Analysis Group White Paper Explores Market Impacts of Energy Co-Location
October 31, 2024
The recent demand growth in the electric power industry has been driven in part by the rise of the digital economy and the proliferation of data centers, which use large quantities of electricity to both train AI models and keep equipment cool. To meet their substantial electricity needs (or “loads”), data centers are increasingly relying on co-location, a method by which data centers locate at the site of existing or new power generation facilities, reducing or eliminating the need for loads to draw energy from the grid. Industry professionals and regulators have raised questions about the impact of the co-location of large loads on electricity prices and grid reliability, and about whether co-located loads are contributing fairly to the costs of the networked grid.
Analysis Group Principal Todd Schatzki and Vice Presidents Megan Accordino and Joseph Cavicchi led a study commissioned by Talen Energy Corporation, an independent power producer and infrastructure company, to explore the market, economic, and ratemaking implications of co-located loads. Their conclusions are summarized in a white paper submitted to the Federal Energy Regulatory Commission (FERC) in advance of its technical conference on this topic. The authors find that increased demand from large loads affects electricity prices similarly (or even less) when loads are co-located rather than connected directly to the grid. Moreover, co-locating loads at existing generation plants reduces the physical distance between generation and loads, which can improve grid efficiency as well as lower costs. The paper also evaluates ratemaking for co-located loads based on existing FERC precedent and economic efficiency, and rebuts claims that co-location shifts costs to other grid customers.