Title: Severe Winter Weather, Data Centers and Your Electric Bill: What You Need to Know

This article is a part of our Ask a Professor series, in which Georgetown faculty members break down complex issues and use their research to inform trending conversations, from the latest pop culture hits to research breakthroughs and critical global events shaping our world.

In the last week of January, Winter Storm Fern left hundreds of thousands of Americans without power and with well over a foot of snow.

The storm also caused soaring electricity prices in some parts of the country. In Northern Virginia, the price of wholesale electricity spiked by 800% on the morning of Jan. 25 during the storm. 

Why has electricity gotten so expensive this winter? It’s complicated, said Safak Yucel, associate professor and associate director at the Business of Sustainability Initiative in the McDonough School of Business.

One reason prices could have surged in the region is the high concentration of data centers. Seventy percent of internet traffic passes through Northern Virginia, home to nearly 400 data centers in the so-called Data Center Alley.

But while prices in the short-term may increase, the cost of electricity could be lower for consumers in the long-term, according to Yucel.

“This is because the majority of the costs of producing electricity come from the cost of maintaining wires, which is a fixed cost regardless of the demand,” he said. “As more customers use the grid, this fixed cost is distributed over more customers, and each ends up paying less on a per-unit basis.”

We asked Yucel about how severe weather conditions affect data centers and the price of electricity, how unpredictable prices affect low-income communities, and solutions policymakers and the private sector can consider to stabilize power prices.

According to the National Energy Assistance Directors Association, heating costs are projected to increase by 9.2% this year, and U.S. households on average are expected to pay $995 for heat. Why are these costs rising, and why has it gotten so expensive to heat our homes? 

Yes, electricity costs are indeed rising for some households, and the reasons behind this increase are really complicated. The first culprit is obviously inflation as everything has become more expensive over the last few years. It is also important to remember that electricity is a unique product whose price varies significantly across different states. 

Over the last few years, some states have actually seen lower prices when adjusted for inflation, whereas others have seen higher prices. In most cases, like any product, higher prices for electricity can be attributable to higher costs. 

For electricity, these are the costs of generating electrons and transporting them through the grid. The former has actually been getting cheaper due to more efficient power plants, but the latter is getting more expensive as grid components, like wires and poles and labor, are becoming more costly. This is the main reason for higher costs for households.

How do these rising costs affect low-income communities?

These rising costs affect low-income communities disproportionately as they need to spend more of their disposable income on electricity. Unfortunately, in most cases, affordability programs of utility firms are insufficient, which has resulted in significantly higher utility disconnections.

Why are power grids strained during severe weather conditions? How do those weather conditions and climate change shape the price of electricity?

First, a little bit of Electricity 101: Electricity is a really unique product for which supply and demand need to be in a tight balance virtually at all times. This is unlike most other physical products. For example, consider bottled water, which can be produced at a factory to be stocked at a supermarket. The factory does not need to instantaneously produce bottled water once a customer walks into the store. In electricity markets, a power plant physically needs to produce an electron whenever a customer flips a switch. 

This condition of matching demand with supply creates several issues during severe weather conditions. First, some power plants may not be “weatherized,” meaning that their operations may not continue under extreme cold or heat, adding strain to the generation side. Second, utility wires may be exposed to weather conditions and disrupted, basically cutting the transportation of electrons. Due to climate change, such extreme weather events are becoming more frequent, further increasing the costs of maintaining the grid.

Why are data centers so energy-intensive, and how does their demand differ from that of typical residential or commercial users?

Data centers rely on running a massive set of computer chips to run sophisticated algorithms. This typically requires significant use of energy. Their demand differs from that of residential and commercial users in many ways. The most important difference is that their electricity use can be scheduled. For example, when there is an ample amount of generation from renewables, such as wind, which produces electricity with little to no cost, these data centers can be scheduled to run sophisticated tasks, consuming this almost free electricity. This is unlike residential and commercial users, whose demand is much less flexible. 

Does the state generally have any role in regulating the price of electricity? What about specifically in northern Virginia? If not, what are some policy options the state has to stabilize electricity costs for consumers? 

Each state has a public utilities commission that oversees the regulation process for the price of electricity for households. So, yes, each state has a significant role in regulating the electricity price. This is the case for Northern Virginia as well. Northern Virginia is home to a significant number of data centers, and their rapid rise has resulted in significant increases in electricity demand. 

In the long-run, this may actually result in lower electricity prices. This is because the majority of the costs of producing electricity come from the cost of maintaining wires, which is a fixed cost regardless of the demand. As more customers use the grid, this fixed cost is distributed over more customers, and each ends up paying less on a per-unit basis. 

However, this adjustment process takes some time. The rapid increase in demand due to data centers in Virginia may result in higher prices in the short-run as this price adjustment process is not instantaneous.

Microsoft recently announced that it would shoulder higher electricity bills in regions where it is building data centers to prevent passing on the costs to local residents. Is this a sustainable solution moving forward?

This is one way tech companies are using to fight the NIMBY (“Not in My Backyard”) reaction of consumers. These companies are hoping that in the long-run, due to the fixed cost being spread over more demand, the unit price is going to be lower. As such, they are willing to provide a stopgap measure in the short-term. This can indeed be a good solution.

How can data center operators better prepare and respond to severe weather conditions to reduce strain on the power grid and keep prices stable?

One challenge here is that it is unclear how many proposed data centers will eventually end up being built. There is a bit of gaming going: Because permitting takes a long time, some developers apply for a permit to connect to the grid, essentially speculating on the possibility that they may eventually build a data center at a given location. This behavior makes it more difficult to plan capacity to meet future demand for utility firms. If such speculative behavior can be prevented, it can help utilities better manage resources and keep prices more stable.

What are some infrastructure investments from the government and the private sector that could make electricity prices more stable in the future?

This requires a coordinated effort between the government and the private sector. The government can try to reduce the cost of grid equipment by, for example, lowering tariffs on steel. The government can also ease the permitting process for new infrastructure to be built, particularly on federal land, for cost-efficient generation technologies, such as wind and solar energy. Ample supply should ease prices in the future.

What would you recommend households do to prepare for price spikes for electricity in times of severe weather?

Households should consider updating their existing appliances with more energy-efficient ones. Some utility companies, as well as state governments, provide generous subsidies for such updates. These investments can pay for themselves in a relatively short time. Having said that, these investments typically require a high upfront cost, which may be challenging, particularly for low-income households who need such improvements the most.