Innovative Utility Tariffs Pave the Way for Flexible, Carbon-Free Data Centers

With data center construction booming across the United States to power AI, electric utilities, regulators, and policymakers are racing to accommodate load growth. The past year has brought legislatively-mandated impact studies, efforts to tame new uncertainties in load forecasting and interconnection operations, and proposals for new customer rates and contracts to more fairly manage the emerging utility and consumer risks of rising data center electricity demand. These dynamics create many opportunities for innovation and partnerships.

We are particularly excited about new regulatory constructs and innovative partnerships to meet demand growth and advance carbon-free energy deployment. Major examples from the past 12 months include:

• New large-load tariffs with mechanisms to support new clean, firm generation in vertically integrated markets (example: NV Energy)
• Utility power procurements for new 24/7 carbon-free electricity in competitive markets (ex: SoCal Edison and Fervo’s partnership)
• Utility-corporate partnerships to develop grid-scale renewables and storage in competitive markets (example: OPPD and Google partnership)
• Power purchase agreements (PPA) and co-location proposals combining carbon-free generation and energy storage (example: Google and Kairos PPA; Constellation’s Three Mile Island agreement with Microsoft)
• Creative utility pilots to test new models for large-load customer load flexibility and interconnection (example: PG&E FlexConnect)

These new approaches require utilities, regulators, and developers to balance multiple objectives. In this blog, SEPA and the North Carolina Clean Technology Energy Center (NCCETC) highlight emerging trends in one approach: clean energy tariffs for data centers and other large loads.

Utility tariffs set the price, terms, and conditions of utility service as approved by utility regulators. Basic service tariffs enable utilities to recover the costs of building and operating the electric system from customer payments. Voluntary tariffs can be designed to additionally incentivize customers to help meet varied system goals and objectives (for example, a time-of-use rate).

With the novel class of tariffs for large load customers, utilities are exploring how to adjust commercial and industrial (C&I) tariffs to better balance emerging constraints and objectives in the data center era. Reviews by Lawrence Berkeley National Laboratory and by Energy Futures Group summarize the large-load tariff pricing structure and contract terms that stakeholders are currently testing.

Each large-load tariff is a package deal, tailoring and bundling contract elements for emerging, territory-specific context. Using a sample of the utility tariffs tracked via DSIRE Insight, we explore the opportunity to incorporate carbon-free electricity into these tariffs and highlight five examples of recently proposed or approved tariffs.

Tariffs are an opportunity to secure clean, firm generation for large loads

Artificial intelligence (AI) innovations are driving much of the data center expansion and load growth, with more expected as the U.S. government and private enterprises pursue AI ambitions. Unique grid planning, operational, and financial risks emerge from both the features of data center load (e.g., large relative to system capacity, high reliability requirements) and the nature of emerging markets for data center services (e.g., sudden and fast-paced expansion, drive for competitive edge in dynamic regional and global markets).

Main concerns for utilities include ensuring resource adequacy, providing timely customer access to transmission and distribution capacity, and mitigating risks to their business and existing customers of potential over-investment or stranded assets if the market for data center services later recedes or shifts unexpectedly. In essence, utilities want to attract and serve their new large customers, while also encouraging them to fairly share in the system benefits and costs of investing in their needs and goals.

To help meet their operational needs and sustainability goals, hyper-scale data center operators have been pursuing reliable carbon-free electricity. Some developers and operators have also been willing to help mitigate their facilities’ contribution to peak load growth through load curtailment or by tapping onsite battery storage. Utilities have several paths to support these pursuits:

• Offering traditional utility green tariffs,
• Promoting existing C&I customer programs and services, particularly those aimed at demand response and energy efficiency,
• Incorporating carbon-free electricity options into emerging utility tariffs for large-load C&I customers, and
• Designing standalone voluntary “clean transition tariffs,” which build upon objectives and approaches common among the first three options.

Utilities and stakeholders need strategic approaches to meet these goals while keeping pace with the foundational grid considerations noted above. Clean transition tariffs are one approach with potential to solve both large load considerations and advance corporate and utility carbon reduction.

5 tariffs to expand clean, firm generation and protect customers from large load growth cost-shifting

Utility large-load rates are nascent. Five of the newest tariffs illustrate the varied ways utilities can bundle investments in clean, firm generation capacity (or load flexibility) with mechanisms that increase utility and large customer certainty and shield other customers from cost-shifting concerns generally associated with data center load growth. We will monitor these tariffs through regulatory review, approval, and customer uptake.

