Strategic Perspectives on U.S. Electric Demand Growth

Introduction

There is very strong evidence that a confluence of three trends—reshoring of industry, AI-driven database expansion, and broad-based electrification—will drive a sustained period of electric demand growth.

The North American Electric Reliability Corporation (NERC) forecasts 78 gigawatts (GW) of winter peak demand growth over the next 10 years. Two years ago, that figure stood at roughly 40 GW of forecasted growth. Individual reporting from utilities and grid operators portends accelerating growth. ERCOT, the Texas grid operator, recently issued a long-term demand forecast showing 62 GW of peak demand growth by 2030. PJM, the grid operator for 13 states in the mid-Atlantic, forecasts 25 GW of peak summer demand growth by 2034. In the Pacific Northwest, 8.5 GW of summer peak demand growth is expected, representing a 30 percent increase, over 10 years. With these figures in mind, every expectation is for NERC’s next long-term forecast (due in December) to be revised further upward.

When considering such estimates, a degree of skepticism is warranted; data points from utilities are difficult to assess because large load customers may be engaged in speculative conversations with many utilities at the same time over a single potential project. However, given a multi-decadal period of near-zero demand growth—U.S. annual electricity consumption grew 0.5 percent annually between 2001 and 2024—the near-certain emergence of a sustained pattern of growth represents a paradigm shift for policy, planning, and investment in the sector.

Risk: Reliability and Underbuilding

Does demand growth pose a reliability risk? Take Texas as an example: surging demand growth in recent years has certainly strained system conditions. But the bulk power system failures (blackouts and loadshedding) that occurred in Winter Storm Uri were caused by a poorly weatherized natural gas supply and generation system more than anything else. Utilities and grid operators have considerable experience, tools, and processes in place to reliably manage demand growth. Utilities can and do delay interconnection for large loads, such as data centers or manufacturing sites, when their models indicate that they cannot reliably serve until the investment and assets are in place to change that risk. A useful principle: the system will serve only as much electricity demand as it can serve.

A corollary is that electric demand will grow only as fast as the power system grows to allow it. The primary risk that federal policymakers must consider is the risk of underbuilding. At the micro level, heavily delayed and high-priced interconnection due to a lack of system capacity risks destruction of latent, “waiting in the wings” electric demand, causing missed opportunities for local economic activity, jobs, and tax bases. At a macro level, a slow and heavily constrained expansion of demand represents considerable lost economic, social, and strategic value for the nation. It is precisely this suboptimal trajectory the nation is on under the status quo policy, regulatory, and investment paradigm in the electric power sector. The risk is that the U.S. electric power sector acts to undermine rather than support national strategic ambitions.

Challenge: Scaling Investment and Stabilizing Customer Rates

Demand growth is not a technology challenge (the relevant technologies are largely mature, well tested, or ready for commercial scale); it is also not an investment challenge (capital markets are eager to pour capital into the sector). The principal challenge posed by demand growth is policy: how to invest and scale power system capacity without an equal scaling of rates for consumers. In the electric power sector, all investment eventually lands on a ratepayer bill.

While underbuilding risks the United States’ long-term strategic position, it is often suggested that the inverse path of overbuilding risks unaffordable electric rates. This view misreads the challenge of the moment. Given predicted demand, the probability of overbuilding right now is low. Even then, this risk evaporates when considered over a strategic time horizon: the overbuild of one decade is a resource gift for the next. This holds most true for transmission systems. Inherited spare capacity allows demand to grow into a system already capable of serving it. In fact, the last several decades of sectoral development have been enabled by a transmission system largely built during the last great era of sectoral expansion in the 1940s, ’50s, and ’60s. Today these assets continue to deliver incredible economic benefits to the whole nation; entire industries and cities have grown up around and been enabled by power system assets that their original planners could never have imagined. Such is the value of long-term vision.

Instead, malinvestment is the major challenge. In the new era of electric demand growth, utility investment must be assessed in terms of how much expanded system capacity is delivered per dollar of ratepayer funds deployed. Recent years have seen a vast increase in transmission and distribution spending by utilities, reaching roughly $25 billion annually, which makes additional investment into high-voltage transmission projects appear unaffordable. However, 90 percent of this spending has flowed into “local” and “reliability” projects, which receive no regulatory or policy oversight and deliver little to no additional system capacity for serving demand growth. This represents a misallocation of valuable ratepayer dollars on a strategic scale.

For example, in the context of a multi-decadal era of demand growth, there is effectively zero justification for replacing an existing line with the same voltage equipment; every replacement should seek to upscale system capacity to maximize the amount of future demand that could be served by the system. Reconducting with higher voltage lines would deliver more capacity from the same right of way and should replace like-for-like replacement as the default utility investment path. Investment plans should prioritize technologies like dynamic line ratings and advanced conductors that deliver maximum system expansion per ratepayer dollar.

