I have a handful of blog posts that I want to write, a backlog resulting from September mayhem in the world of energy. There’s a follow up to the fairly technical look behind GridSolver and some of the features that we’ve been building into the WattCarbon Aristotle platform. But before all that, I want to return to the idea of a Community Energy Portfolio Standard.
I floated this idea in late August, as the crescendo of public outrage over data centers was cresting over the nation. Unsurprisingly, nearly every conversation at NY Climate Week this year touched on this idea in one form or another.
“Why don’t we get data centers to pay for [XXX]” was the refrain, and data center companies seem to be obliging. One developer tried direct cash payments to local homeowners. Amazon and Meta separately announced $1b for community investment funds. Google has a $17m Water Restoration Fund on top of many other initiatives. The list is long, and at times, bewildering.
Politicians smell opportunity. For example, in New York, Governor Kathy Hochul has suggested that new large loads should pay $1 million per megawatt into a government piggybank. This money would fund affordable housing, childcare, roads, and a lot of other programs that Democrats care about. Nearly every state - Red or Blue - has a proposal like this now. We might call this the Great AI Shakedown.
The idea behind these reparations is that data centers are making so much money that they should compensate the general public, given that their massive revenue is enabled by their use of public energy resources. Estimates range, but it’s safe to assume that a data center will earn roughly $1.25 in revenue for each kilowatt hour that it consumes (typically costing them around $0.20 in energy bills). These are money-printing machines, and most of that money will end up in Silicon Valley and Wall Street and not in the communities where the power grids are laboring to keep up with demand.
But while the allure of booty leads all of us to consider what nirvana might unfold, these untold riches are far from guaranteed, and poorly designed programs threaten to waste what is otherwise a spectacular moment for community reinvestment into the energy transition.
Why this Matters
Nearly 40% of carbon emissions are associated with buildings and upwards of 75% of carbon emission reductions will be delivered through investments in heating, transportation, and clean energy generation. We probably shouldn’t evaluate data center impact solely in terms of carbon emissions, but the link between data center energy use and the fact that what’s driving global warming is also largely related to energy use shouldn’t be lost either.
The reasoning behind a Community Portfolio Standard is more than “make them pay their fair share.” To be clear, there is every reason to expect a data center to pay for its power, its allocation of capacity, and infrastructure investments required to transport power to its site. A data center’s GHG emissions should be fully mitigated and other externalities should be addressed, just like any other new construction.
But the bit-watt spread, the margin that is earned on the consumption of electricity, means that any other form of extracting concessions from a data center except for those that enable it to consume more electricity will be suboptimal and result in a missed opportunity for the community. Left to traditional tax and spend politics, we’ll likely see a repeat of California’s Cap and Trade debacle, where billions of dollars in taxes were levied on polluters for their GHG emissions only to be poured down the drain of a high-speed rail boondoggle.
Rather than filling the coffers of government agencies, data centers should be investing directly into their local communities. These investments should be tied to the thing that data centers care about the most - watts. Again, these data centers will earn around $30/day for using the amount of electricity that most people use in their homes on a daily basis. Some of these data centers are the equivalent of a large city in terms of their energy use, which means that they’ll be earning upwards of $30 million per day.
What is Possible
Imagine instead of a few thousand dollars here or there for a playground and some empty promises, that a data center had to make a firm commitment to unlock new capacity on the grid by paying for solar panels on every roof, a battery in every garage, and a new efficient heat pump in every back yard. What if free energy efficiency upgrades were available for anyone who wanted them and low-income weatherization wasn’t an underfunded state program but a ubiquitous feature?
Tying the allocation of watts for the data center to their investment in watts in the community and making their ability to make money contingent on successfully delivering on these community benefits aligns incentives in a way that leads to spirited competition, rather than shirking or avoidance. A data center that shows up to a city council meeting with a well-formed community benefit plan tied to its own consumption of power, where lower bills, warmer showers, and colder beers are the payoff for sharing in the public power supply is a better outcome for our communities, is a better way to approach the politics of data center development, and eliminates most of the pork barrel cynicism that accompanies climate-oriented policies today.
Looking around the country, there are many more initiatives to tax and regulate data centers than there are proposals to incentivize community energy development. Some states are leaning the right direction, but we won’t get there by piling more money into traditional utility rebate programs. A fresh approach that ties the insatiable desire for more power to investment into clean, community-based energy infrastructure unlocks far more value and earns data centers the right to use public power resources.