AEP Ohio’s Joint Application with Amazon Data Services for Approval of a Reasonable Arrangement builds on a 2018 economic development arrangement through which Amazon developed data centers in AEP Ohio’s service territory. The new proposed tariff would enable the parties to change Amazon’s transmission cost calculation from the existing monthly demand metric to an annual peak metric once Amazon installs behind-the-meter battery storage at its data centers. Parties suggest that this change better incentivizes customer battery storage investments capable of providing peak time load flexibility. – Pending, Docket No. 23-0858-EL-AEC (2023); Note that separately, AEP Ohio proposed New Tariffs Related To Data Centers and Mobile Data Centers (Schedule DCT), Pending, Docket No. 24-508-EL-ATA (2024).

Dominion Energy Virginia’s Schedule CFG: Carbon-Free or Renewable Generation Supply Service is a voluntary, experimental ‘companion’ rate through which existing customers can either (1) purchase up to 100% of the net energy output and RECs from a new carbon-free or renewable generation facility constructed by Dominion Energy on the customer’s behalf, or (2) purchase power through a PPA arranged by the utility with a third-party. Costs of option one would be “ring-fenced”; that is, isolated from the utility’s cost of service study and not allocated to other customers. The tariff is available to small, intermediate, and large (>500 kW) non-residential customers. –Approved, Docket No. PUR-2024-00114 (2024)

Indiana Michigan Power Company’s Tariff I.P. (Industrial Power) applies to general service customers with a minimum monthly energy demand of 600 kW. In collaboration with Amazon Data Services, Microsoft, Google, and the Data Center Coalition, the utility proposed tariff modifications for new or expanding large-load customers (70 MW at an individual site or 150 MW on an aggregated basis). These changes, established through a settlement agreement, include collateral and financial assurance requirements, a 12-year minimum contract length after a load ramp period, flexible cancellation and capacity reduction conditions, an 80% minimum monthly minimum billing demand, and higher minimum monthly charges to reduce cost shifting. Additionally, the parties have agreed to develop a new Clean Transition Tariff, targeted for introduction by October 1, 2025, will convene to discuss emergency load-shed and demand response opportunities, and will study the potential of grid-enhancing technologies to expand transmission capacity. As part of the agreement, Amazon, Microsoft, and Google will each contribute $500,000 annually for five years to the Indiana Community Action Association (INCAA) to support low-income customer weatherization initiatives. – Approved, Docket No. 46097 (2024)

Montana Dakota Utilities’ High-Density Contracted Demand Response Rate grants a lower-cost, interruptible service rate to data center-like customers with an expected demand of at least 10 MW per month at a single delivery point and an expected minimum load factor of 85% that also can curtail load for up to 200 hours per year. The tariff also defines cost responsibilities for new infrastructure required to serve the customer. – Approved, Docket No. PU-22-337 (2023)

NV Energy’s Clean Transition Tariff (CTT) would supply interested large customers with dedicated access to new clean generation resources at rates that do not impact other customers. The utility and customer would arrange a customer-specific long-term energy supply agreement (“ESA”) to be filed within the NV Energy integrated resource plan. Through the ESA, NV Energy would purchase electricity from a third party’s new clean resource and sell the power to the utility customer. The customer would claim all hourly energy attributes. This tariff is pending regulatory approval and is designed for fully-bundled new retail customers with an annual average hourly load of 5 MW or more. Under this pending tariff, NV Energy has filed an application for an ESA with Google, in which NV Energy would procure electricity from a 115 MW enhanced geothermal project. Once operational (expected in 2030), Google would purchase 100% of the energy and RECs from NV Energy for a 15-year term. – Pending, Docket No. 24-05023 (2024) and Pending Docket No. 24-06014 (2024).

Synthesis: Large load tariffs can accomplish multiple objectives

The five tariffs above, and others we have reviewed, are complementary to tariffs more generally designed to help utilities manage large-load growth. The commonalities suggest that accommodating large-load growth, securing local economic benefits, advancing clean and reliable energy, and protecting existing utility customers are interconnected objectives– rather than separate or competing tasks.

What Can Utilities Accomplish with Tariffs for Large-Load Customers?

Source: SEPA (2024)

SEPA and NC Clean Energy Technology Center Look Ahead

Innovative tariffs represent a key strategy for addressing the challenges of rising demand from data centers and large energy consumers. By integrating fair (and creative) contract terms and supportive pricing for customers interested in powering their facilities with carbon-free or renewable resources, emerging rate structures promise to support broader economic development that depends on grid reliability and cost and risk management for all customers.

As we move further into 2025, legislative and regulatory activity around data center load growth is expected to continue. Staying ahead of these trends is critical for utilities, state policymakers, and regulators. Our organizations will continue tracking state progress and utility tariffs that can support progress, and we welcome partners who would like to be involved in this effort.