Artificial intelligence and data centers have been the subject of extensive discussion in recent months. Do we need a massive buildout of computing power to win an AI arms race with China? Will we have enough electricity? And what will happen to utility rates? Should we hand out subsidies to attract data centers, or avoid data centers like the plague?
The data center discussion is highly nuanced, marked by an interesting mix of not-in-my-backyardism and yes-in-my-backyardism.
This debate has touched down in Platte County in the Kansas City area, where “Project Kestrel” would grant substantial property and sales tax subsidies to support the development of a new, $100 billion data center campus. But is this the right move for Platte County, or for Missouri?
Missouri is in need of investment, and artificial intelligence and associated data centers already play a significant role in our economy.
However, economic development subsidies enrich individual developers at the expense of taxpayers, schools, and other public services. Using tax subsidies to lure data centers, filmmakers, sports teams, and others into Missouri shrinks the tax base of the region without leading to meaningful economic growth. Opportunity costs are largely ignored, with estimates for economic “boosts” not taking into account what the millions given away in subsidies could have achieved if invested in infrastructure, public safety, education, or tax rebates for Missourians.
Looking at electricity, data centers are enormous consumers that are prompting the buildout of new generation facilities. On a regulated grid, such as Evergy’s in the Kansas City area, building new generation and associated transmission is one of the most expensive processes for average ratepayers, because monopoly utilities are allowed to recoup the cost of their capital investments and typically earn a government-approved profit.
Now, it is true that average Missourians use artificial intelligence, indirectly driving the increased demand for data centers. It is also true that we currently cannot predict with certainty the amount of electricity artificial intelligence and data centers will ultimately require.
In April 2024, Goldman Sachs forecast that data centers would rise from 2.5 percent to 8 percent of all U.S. electricity usage by 2030. However, Google recently reported a 33-fold reduction in energy usage for AI queries in a single year.
Some legislation has been passed in an attempt to shield average Missourians from bearing “unjust or unreasonable” costs of powering new data centers. However, this does not mean that none of the burden of new power-plant construction will fall on average ratepayers. Furthermore, if utilities overbuild generation capacity based on overly aggressive demand projections, average ratepayers could find themselves footing the bill for underused assets.
Yet, there is risk in veering too far in the other direction as well: An underbuild of new generation would likely lead to Missouri missing out on significant investment.
To navigate this dilemma, policymakers in Missouri should think outside of the box. Instead of solely considering solutions inside the regulated, ratepayer-supported grid, Missouri should follow New Hampshire’s example and consider consumer regulated electricity (CRE). The idea is simple: huge customers like data centers are driving up electricity demand and putting strain on the grid and ratepayers. CRE would allow off-grid electricity providers to build and operate generation and transmission facilities whose output would be sold exclusively to these new customers. This approach would help shield Missouri ratepayers from both the rate hikes that would otherwise come with new plant construction and the risk of overbuild. CRE would also provide developers with speed, flexibility, and certainty—attractive qualities that are often lost to red tape and lengthy regulatory approval processes.
Adopting CRE could help ease tensions in Platte County and across the state. Of course, the pressure to offer tax subsidies would remain, but this problem is not exclusive to data center development. Corporate handouts are not the way to encourage economic growth. Instead of trying to lure businesses with subsidies, Missouri should have a free market–oriented economic and regulatory environment; for example, one that is conducive to polices like CRE.
