Feds deal blow to dream of data centers connected to nuclear plants

As tech giants search for clean electricity to power their massive data-center expansions, one energy source has garnered strong interest: existing nuclear power plants.

But on Friday, federal regulators unexpectedly rejected a proposal from Amazon and power-plant owner Talen Energy, dealing a blow to one of the highest-profile partnerships involving nuclear plants and data centers — and throwing cold water on hopes of a broader boom in nuclear-powered, ​“colocated” data centers.

The Federal Energy Regulatory Commission’s 2–1 decision to reject the amended interconnection service agreement (ISA) proposed by grid operator PJM Interconnection doesn’t doom the Amazon-Talen project completely. FERC made clear that the companies, which aim to rapidly expand a large data center entirely powered by a majority Talen-owned nuclear plant in Pennsylvania, can resubmit a proposal that more thoroughly addresses its concerns.

But industry watchers agree that FERC’s denial does complicate plans reportedly in the works from companies such as Constellation Energy, Vistra, Dominion Energy, and Public Service Enterprise Group that are looking to entice data-center developers to plug directly into their nuclear power plants.

“In the near term, we do not think that this will stop deals for data centers,” Rob Rains, an analyst with Washington Analysis, wrote in a Monday research note. ​“But FERC’s pithy denial order creates a new challenge for hyperscalers and power producers who were looking for this decision to act as a blueprint.”

Deals like Amazon’s $650 million purchase of a data-center campus connected to Talen Energy’s 2.5-gigawatt Susquehanna nuclear plant are meant to help tech firms quickly access nuclear power rather than wait years for new — or restarted — nuclear power plants to come online.

In recent months, tech giants have made several deals to secure carbon-free nuclear power for their fast-growing cloud-computing and AI data-center needs. Those include Microsoft’s long-term power purchase agreement with Constellation to support its $1.6 billion plan to reopen its shuttered Three Mile Island Unit 1 reactor, as well as plans from Amazon and Google to support small modular reactors, a class of nuclear power that has yet to be built.

FERC’s decision doesn’t affect these efforts to bring more nuclear onto the grid. But nuclear facilities remain expensive to build and operate in the U.S. and take years to come online. In the short term, that means new nuclear power is unlikely to help tech giants seeking large amounts of round-the-clock carbon-free power ASAP.

In contrast, ​“behind-the-meter” arrangements for existing nuclear — like the Amazon-Talen deal — are seen as a way for a rapidly growing data center industry to quickly secure both carbon-free power and increasingly scarce grid interconnections.

Why FERC said no

Not everyone was happy when Amazon and Talen announced plans to expand the existing 300-megawatt Susquehanna data center to 480 megawatts.

In fact, utilities Exelon and American Electric Power challenged the expansion request with FERC. The utilities claimed that if PJM, the grid operator for Pennsylvania, carried out that expansion, it could shift up to $140 million in costs per year onto customers of utilities that are part of PJM, which manages the grid serving Washington, D.C., and 13 states stretching from the mid-Atlantic coast to the Great Lakes.

More broadly, the idea of fast-tracking colocation deals like these drew concerns from utilities, consumer advocates, and environmental groups who worried that allowing deep-pocketed tech companies to redirect nuclear power from the grid at large to new data centers could drive up consumer utility bills, threaten grid reliability, and sap a critical source of carbon-free energy from states that rely on it to reach their carbon-cutting goals.

From an emissions perspective, siphoning off nuclear power equates to ​“ripping thousands of megawatts off the grid which will be immediately backfilled by gas in the near to medium term,” said Jackson Morris, director of state power-sector policy at the Natural Resources Defense Council. In a July blog post, he outlined the climate harms that could arise if nuclear power plants were allowed to do this at large scale.

These issues were not at play in FERC’s decision, however, Morris said. ​“They were looking at this — rightfully, because that’s their statutory directive — as how they maintain the reliability of the markets and the reliability of the grid.”

Pavel Molchanov, managing director and equity research analyst at Raymond James & Associates, agreed that for FERC, ​“this issue has nothing to do with nuclear power. It would be exactly the same regulatory pushback if instead of a nuclear plant this was a combined-cycle gas turbine, or wind, or solar, or hydro.”

That’s because the colocation issues that regulators are concerned about are ​“focused on avoiding a situation where a major electricity user, such as a data center, would create risks for the ordinary consumer,” he said. Those risks include consumers being forced to bear more than their fair share of costs that could arise when large portions of a power plant’s generation capacity is withdrawn from the grid.