Opportunity: Powering the Commanding Heights

Demand growth has been framed as a problem by both climate advocates and ratepayer advocates. For the former, new demand dispatches fossil-fired assets which are marginal in the resource mix. For the latter, demand sourced from big industry forces investment that is socialized onto incumbent business and household bills. Both framings are flawed and counterproductive. Demand growth represents an opportunity to transform the U.S. electricity system into the lynchpin of U.S. global energy, economic, and strategic advantage for the century to come.

An incredibly expensive overhaul and expansion of the U.S. electric power system was always necessary. First, this is the case because the U.S. power grid is aging—70 percent of transmission lines are aged over 25 years and are nearing the conclusion of their typical 50–80-year lifecycle—and inherited from past eras of strong demand growth. Existing infrastructure is also geographically mismatched to the new generation and demand source. Second, this overhaul and expansion has been necessary because trends toward electrification of transport, HVAC, and industry drive demand growth of their own. Third, the commanding heights of technology in the twenty-first century are AI, semiconductors, and battery technology, all of which are electricity intensive to train, manufacture, and operate. In short, the economy of the future is far more electricity intensive than the economy of the present and recent past.

Both Congress and state policymakers must understand that demand growth in effect makes a transformative overhaul of the U.S. electric power system far cheaper. The rate impact of investment is lower under conditions of demand growth than stagnant demand because the costs of investment are spread out over a much larger and growing volume of electricity consumed. Investments effectively pay for themselves as demand growth fills in behind those investments and dilutes the rate impact; moreover, they provide a broad range of social, economic, and strategic benefits to the nation. Policymakers should seize the opportunity and advance policy that enables and invites further demand growth and builds the grid that will power the command heights of the twenty-first century.

The Federal Role

By virtue of the Federal Power Act, state policy and officials have primary authority over investment decisions undertaken by utility and independent power companies. The federal role is to shape the decisionmaking landscape for these policymakers. Three areas are particularly ready for reform, if policymakers want to reduce risks and maximize opportunity:

Transmission

The value of transmission is in its ability to integrate “pools” of generation, driving improved utilization of assets and whole-of-system efficiency, which lowers costs for consumers. This logic applies equally to regions organized under vertically integrated utilities and regions with restructured markets. Evidence for this is provided by the simple fact that integration of power pools through high-voltage transmission was pioneered, pursued, and principally achieved by vertically integrated utilities such as the Tennessee Valley Authority or American Electric Power.

Transmission projects that cross state, utility service territory, and planning region borders will deliver considerable value to ratepayers, and via the efficient serving of demand growth, they will unlock considerable national economic, social, and strategic benefits. These projects by nature spill benefits widely over jurisdictional borders. Perversely, wide public benefit undermines project viability because no individual state or utility is positioned or incentivized to invest local ratepayer dollars toward national public goods. The result is a suboptimal equilibrium which channels investment into low-value local transmission projects and a relative overinvestment in local generation resources (i.e., underutilization of existing generation assets). The long-term national strategic interest suffers. There is therefore a unique national interest in the expansion of high-voltage transmission and regional or interregional transfers.

Though the recent Federal Energy Regulatory Commission (FERC) Order 1920 represents a significant step toward increased long-term regional transmission planning, implementation will take years or decades to materialize significant new projects impacting system conditions. A reliance on process over projects will not meet the urgency of the current moment. Congress should direct the National Interest Electric Transmission Corridor (NIETC) authority toward projects that expand regional and interregional transfer capacity in regions facing heavy demand growth and hosting strategic industries. Likewise, NIETCs should be given primary siting authority and expanded federal financing tools that “buy-down” cost allocation concerns at the state level. Congress should also direct FERC rulemaking, which implements new capacity-increasing standards for reconducting and grid-enhancing technologies deployment.

Nuclear

As they plan generation investment in response to demand growth, federal policymakers should give state and utility planners a viable third option, in the form of nuclear energy, to supplement renewables and natural gas. It is in the long-term strategic interest of the United States to undertake a large-scale expansion of its nuclear fleet to (1) improve reliability by diversifying the power generation mix, (2) balance against a strategically naïve domestic overreliance on natural gas, (3) free up natural gas volumes for higher economic value export markets, and (4) establish global leadership in a technology that can cement strategic international alliances for decades.

Congress should pursue deep structural reform at the Nuclear Regulatory Commission, mandate rapid approval of small modular reactors and other advanced nuclear designs and licenses, and authorize expanded federal investment and de-risking tools for nuclear projects, targeting the uniquely high social and economic value of coal-to-nuclear site transitions.

Permitting

Permitting reform takes on additional urgency under the conditions of demand growth. It is well established that a more efficient federal permitting system for energy infrastructure would reduce energy costs, increase energy reliability, reduce emissions, and improve overall economic outcomes. Serving demand growth requires the construction of new generation and transmission assets, and permitting reform will reduce costs and timelines for these projects.

Cy McGeady is a fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.