Powering Data Centers: Energy Strategy and Structuring for a Constrained Grid

Rapid growth in data center development is reshaping US energy markets and regulatory priorities. Data centers currently account for approximately 4.5% of US electricity consumption, with projections indicating that demand could rise to between 9% and 17% of total electricity generation by 2030. This expansion is driving new approaches to energy procurement, increasing pressure on infrastructure, and prompting policymakers to reassess how costs and risks are allocated. Nuclear power is emerging as a potential solution to meet this demand due to its ability to provide reliable, continuous baseload electricity at scale. For developers, operators, and investors, securing reliable and scalable power has become a central commercial and legal challenge.

POLICY PRESSURE AND THE SHIFT TOWARD SELF-SUPPLY

Recent policy developments are unfolding against a backdrop of growing public concern that expanding data center demand may be contributing to rising electricity costs for consumers. In response, policymakers are increasingly focused on ensuring that the costs associated with new generation and transmission infrastructure are not unfairly shifted to ratepayers. Recent legislative proposals on both sides of the aisle are trending toward incentivizing or even requiring data center developers to secure dedicated sources of power, rather than relying exclusively on the existing grid.

This shift has accelerated interest in “bring your own power” (BYOP) strategies. Under these models, data center operators develop or contract for generation capacity, often co-located with their facilities. The approach offers several advantages, including greater control over timing, insulation from rate volatility, and reduced exposure to interconnection delays.

At the same time, self-supply introduces complexities. Developers must navigate high upfront capital costs, project risks associated with power generation, and regulatory requirements that vary by jurisdiction. For technology companies, these arrangements could extend beyond traditional business models and require new internal capabilities and governance structures. As a result, while BYOP strategies are gaining traction, they are not a cure-all and must be evaluated alongside other procurement options.

INFRASTRUCTURE CONSTRAINTS AND PROCUREMENT INNOVATION

The rapid increase in data center demand is colliding with structural limitations in the US electricity system. The traditional model of generation, transmission, and distribution is under strain, with interconnection processes emerging as a key bottleneck. These processes, which govern how new resources and large loads connect to the grid, are often time intensive, prone to delay, and subject to cost uncertainty.

Projects face a range of development challenges, including grid congestion, delays in interconnection queues, and the need for significant system upgrades. Regulatory complexity compounds these issues, as approvals may be required from federal regulators, regional grid operators, state public utility commissions, and local authorities. Each layer can affect project timing and overall feasibility.

In response, market participants are adopting a wider range of procurement structures. Power purchase agreements (PPAs) remain a core tool, enabling long-term procurement of energy from generation assets. Utilities are also offering specialized tariffs and negotiated service agreements tailored to large-load customers.

More novel approaches are also gaining momentum. Behind-the-meter generation allows developers to install on-site power resources, reducing reliance on the grid. Energy park and microgrid models combine generation, storage, and load within integrated developments that are sometimes islanded from the grid, offering greater control over supply and infrastructure. These solutions can accelerate deployment timelines but often involve additional regulatory and commercial considerations.

Demand flexibility is another emerging tool. By agreeing to curtail or adjust load under certain conditions, data center operators may gain faster access to grid capacity or participate in demand response programs. However, this approach requires careful alignment with operational requirements and self-generation capabilities. Not all data center workloads or project sites can tolerate interruptions in grid-connected power supply.

TAX INCENTIVES AND STRUCTURING CONSIDERATIONS

Federal tax incentives are playing a key role in shaping how energy infrastructure for data centers is financed and structured. While data center facilities themselves are not generally eligible for federal income tax credits, tax credits are available on the power generation side for zero-emissions technologies and energy storage systems. The current framework distinguishes between so-called “legacy” credits for projects that began construction before 2025 and newer technology-neutral credits applicable to qualifying projects that began construction thereafter. The technology-neutral tax credits expand eligibility to a broader range of generation sources, including nuclear.

Eligibility for these credits depends on several technical and timing-based requirements. “Beginning of construction” rules are critical, as they determine which credit regime applies and whether projects are subject to newer restrictions enacted in the One Big Beautiful Bill Act. In particular, the new “foreign entity of concern” limitations, now generally applicable to technology-neutral credits, are tied to ownership, governance, financing, and supply chain sourcing. Failure to satisfy these requirements can result in the loss of credit eligibility, making compliance a key consideration in project planning and documentation.

These incentives can directly influence project economics and deal structures. Credits are generally claimed by the owner of the generation asset, often structured through pass-through entities or monetized through tax equity arrangements or credit transfers. Although data center operators do not typically claim the credits themselves, their economic value may be reflected in pricing under PPAs or other commercial arrangements. As a result, tax considerations are closely integrated into contract negotiations, capital structuring, and overall project feasibility assessments.

LOOKING AHEAD

The intersection of data center growth and energy infrastructure constraints is likely to remain a defining issue for the US power sector. Policymakers are expected to continue focusing on cost allocation and consumer protection, while regulators and grid operators pursue reforms to interconnection processes and market design.

At the same time, evolving procurement models, including self-supply, hybrid arrangements, and integrated energy developments, are likely to reshape how projects are structured. Companies that align energy strategies with regulatory requirements, commercial objectives, and operational needs will be better positioned to navigate this environment and support continued expansion of digital infrastructure.