Artificial intelligence and cloud computing are rapidly transforming the American economy. But the data centers that power these technologies are creating a new political panic. Some fear rising electricity demand could overwhelm the grid, drive up costs, and force states into a false choice between innovation and reliability.
A new Goldwater Institute report, Pricing Scarcity Easing the Short-Term Surge in Data Center Energy Demand, by Domenico Ferraro, PhD, Associate Professor at Arizona State University, finds that this framing gets the problem backward. Data centers are not the real threat, Ferraro explains. The bigger problem is an electricity system that hides scarcity from consumers until strain appears as congestion, reliability risks, or higher costs.
The scale of the challenge is real. According to the report, data centers are projected to account for between 6.7% and 12% of total U.S. electricity consumption by 2028, up from 4.4% in 2023, with much of that growth driven by AI-related computing.
“These projections have led some commentators to raise alarm, arguing that data centers could overwhelm already overburdened power grids and threaten reliability for many Americans,” Ferrraro writes. “But this framing misidentifies the source of the problem. The relevant policy question is not whether to accommodate data center growth, but how to facilitate the transition toward expanded electricity capacity.”
America has absorbed major electricity shocks before. The grid expanded through wartime industrialization, air conditioning, the computer revolution, and the rise of the internet. None required policymakers to freeze technological progress in place. The question is not whether the grid can adjust. It is whether policy will allow prices, investment, and innovation to do their work to improve our lives.
The near-term problem is especially important because electricity is unlike most goods. It must be produced and consumed in real time. Power plants, transmission lines, and grid operators must constantly balance supply and demand. When demand spikes and supply is constrained, the system cannot simply pull extra electricity off a shelf.
In most markets, scarcity is communicated through prices. Hotel rooms become more expensive during peak travel. Airline tickets rise when flights fill up. Concert tickets increase in price or sell out when seats are limited. Those prices convey information. They tell consumers that capacity is scarce and encourage some people to shift timing, reduce consumption, or choose an alternative.
Electricity markets often fail to do that at the retail level. Wholesale electricity prices can rise quickly when the grid is congested, but most households and businesses pay fixed retail rates that hide real-time conditions. As the report explains, “the wholesale market is highly responsive” while “the retail market is largely fixed and predictable.”
That disconnect matters. If a family is cooking dinner during a period of grid stress, it usually has no idea whether electricity is unusually scarce at that moment. If prices reflected that scarcity, some consumers might delay use or shift consumption to less strained hours. When millions of consumers face fixed prices, demand remains high precisely when the system is under the most pressure.
The same logic applies even more strongly to large users, including data centers. If major electricity consumers face pricing that reflects scarcity, they have stronger incentives to manage load, improve efficiency, or reduce strain during critical periods. The report identifies real-time pricing, peak-based charges, and interruptible service agreements as examples of tools that can align private incentives with system reliability.
That does not mean policymakers should punish data centers or obstruct technological growth. Quite the opposite. Data centers power services Americans rely on every day, from cloud computing and digital platforms to emerging AI tools that could drive major productivity gains across the economy. A policy of delay would not strengthen the grid. It would make America less competitive and less prepared for the next technological revolution.
Nor does it mean the country can avoid building. In the long run, rising electricity demand will require major investment in generation, transmission, storage, and efficiency. But in the short run, the most immediate opportunity is to use existing capacity more intelligently by allowing prices to communicate scarcity before the system reaches a breaking point.
“Data centers are not overwhelming the grid,” Ferraro concludes. “They are exposing a system that does not price scarcity. The solution isn’t to slow the data centers. It’s to fix the pricing. The solution in the near term is straightforward: better price signals, fewer regulatory barriers to flexible rate structures, and demand that responds when the system is under strain.”
Read the full report here.
