FERC’s New Large Load Orders: Key Takeaways for Utilities and Data Centers

As data center demand continues to grow, regulators, utilities, and developers are facing increasing pressure to connect large new loads to the grid whileaintaining reliability and managing costs. 

In this video, Balch partner Lyle Larson discusses the Federal Energy Regulatory Commission (FERC)’s recent show cause orders directing regional grid operators to evaluate and, where necessary, revise their approaches to large-load interconnections. 

Lyle explores what these developments could mean for utilities and data center developers, including greater scrutiny of project planning, evolving cost-allocation expectations, and the need for clear processes to support reliable and efficient grid integration.

Lyle is partner in Balch’s globally ranked Energy Practice. He is recognized by Chambers Global as a leader in the Energy and Electricity sector.

Full Transcript:

FERC issued a series of show cause orders each directed to a different region in the country and each region is going to need to establish clear rules of the road and accountability to ensure that reliability is preserved while new large loads are coming in, which can be very disruptive, but also that other customers, non-data center customers, you and me, that we're not going to have to pay for a part of it and that's it. The clear rules of the road for accountability and for modeling to ensure that there's nothing connected to the grid that we don't thoroughly understand. 

What FERC identified as the core issue for hyperscalers to be able to get speed, get to power fast, they call that speed the power, is to allow each region to adapt a solution that makes sense given its history, the way it's structured, who's doing what, how they're organized and one size can't fit all. And that was critically important because one size won’t fit all. 

What is new is a degree of accountability. I think every region has it on their to-do list to figure out how to effectively respond to the difficult challenges of adding major new loads quickly, but you can have a little bit of, what's the word, paralysis by analysis. And so, I think there's been a paralysis by analysis, a little bit of a phenomenon and in some regions the states and the utilities aren't on the same page. Not every state in a large region has the same politics. Some are pro data centers, some aren't. Some want any kind of generation supply that can keep the lights on to be built. Other regions want just no carbon because they have environmental priorities. And so, every region's a little bit different and so folks allowing each region to develop a regional approach. Now they're going to have certain minimum expectations. 

There's going to be a lot of need for the utilities in the regions to spell out cost responsibilities, to spell out how to properly and quickly study the impacts and to coordinate all of that. And so, I think what it's going to do is every region is going to have to make a showing to FERC within the next few months that either their existing approaches meeting all the minimum requirements of what FERC has articulated needs to be done and a lot of that is to preserve reliability, make sure that we understand that everything that's connecting to the grid, we understand what it's doing, what is it taking, what is it giving and what is it causing us to have to do because of it's so unique and it is so unique so that we can make sure that we're counting for the costs that are incurred because of those data centers and making sure that the data centers carry that cost so that the rest of us don't have to pay for it. 

That's the key and what data center developers would take from it I think is you need to really understand your project. You need to really understand the flexibility characteristics that your project might have. What are the unique compute needs and compute patterns that you're under? When are you responding to increase versus when are you doing backup? And there's a lot of stuff that goes on and the computers are consuming a lot of the electricity, but a lot of the electricity is climate control in the building to make sure the computers don't overheat. 

But anyway, the data centers need to really understand and have a real plan for when they come up to the utilities and make a pitch or an application to attach to the system. They need to be ready to really explain to the utilities who they are, not in terms of corporation but what they are, how big, what other components are you going to be flexible? Are you not going to be flexible? Are you going to have some of your own generation onsite? Are you not? If you do, how are we going to integrate your power generation with your power consumption and how is that going to interface with the grid that all has to be understood in advance and studied so that the cost impacts can be assessed and accounted for. 

So, it's a combination of fiscal responsibility and accountability for the impacts that you have. And what FERC has said is basically no free lunch. The utilities are not going to be able to give special good rates for the data centers and make everyone else kind of make up the difference. The data centers are going to have to pay for what they cause to be done to the system and that's going to require a lot of financial responsibilities, a lot of collateral and deposits and things like that. '

And so right now there's a lot of speculation and a lot of developers may be speculating that they may build a data center campus somewhere. They don't really know exactly who's going to be in there. They don't really know exactly if they're going to have any onsite generation supply of their own, but they just want to get the process started. That's called a speculative interconnection request. They might do that in two or three locations in different parts of the country and they're going to be arbitraging. Who's going to give me the best deal? Who's going to interconnect me and give me my power for the least amount of money, but I don't really know who I am yet. I just want to gauge out the economics. That approach isn't going to work anymore because I don't think it's worked at all anyway. You need to really know what your plan is and you need to have a really clear vision of what you are proposing to put on the grid so that way it can be studied expeditiously and the customers can be protected because you're going to be able to maybe be flexible and flexible is good. 

But if you're not going to be flexible, you're going to have to pay. And I think what we're seeing is data center developers are going to need to really have a plan and speculative inquiries and things like that aren't going to get anywhere. I think that's what we're seeing.