FERC ordered further study of PJM’s amended ISA in August. Other critics of the plan, including Pennsylvania utility regulators and the organization representing states that are part of PJM, warned that it could set a precedent for more nuclear plants to withdraw electricity from the grid to serve data centers, which could exacerbate the gap between power supplies and growing demand that is causing capacity prices to spike across PJM.

Constellation and Vistra, companies that own and operate nuclear power plants in PJM territory and that are reportedly working on similar deals of their own, supported PJM’s amended ISA. The companies argued that colocating at nuclear power plants actually reduces consumer costs by avoiding the need for expensive grid upgrades to expand capacity for data centers and other large consumers of electricity.

Talen and Amazon also argued that their plan would reduce the burden on utility customers by taking on the cost of these upgrades themselves. The companies cited a study commissioned by the Nuclear Energy Institute trade group that found that the high-voltage transmission upgrades triggered by new data-center interconnections can cost from $150 million up to $250 million.

Some expenses could end up being the responsibility of the data-center developer or other large customers. But other grid costs associated with the new electricity demand could end up being shifted to regulated utilities like Exelon and AEP, which earn a set rate of profit for capital costs that are then passed onto their customers.

No FERC guidance on complex colocation conflicts

FERC commissioners Mark Christie and Lindsay See, the two Republicans on the five-member commission, voted to deny PJM’s amended ISA. In their decision, they made clear that FERC was not adjudicating these competing claims.

Rather, as Christie wrote in his concurring statement, ​“these colocation arrangements are a fairly new phenomenon that entails huge ramifications for grid reliability and consumer costs. Given these ramifications, the Commission truly needs to ​‘get it right’ when it comes to evaluating colocation issues.”

FERC Chair Willie Phillips, a Democrat, voted against the denial, while FERC’s other two Democratic commissioners, David Rosner and Judy Chang, did not participate in the decision.

In a separate dissent, Phillips said that he would have chosen to accept the plan while also requiring PJM to ​“submit regular informational filings to provide transparency into the arrangement’s operations over time.”

Denying the amended ISA amounts to ​“creating unnecessary roadblocks to an industry that is necessary for our national security,” Phillips wrote. ​“Maintaining our nation’s leadership in this ​‘era-defining’ technology will require a massive and unprecedented investment in the data centers necessary to develop and operate those AI models.”

Friday’s decision was issued immediately after FERC conducted an all-day technical workshop on colocation issues, where representatives of grid operators, utilities, and power-plant owners sparred over how to manage the potential benefits and harms of pulling power-plant capacity from the grid to supply data centers and other large consumers of electricity.

In a Sunday research note, analysts with the research firm Jefferies highlighted FERC commissioners’ focus on ​“equity and data centers being good corporate citizens” at the technical conference. Still, the analysts expressed surprise that FERC denied the amended ISA so soon after that discussion, and warned that Friday’s decision bodes poorly for other nuclear power-plant operators hoping to ink colocation deals with data centers.

“Time to power is at the core of this outcome,” the analysts wrote. Colocations offer the promise of quickly making available hundreds of megawatts of grid capacity in the parts of the country where data-center development is concentrated, such as Northern Virginia.

But the same lack of grid capacity is also causing problems for utilities, state policymakers, and customers at large, Rains of Washington Analysis noted. A majority of FERC commissioners appear to have felt that approving a potentially precedent-setting plan for tech giants to pull nuclear power from the grid to serve their own needs was imprudent in the face of these concerns, he said.

“FERC is, I think, putting pressure on the RTOs” — regional transmission organizations like PJM — ​“to come up with policy solutions for anticipating these kinds of arrangements coming out of this technical conference,” Rains said. At the same time, ​“FERC is giving itself maximum flexibility to review another colocation agreement and potentially approve it without having to be accused of applying a double standard or some kind of policy inconsistency.”

Industry analysts said they don’t expect FERC to take up these matters until mid-2025 at the earliest. In the meantime, ​“this probably throws a wrench into things in the near term,” Rains said.

Given the uncertainty that FERC’s decision has created for colocation plans, it’s likely that data-center developers will seek power purchase arrangements like those Microsoft has struck with Constellation, he said. ​“A colocation agreement was just a lot shorter.”

Meanwhile, the overarching problem driving efforts like Talen and Amazon’s colocation deal remains in place, Rains said — a power grid that hasn’t expanded fast enough to support either the boom in demand for power or the backed-up gigawatts of clean energy projects unable to interconnect to the grid.

FERC has taken action on this front, with major orders on interconnection reform and long-term grid planning, he said. ​“But you’re still looking at a long process.”