Michigan OKs landmark regulations that push up-front costs to data centers

Michigan regulators on Thursday adopted landmark standards for the booming data center industry with a plan they say tries to protect residents from subsidizing the industry’s hefty energy use.

In a 3-0 vote, the Michigan Public Service Commission adopted a rate structure that requires data centers and other energy-intensive industries in Consumers Energy’s territory to sign long-term power contracts with steep penalties for exiting early.

The order also requires Consumers to show that data centers will shoulder all costs to build transmission lines, substations and other infrastructure before adding them to the grid.

Commission Chair Dan Scripps called it a “balanced approach” that shows Michigan is “open for business from data centers and other large load customers, while also leveraging those potential benefits of the growth … in a way that’s good for all customers.”

The deal disappointed some environmentalists, who had pushed for explicit requirements that data center power come from renewable sources. Michigan utilities are legally required to achieve 100% clean energy by 2040. They must detail how they plan to meet that requirement in filings next year.

“While the order includes important consumer protection terms, the commission missed an opportunity to emphasize the importance of the state’s climate goals,” said Daniel Abrams, an attorney with the Environmental Law and Policy Center.

The rate structure applies to customers whose energy use exceeds 100 megawatts. Data centers are among very few industries that demand that much power. Often, they demand an order of magnitude more.

Consumers serves 1.9 million customers across much of the Lower Peninsula. Company spokesperson Matt Johnson said officials are still reviewing Thursday’s order and “its impact on all stakeholders.

“Consumers Energy intends to work hard to continue to attract new businesses, including data centers, to Michigan, in a way that benefits everyone and fuels the state’s economic development,” he added.

The deal comes amid an uncertain time for the data industry, which is growing fast because of artificial intelligence. Much more energy is needed to power the transformation, but many industry analysts fear rising AI stocks are a bubble and demand for the technology won’t materialize, leaving utilities and ratepayers to pick up the infrastructure tab for failed projects.

Hoping to avoid such an outcome, Consumers in February proposed special regulations that would lock data centers into 15-year contracts that guarantee consistent electricity use and require payments even if a facility ceases or downsizes operations mid-contract.

The commission’s decision Thursday approves much of that request, with some significant modifications.

DTE takes a different approach

The other big utility in Michigan, DTE Energy, is taking a different approach.

Rather than establishing a blanket rate structure like Consumers, DTE wants to negotiate its first data center contract individually while aiming to avoid public vetting of the deal.

After announcing last week that it had inked an agreement to supply power for a proposed Stargate data center in Saline Township, DTE filed a draft 19-year contract with state energy regulators and requested swift approval without a public hearing.

Michigan law allows such expedited reviews in cases that would bring no added costs to utility consumers.

DTE officials argue adding the Stargate data center to its system will help keep rates down for everyone by spreading fixed costs among more paying customers.

“Given the sizable affordability benefits for our customers, as well as the economic impact the project will have, we think moving forward in this fashion makes the most sense,” spokesperson Jill Wilmot said.

But DTE officials also stated in its filing that the company expects to spend some $500 million upgrading its transmission system and building a substation to serve the data center. Critics argue the utility is so intentionally vague it is impossible to vet DTE’s claims about affordability.

“It’s just highly concerning that they are trying to keep this somewhat private, because there’s so much at stake,” said Bryan Smigielski, a Michigan organizer with the Sierra Club.

Michigan Attorney General Dana Nessel also opposes DTE’s quest for expedited review, and has requested a thorough vetting of the proposed contract.

Members of the Public Service Commission have not decided whether to grant DTE’s request for quick approval, Scripps said.

Michigan’s data center electricity rate deliberations come amid a surge of interest from developers looking to take advantage of new tax breaks that could save the industry tens of millions of dollars. Lawmakers last year voted to exempt large data centers from Michigan’s 6% sales and use tax in an effort to lure the industry to Michigan.

Beyond the Stargate campus, DTE is in late-stage negotiations for another 3 gigawatts’ worth of data center capacity, while Consumers Energy is nearing deals for three large data centers amounting to a collective 2 gigawatts of power.

Developers are also scoping out rural land throughout the southern Lower Peninsula, from the Grand Rapids area to the outskirts of Monroe.

The wave of interest could have big implications for water and land use in Michigan. Hyperscale data centers occupy hundreds of acres apiece. Those that use water vapor to cool the servers inside the facilities — the industry’s most common cooling technique — also use large amounts of water.

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This story was originally published by Bridge Michigan and distributed through a partnership with The Associated Press.