Supporting Data Center Development by Reducing Energy System Impact
In the last decade, American data center energy use has tripled. By 2028, the Department of Energy predicts it will either double or triple again. To meet growing tech industry energy demands without imposing a staggering toll on individual energy consumers, and to best position the United States to benefit from the advancements of artificial intelligence (AI), Congress should invest in innovative approaches to powering data centers. Namely, Congress should create a pathway for data centers to be viably integrated into Thermal Energy Networks (TENs) in order to curb costs, increase efficiency, and support grid resilience and reliability for all customers.
Congress should invest in American energy security and maximize benefits from data center use by:
- Authorizing a program for a new TEN pilot program that ties grants to performance metrics such as reducing the cost of installing underground infrastructure,
- Including requirements for data centers related to Power Usage Effectiveness (PUE) in the National Defense Authorization Act for Fiscal Year 2026, and
- Updating the 2018 Commercial Buildings Energy Consumption Survey (CBECS) Data Center Pilot to increase data center participation.
These actions will position the federal government to deploy innovative approaches to energy infrastructure while unlocking technological advancement and economic growth from AI.
Challenge and Opportunity
By 2028, American data center energy demands are expected to account for up to 12% of the country’s electricity consumption from 4.4% in 2023. The development of artificial intelligence (AI) technologies is driving this increase because they consume more compute resources than other technologies. As a result of their significant energy demand, data centers face two hurdles to development: (1) interconnection delays due to infrastructure development requirements and (2) the resulting costs borne by consumers in those markets, which heighten resident resistance to siting centers nearby.
Interconnection rates across the country are lengthy. In 2023, the interconnection request to commercial operations period was five years for typical power plant projects. In states like Virginia, widely-known as the “Data Center Capital of the World,” waits can stretch to seven years for data centers specifically. These interconnection timelines have grown over time, and are expected to continue growing based on queue lengths.
Interconnection is also costly. The primary cost drivers are various upgrade requirements to the broader transmission system. Unlike upgrades for energy generators, which are typically paid for by the energy generators, the cost of interconnection for new energy consumers such as data centers affects everyone around them as well. Experts believe that by socializing the costs of new data center infrastructure, utilities are passing these costs to ratepayers.
Efforts are underway to minimize data center energy costs while improving operational efficiency. One way to do that is to reclaim the energy that data centers consume by repurposing waste heat through thermal energy networks (TENs). TENs are shared networks of pipes that move heat between locations; they may incorporate any number of heat sources, including data centers. Data centers can not only generate heat for these systems, but also benefit from cooling—a major source of current data center energy consumption—provided by integrated systems.
Like other energy infrastructure projects, TENs require significant upfront financial investment to reap long-term rewards. However, they can potentially offset some of those upfront costs by shortening interconnection timelines based on demonstrated lower energy demand and reduced grid load. Avoiding larger traditional grid infrastructure upgrades would also avert the skyrocketing consumer costs described above.
At a community or utility level, TENs also offer other benefits. They improve grid resiliency and reliability: The network loops that compose a TEN increase redundancy, reducing the likelihood that a single point of failure will yield systemic failure, especially in light of increasing energy demands brought about by weather events such as extreme heat. Further, TENs allow utilities to decrease and transfer electrical demand, offering a way to balance peak loads. TENs offer building tradespeople such as pipefitters ”plentiful and high-paying jobs” as they become more prevalent, especially in rural areas. They also provide employment paths for employees of utilities and natural gas companies with expertise in underground infrastructure. By creating jobs, reducing water stress and grid strain, and decreasing the risk of quickly rising utility costs, investing in TENs to bolster data center development would reduce the current trend of community resistance to development. Many of these benefits extend to non-data center TEN participants, like nearby homes and businesses, as well.
Federal coordination is essential to accelerating the creation of TENs in data-center heavy areas. Some states, like New York and Colorado, have passed legislation to promote TEN development. However, the states with the densest data center markets, many of which also rank poorly on grid reliability, are not all putting forth efforts to develop TENs. Because the U.S. grid is divided into multiple regions and managed by the Federal Energy Regulatory Commission, the federal government is uniquely well positioned to invest in improvements in grid resiliency through TENs and to make the U.S. a world leader in this technology.
Plan of Action
The Trump Administration and Congress can promote data center development while improving grid resiliency and reliability and reducing consumers’ financial burden through a three-part strategy:
Recommendation 1. Create a new competitive grant program to help states launch TEN pilots.
Congress should create a new TEN pilot competitive grant program administered by the Department of Energy. The federal TEN program should allow states to apply for funding to run their own TEN programs administered by states’ energy offices and organizations. This program could build on two strong precedents:
- The Department of Energy’s 2022 funding opportunity for Community Geothermal Heating and Cooling Design and Deployment. This opportunity supported geothermal heating and cooling networks, which are a type of TEN that relies on the earth’s constant temperature and heat pumps to heat or cool buildings. Though this program generated significant interest, an opportunity remains for the federal government to invest in non-geothermal TEN projects. These would be projects that rely on exchanging heat with other sources, such as bodies of water, waste systems, or even energy-intensive buildings like data centers. The economic advantages are promising: one funded project reported expecting “savings of as much as 70% on utility bills” for beneficiaries of the proposed design.
