Power, Water, and Change: AI's Impacts on Energy and Environmental Strategy

Originally Published on Public Utilities Fortnightly

A water-intensive facility is proposed in the arid Southwest or a groundwater-dependent region of Texas, stoking fears of water shortages. Residents learn of a proposed industrial facility and organize public opposition based on fears of environmental impacts and higher electricity costs.

A utility delays retirement of older oil- or coal-fired units and dispatches less efficient generation sources to meet rising power demands, fueling air quality and environmental justice concerns.

What do these scenarios have in common? Data centers.

Unlike so many debates on artificial intelligence (AI), these issues are not theoretical or futuristic. They are happening now. The impacts extend well beyond the virtual economy and directly affect water supplies, power delivery, permitting timelines, and local activism.

Any company that manages energy use, infrastructure, public affairs, or environmental compliance would be wise to account for these developments into its strategy to position itself to navigate emerging risks and stay ahead of potential constraints on resources. Here are just a few of the considerations, followed by five strategies for companies to help protect themselves with vigilance and targeted action.

New Generation Buildup — And Who Pays

Electricity consumption is increasing rapidly. Conservative predictions are 2-3% annually for the next several years, but some projections run as high as 5%. Those numbers sound small, but the growth is dramatic compared to decades of relatively flat to no load growth, and the new electric generation needed to meet this increase is huge.

New demand is largely attributable to the dramatic expansion of data centers as part of the AI boom. Adding to the crunch, gigawatts of baseload electric generating capacity has been retired in the past five years.

So, new generation is needed, as is new transmission to deliver the electricity. But siting, developing, and operating power infrastructure is not cheap, and it takes time. Who pays for this and how do we meet demand in the meantime?

The New Water Wars?

Power is only half the story. Water demand associated with the cooling requirements of data centers has become a flashpoint, especially in arid or groundwater-dependent regions. A large data center may use anywhere from a few hundred thousand to several million gallons of water daily for cooling.

But in some areas, municipal and industrial water supplies are already strained. Adding large, water-intensive facilities raises difficult questions about availability, priority, and long-term sustainability. Even where supplies exist on paper, public perception can tell a different story.

Water quality considerations add another layer of complexity. Increased withdrawals, wastewater discharges, or thermal impacts can implicate existing permits, numeric limits, and downstream users, at least theoretically. What might once have been treated as a routine permitting issue is now a potential catalyst for public opposition or regulatory scrutiny.

Ratemaking Moves Out of the Shadows

Blaming data centers for rising electricity prices does not tell the whole story. Costs have risen across the economy, including for all things that are required to build and maintain electricity generation and transmission infrastructure. In jurisdictions with vertically integrated retail rate regulation, under traditional ratemaking principles, new customers generally bear the costs of any marginal increases in utility’s cost of service they may cause.

Retail ratemaking is not entirely foolproof, however, and is not wholly within the control of either utilities or state regulators. For example, large swaths of the country have experienced rate restructuring or deregulated wholesale power markets, using mechanisms that predate current market trends and that have not been tested in a growth environment like the current one.

Utilities and regulators are experimenting with new approaches: special contract rates, interruptible tariffs, upfront infrastructure contributions, novel cost-allocation methodologies, workarounds to organized wholesale market mechanisms, and even new generation sources specifically designed for data centers.

Done well, these tools can both facilitate growth and protect existing customers. If done poorly (or publicly perceived as such), they can invite litigation, political backlash, or both, with effects rippling out to other customers, including other large industrial and manufacturing concerns.

Rate design should no longer be a sleepy, background issue — it is a material business consideration that must be managed proactively.

Local Activism Reawakened

The most immediate effects of the data center explosion may be social and political. The scale and visibility of data center development has reawakened forms of local activism that many industries had grown accustomed to managing quietly.

Neighborhood opposition, environmental justice concerns, and not-in-my-backyard dynamics are increasingly common. In some cases, they are coupled with efforts to slow data center development using whatever mechanisms local citizens may identify.

These fights now routinely intersect with state-level energy regulation, federal environmental statutes, and utility planning processes. Locals are pulling whatever levers they can find to challenge data center development: land-use challenges, petitions to list local species as threatened or endangered, and organized participation in public service commission proceedings, to name a few.

Local manufacturers and industrial interests may face collateral damage from public efforts originally targeted toward others. Companies that underestimate this dynamic may find themselves reacting rather than shaping outcomes.

Corporate Strategies to Respond

Companies in areas experiencing growth in data centers and proposals for new ones — in other words, most of the United States — can help protect themselves with vigilance and targeted action:

• Treat energy and water as long-term siting constraints, not post-hoc permits: In the past, in many areas, the availability of basic utilities could be taken for granted, subject to permitting and business-as-usual costs. It can no longer be assumed that power and water will always be available with the same predictability and cost. Leading companies will need to anticipate and manage or avoid delays, public opposition, and cost overruns.
• Engage early in utility planning and ratemaking proceedings: As load growth pushes ratemaking into the spotlight, incumbents with significant loads of their own should pay attention to how new large loads are managed, whether individually or through trade associations that carry expertise specific to the ratemaking jurisdiction. Large load developers need to be attuned to these trends as well.
• Plan for generation and transmission, not just interconnection: Increasingly, concerns may move beyond interconnection to more fundamental questions of the availability of generation, transmission, import capacity, and water. Sophisticated commercial and industrial players need to stay abreast of who bears the costs of new investments, how they are recovered, and how reliability obligations will be met under stress conditions.
• Anticipate local and environmental opposition as a business risk: Community concerns over water use, air quality, and other environmental concerns are gaining a higher profile. Companies that proactively manage these issues — through project design, stakeholder engagement, and regulatory strategy — can reduce the likelihood of disputes spilling into contested proceedings. Even with environmental justice falling out of favor at federal agencies, the same community engagement strategies developed for environmental justice may be helpful now.
• Align infrastructure decisions with public and regulatory narratives: Choices about location, power supply, and operations increasingly play out in public forums, from utility commissions to local zoning boards. Consistency between internal strategy and external messaging is critical to maintaining credibility and momentum.

The pace of change may be hard to predict, but the larger arc of the direction is clear. Companies that account for and anticipate the new reality in their energy and environmental strategy now will be far better positioned than those who wait and scramble to respond later.