In his State of the Union Address, Trump announced his plan for dealing with high electricity costs associated with the increased demand from AI data centers:
Many Americans are also concerned that energy demand from AI data centers could unfairly drive up their electric utility bills. Tonight, I’m pleased to announce that I have negotiated the new Ratepayer Protection Pledge. You know what that is. We’re telling the major tech companies that they have the obligation to provide for their own power needs.
Details are scarce, but we might get more soon. But based on the limited details we have, I’m skeptical that this plan will work.
Forcing AI companies to provide their own power doesn’t get at the root of the issue, which is that the resources we use to generate electricity are scarce. Even if AI data centers put a new power plant on site, they have to use the same set of scarce resources that goes into providing electricity to everyone else. The “Ratepayer Protection Pledge” just shifts the increased demand away from existing electricity providers toward the inputs that existing electricity providers use. Building new power plants close to the data centers doesn’t make the inputs to electricity generation more plentiful.
For example, suppose a new AI data center is built in a town with one electric company. The increased demand for electricity results in a higher price for electricity for all the townspeople. Frustrated by higher electricity prices, the townspeople get together and pass a law saying the AI data center must provide its own power—it can’t use the same electric company that the rest of the town uses.
So, the law-abiding AI data center decides to build its own power plant. The AI data center and the existing electric company now bid against each other for the scarce resources used in electricity production, including land, labor, tools, machinery, and raw materials. The electric company—facing higher costs—decides that it cannot produce the same amount of electricity and offer it for the same price as before. They reduce the amount of electricity they produce and increase their prices. The townspeople end up paying higher prices anyways.
The only solution to the townspeople’s problem is to make the inputs more plentiful or to make electricity production more efficient with a given set of inputs. But this cannot be done by law. The AI data center, the electric company, or new entrants to the market (hey, electricity production is in high demand and could be very profitable for a time) have to find previously-unknown sources of coal, natural gas, nuclear material, or other sources, or figure out a way to make the known sources produce more electricity than before.
An analogy: suppose there’s a new craze in Florida, such that a small group of people try to live on orange juice. We’ll take it to an extreme: these people don’t just drink it, but they fill their swimming pools with orange juice, paint their houses with super-concentrated orange juice, and replace their neighborhood roads with streams of orange juice. Their demand sends orange juice prices soaring. In response, everyone else passes a law requiring the orange juice fanatics to produce their own orange juice.
So they build their own orange juice factory. They bid against existing orange juice producers for oranges, juicing machines, etc. Existing orange juice producers now face higher costs for producing orange juice and decide that the only way to remain profitable is to reduce the quantity of orange juice they produce and increase their prices. Everybody is back in the same position of having to pay much higher prices for orange juice.
Making some consumers of a particular good build their own middle-stage factory does nothing to increase the total production of the good.
Note that this is not a case of “costs of production determining prices,” which is a terrible but persistent economic fallacy. The costs of production rise because there is an increase in demand for the output, whether it’s electricity or orange juice.
The “Ratepayer Protection Pledge,” in effect, just encourages or forces AI companies to vertically integrate a little bit, which doesn’t abolish scarcity. No law can abolish scarcity.