- The New York State’s Large-Scale Thermal program, run by its Energy Research and Development Authority (NYSERDA), has offered multiple funding opportunities that specifically include the development of TENs. In 2021, it launched a Community Heat Pump Systems (PON 4614) program that has since awarded multiple projects that include data centers. One project reported its design would save $2.4 million or roughly 77% annually in operations costs.
Congress should authorize a new pilot program with $30 million to be distributed to state TEN programs, which states could disperse via grants and performance contracts. Such a program would support the Trump administration’s goal of fast-tracking AI data center development.
To ensure that the funding benefits both grant recipients and their host communities, requirements should be attached to these grants that incentivize consumer benefits such as reduced electricity or heating bills, improved air quality and decreased pollution. The grant awards should be prioritized according to performance metrics such as projected cost reductions related to drilling or to installing underground infrastructure and greater operational efficiency.
Recommendation 2. Include power usage effectiveness in the amendments to the National Defense Authorization Act for Fiscal Year 2026 (2026 NDAA).
In the National Defense Authorization Act of 2024, Sec. 5302 (“Federal Data Center Consolidation Initiative amendments”) amended Section 834 of the Carl Levin and Howard P. “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015 by specifying minimum requirements for new data centers. Sec. 5302(b)(2)(b)(2)(A)(ii) currently reads:
[…The minimum requirements established under paragraph (1) shall include requirements relating to—…] “the use of new data centers, including costs related to the facility, energy consumption, and related infrastructure;.”
To couple data center development with improved grid resilience and stability, the 2026 NDAA should amend Sec. 5302(b)(2)(b)(2)(A)(ii) as follows:
[…The minimum requirements established under paragraph (1) shall include requirements relating to—…] “the use of new data centers, including power usage effectiveness, costs related to the facility, energy consumption, and related infrastructure.”
Power usage effectiveness (PUE) is a common metric to measure the efficiency of data center power use. It is the ratio of total power used by the facility over the amount of that power dedicated to IT services. The PUE metric has limitations, such as its inability to provide an apples-to-apples comparison of data center energy efficiency based on variability in underlying technology and its lack of precision, especially given the growth of AI data centers. However, introducing the PUE metric as part of the regulatory framework for data centers would provide a specific target for new builds to use, making it easier for both developers and policymakers to identify progress. Requirements related to PUE would also encourage developers to invest in technologies that increase energy efficiency without unduly hurting their bottom lines. In the future, legislators should continue to amend this section of the NDAA as new, more accurate, and useful efficiency metrics develop.
Recommendation 3. The U.S. Energy Information Administration (EIA) should update the 2018 Commercial Buildings Energy Consumption Survey (CBECS) Data Center Pilot.
To facilitate community acceptance and realize benefits like better financing terms based on lower default risk, data center developers should seek to benchmark their facilities’ energy consumptions. Energy consumption benchmarking, the process of analyzing consumption data and comparing to both past performance and the performance of similar facilities, results in operational cost savings. These savings amplify the economic benefits of vehicles like TENs for cost-sensitive developers and lower the potential increase of community utility costs.
Data center developers should create industry-standard benchmarking tools, much as other industries do. However, it’s challenging for them to embark on this work without accurate and current information that facilitates the development of useful models and targets, especially in such a fast-changing field. Yet data sources such as those used to create benchmarks for other industries are unavailable. One popular source is the CBECS, which does not include data centers as a separate building type. This issue is longstanding; in 2018, the EIA released a report detailing the results of their data center pilot, which they undertook to address this gap. The pilot cited three main hurdles to accurately account for data centers’ energy consumption: the lack of a comprehensive frame or list of data centers, low cooperation rates, and a high rate of nonresponse to important survey questions.
With the proliferation of data centers since the pilot, it has become only more pressing to differentiate this building type and enable data centers to seek accurate representation and develop industry benchmarks. To address the framing issue, CBECS should use a commercial data source like Data Center Map. At the time the EIA considered this source “unvalidated,” but it has been used as a data source by the U.S. Department of Commerce and the International Energy Agency. Additionally, the EIA should also perform the “cognitive research and pretests” recommended in the pilot to find ways to encourage complete responses in order to recreate its pilot and seek an improved outcome.
Conclusion
Data center energy demand has exploded in recent years and continues to climb, due in part to the advent of widespread AI development. Data centers need access to reliable energy without creating grid instability or dramatically increasing utility costs for individual consumers. This creates a unique opportunity for the federal government to develop and implement innovative technology such as TENs in areas working to support changing energy demands. The government should also seize this moment to define and update standards for site developers to ensure they are building cost-effective and operationally efficient facilities. By progressing systems and tools that benefit other area energy consumers down to the individual ratepayer, the federal government can transform data centers from infrastructural burdens to good neighbors.
This budget was calculated by using the allocation for the NYSERDA Large-Scale Thermal pilot program ($10 million) and multiplying by three (for a three year pilot). Because NYSERDA’s program funded projects at over 50 sites, this initial pilot would plan to fund roughly 150 projects across the states.
Performance-based contracts differ from other types of contracts in that they focus on what work is to be performed rather than how specifically it is accomplished. Solicitations include either a Performance Work Statement or Statement of Objectives and resulting contracts include measurable performance standards and potentially performance incentives.
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