demand is driving a significant increase in electricity consumption, with projections indicating a 25% increase by 2030. This surge is primarily driven by the expansion of computing capacity, particularly for artificial intelligence (AI) and cryptocurrency applications. The resulting strain on the grid is prompting utilities and regulators to reevaluate their approaches to managing electricity supply and demand.

Key Findings

• The U.S. electricity demand is expected to grow by 1.7% annually, with some estimates as high as 3.2% per year.
• Data centers are anticipated to account for 12% of nationwide electricity demand by 2028, up from approximately 4% in 2023.
• Individual utilities are experiencing rapid growth rates, with some expecting to double their peak demand in the next decade.
• The increased demand is not limited to the U.S., with countries like Ireland facing similar challenges.

Projections and Uncertainties

• Projections for electricity demand growth are changing rapidly, with estimates varying widely depending on factors like technological advancements and changes in energy policy.
• The actual demand from data centers may be overestimated, and the industry's growth could be impacted by factors like AI chip shortages or changes in cryptocurrency markets.

Methodology Insights

The research approach involves analyzing the implications of rising electricity demand on the grid and exploring alternative strategies for managing supply and demand. By drawing on lessons from other resources like natural gas and water, the authors propose a contracts- and trading-based framework for regulating data centers, known as "demand-side connect-and-manage."

Importance of Methodology

• The demand-side connect-and-manage approach allows for the integration of new large loads into the grid while managing the associated risks.
• This methodology is informed by the experiences of other industries, such as natural gas and water, which have faced similar challenges in managing scarcity and variability.

Analysis and Interpretation

The findings suggest that the traditional duty-to-serve model, which prioritizes meeting peak demand at all times, may not be the most effective approach in managing the emerging challenges posed by data center demand. Instead, a more nuanced strategy that incorporates elements of contracting, regulation, and market mechanisms is necessary.

Patterns and Trends

• The growth in data center demand is driving innovation in electricity supply and management, with companies exploring new approaches to clean energy and energy efficiency.
• The emergence of new technologies, such as AI and cryptocurrency, is creating new challenges and opportunities for the electricity sector.

Implications for Business Leaders

• Companies must navigate the complexities of electricity contracting and regulation to ensure a reliable and efficient supply of electricity for their operations.
• The growth in data center demand presents opportunities for innovation and investment in clean energy and energy efficiency technologies.

Actionable Recommendations

• Utilities and regulators should consider adopting demand-side connect-and-manage approaches to integrate new large loads into the grid while managing associated risks.
• Companies should explore opportunities for innovation and investment in clean energy and energy efficiency technologies to support the growth in data center demand.

By adopting a demand-side connect-and-manage approach and leveraging lessons from other industries, the electricity sector can better manage the challenges posed by the rapid growth in data center demand and create opportunities for innovation and investment in clean energy and energy efficiency technologies.

Practical Implications

The rapid growth in data center demand presents both challenges and opportunities for the electricity sector. As the demand for electricity continues to rise, utilities and regulators must adapt to ensure a reliable and efficient supply of power. The practical implications of this growth are far-reaching, with significant consequences for the management of electricity systems.

Real-World Applications

The increasing demand for electricity from data centers is driving the need for innovative solutions to manage the grid. Utilities and regulators are exploring new approaches to integrate large loads into the grid while minimizing the risks associated with supply-demand mismatches. One potential solution is the adoption of demand-side connect-and-manage approaches, which allow new large loads to connect to the grid while providing a framework for managing curtailments during periods of high demand.

Strategic Implications

The growth in data center demand has significant strategic implications for businesses and managers. Companies that are able to adapt to the changing energy landscape and invest in clean energy and energy efficiency technologies are likely to be better positioned to meet the challenges and opportunities presented by this growth. Utilities and regulators must also be proactive in managing the grid and ensuring that it is able to meet the increasing demand for electricity.

Who Should Care

The growth in data center demand and the need for innovative solutions to manage the grid are relevant to a wide range of stakeholders. Utilities, regulators, and companies investing in data centers all have a vested interest in ensuring that the electricity system is able to meet the increasing demand for power. Additionally, consumers and policymakers who are concerned about the environmental impacts of energy production and consumption should also be aware of the implications of this growth.

Actionable Recommendations

To address the challenges and opportunities presented by the growth in data center demand, the following actionable recommendations are proposed:

1. Adopt demand-side connect-and-manage approaches: Utilities and regulators should consider adopting demand-side connect-and-manage approaches to integrate new large loads into the grid while managing associated risks.
2. Invest in clean energy and energy efficiency technologies: Companies should explore opportunities for innovation and investment in clean energy and energy efficiency technologies to support the growth in data center demand.
3. Develop flexible pricing mechanisms: Utilities and regulators should consider developing flexible pricing mechanisms that reflect the changing demand for electricity and provide incentives for energy efficiency.
4. Enhance grid management: Utilities and grid operators should invest in advanced grid management technologies to improve the efficiency and reliability of the grid.
5. Promote transparency and coordination: Utilities, regulators, and companies should work together to promote transparency and coordination in the management of the grid and the integration of new large loads.

Conclusion

The growth in data center demand presents both challenges and opportunities for the electricity sector. By adopting demand-side connect-and-manage approaches and investing in clean energy and energy efficiency technologies, utilities and companies can better manage the grid and reduce the risks associated with supply-demand mismatches. The strategic implications of this growth are significant, and companies that are able to adapt to the changing energy landscape are likely to be better positioned to meet the challenges and opportunities presented by this growth. Ultimately, a coordinated and proactive approach to managing the grid and promoting innovation and investment in clean energy and energy efficiency technologies is essential for ensuring a reliable and efficient supply of power to meet the growing demand from data centers.