Power Is Becoming the Critical Path for Data Center Development

FERC's large-load orders confirm a broader shift in how AI infrastructure will be planned, financed and built.

Until recently, data center development was driven primarily by considerations such as land availability, fiber connectivity, tax incentives and project financing. Increasingly, however, a single question is determining whether projects move from concept to construction: Can they secure reliable power on commercially viable timelines?

Recognizing that the nation's transmission system was not designed for AI-scale electricity demand, the Federal Energy Regulatory Commission (FERC) recently directed the country's six regional transmission organizations (RTOs) and independent system operators (ISOs) to justify or revise the rules governing how data centers and other large-load customers connect to the interstate transmission system. FERC’s orders target five areas of reform, including transmission study processes, cost transparency, co-location and behind-the-meter generation, flexible transmission service and generation serving electrically proximate large loads.

Collectively, these reforms are intended to address many of the practical challenges posed by rapidly growing large-load customers, including lengthy interconnection timelines, uncertainty regarding responsibility for the costs of transmission upgrades, increasing interest in alternative power arrangements and the need to integrate unprecedented new demand without compromising grid reliability or unfairly shifting costs to existing ratepayers. Rather than simply revising transmission tariffs, FERC is seeking to modernize interconnection frameworks that were developed for a fundamentally different demand profile and better position regional transmission systems to accommodate rapidly growing demand from AI-driven data centers and other large-load customers.

The orders are important, but they also confirm what the market has already learned: power is no longer simply a utility issue—it is becoming a core development issue.

Power Is Now a Development Issue

Historically, developers often identified a site before fully evaluating transmission availability or utility capacity. That sequence is changing. Today, interconnection timelines, available transmission capacity and anticipated transmission upgrade obligations increasingly shape site selection itself, influencing not only where projects are built, but also how they are financed and whether they remain commercially viable.

Reliable power is becoming as fundamental to project success as site control, permitting and financing.

The implications extend well beyond developers. For investors and lenders, interconnection risk is becoming a fundamental underwriting consideration that can materially affect project economics and financing. For utilities, regulators and public agencies, the challenge is accommodating unprecedented load growth while maintaining system reliability and protecting existing ratepayers from inappropriate cost shifting. As access to power becomes an increasingly important driver of economic development, reliable electric infrastructure may soon be as consequential as tax incentives or available real estate in determining where AI infrastructure is built.

Speed Matters, Cost Matters More.

Much of the attention surrounding FERC's orders has focused on accelerating interconnection. The more consequential question, however, may be who ultimately pays for the infrastructure needed to serve new large-load customers.

FERC repeatedly emphasizes preventing inappropriate cost shifting while improving transparency surrounding transmission upgrade costs, leaving regional markets to determine how those competing objectives should be balanced.

Those decisions will shape project economics long before construction begins. They will influence which sites remain viable, how projects are financed and where capital ultimately flows.

These developments are also likely to accelerate interest in co-location arrangements, on-site generation and alternative power procurement strategies as developers seek greater certainty around power availability. These approaches may reduce interconnection risk, but they also introduce additional regulatory, permitting, commercial and real estate considerations that must be addressed early in the development process.

Dedicated Generation is Not a Complete Solution

One response to growing interconnection constraints has been increasing interest in dedicated generation and other alternative power supply strategies. Faced with lengthy interconnection queues and uncertainty surrounding transmission upgrades, these approaches can provide greater certainty over project schedules and power availability while reducing reliance on timely expansion of traditional utility service.

However, dedicated generation is rarely a complete substitute for the grid. It introduces its own permitting, environmental, land use and commercial challenges, potentially increasing development costs, extending project timelines and, depending on the technology employed, creating additional water and community impacts. Moreover, many large-scale data center projects will continue to rely on utility interconnections for backup service, operational flexibility and other operational needs. As a result, dedicated generation often changes the nature of the interconnection challenge rather than eliminating it, reinforcing that access to, and coordination with, the grid remains a critical component of project development.

One Market Is Becoming Six

Although FERC established a common direction, it intentionally stopped short of imposing a single national framework. Each RTO and ISO must now determine whether its existing tariff adequately addresses large-load interconnections or propose reforms tailored to its region.

For companies developing projects across multiple markets, that means interconnection strategy will become increasingly regional. Developers pursuing national portfolios will therefore need regional regulatory strategies—not simply a national power procurement strategy. Differences in study procedures, cost allocation, co-location rules, and available transmission services may prove just as important as differences in land costs or tax incentives.

FERC's orders do not resolve the industry's power challenges. More importantly, they formally acknowledge that access to power has become a defining constraint on large-scale data center development.

For organizations across the data center ecosystem, the practical lesson is clear. Power strategy can no longer be treated as a downstream utility issue. It must be integrated into site selection, real estate strategy, permitting, financing, utility coordination and regulatory engagement from the outset.

FERC’s orders ultimately underscore a broader reality: power is becoming the critical path for data center development. As access to power increasingly shapes where and how AI infrastructure is developed, organizations that incorporate power strategy into the earliest stages of project planning will be best positioned to manage risk, control costs and maintain development schedules in an increasingly constrained market.