Electricity Prices in the AI Era

As AI demand explodes, electricity has emerged as a bigger bottleneck than the GPU and memory supply chains. US data centers already account for approximately 5% of total electricity consumption, and if electricity demand doubles every two years, it could exceed total US power generation by the mid-2030s.

Data center construction requires not only permits and surrounding infrastructure but also a review of expected electricity prices. In particular, the variable cost of electricity can determine the viability of a data center business, so founders and investors must examine power plants, power contracts, and site selection together.

Electricity is part of energy commodities such as crude oil and natural gas, and commodity markets must satisfy the following system balance equation:

• Supply = Demand + Net Exports + Change in Storage

Because commodities involve physical delivery on a set settlement date, prices are unlikely to deviate from fundamentals for long. Crude oil is refined into gasoline, diesel, and jet fuel, while natural gas is used in industrial, residential, and commercial sectors as well as power generation, connecting to different commodity markets.

In competitive markets, the marginal cost of supplying one additional unit of demand determines the price. However, because electricity is difficult to store and supply and demand must be matched in real time for grid stability, it requires a more complex operational system than general commodities.

For this reason, electricity markets are often managed by an Independent System Operator (ISO), which oversees generator operation and market operations. The latter part of the article covers how power plants and data centers operate, corporate response strategies, and methods for determining prices in the US electricity market.