White Paper: Data Centers

October 6, 2025

The foundation’s white papers are intended to make scholarly research on Indiana issues more widely available to policy analysts and researchers. White Papers represent research in progress and are published to invite comment and discussion as preparation for their submission to academic journals and other professional publications. The authors are solely responsible for the content of their research and analysis.

—————————————————–

How Indiana Can Build Data Centers Without Raising Household Electricity Costs?

“This so-called ‘Zero Carbon’ Energy sources. There is nothing of that sort, but they are ‘lower-carbon’ energy sources.” — Chris Wright, U.S. Secretary of Energy.      

by Shashank Chandrakumara

For decades, coal has served as the backbone of Indiana’s energy system. In 2023, the state ranked as the second-largest coal consumer in the United States, using nearly 21 million tons of coal for electricity generation and accounting for roughly 40% of Indiana’s total energy mix. This long-standing reliance on coal has historically kept energy costs low because coal plants can be built and brought online faster and with far less infrastructure investment than alternative energy sources. Moreover, coal remains the most abundant and reliable source of dispatchable power for both households and industries across Indiana. However, as the state begins to transition toward new forms of energy, this once-stable foundation is beginning to shift.

Over the past decade, coal’s share of Indiana’s energy mix has steadily declined. Between 2012 and 2024, the state retired 5.7 gigawatts of coal capacity, and utilities have increasingly turned to higher-cost energy infrastructure such as nuclear and solar farms. Consequently, household electricity bills have begun to rise. Looking ahead, another 9 gigawatts of coal capacity is scheduled to retire between 2025 and 2038, which suggests an even steeper decline in the supply of low-cost, dispatchable power.

At the same time, the boom in artificial intelligence is driving unprecedented growth in electricity demand. Data center proposals in Indiana are estimated to require 9.7 gigawatts of electricity to connect to the public grid, which exceeds the 9 gigawatts of capacity being retired from coal-fired power plants. This convergence of declining coal capacity and soaring energy demand from data centers, combined with already rising household utility bills, underscores a pressing challenge for policymakers: how can Indiana meet the power needs of a rapidly digitizing economy without transferring the financial burden to families?

Indiana can address this challenge by requiring data center companies to directly fund the redevelopment of coal plants that are nearing retirement or closure. By doing so, these companies can upgrade existing facilities to generate additional power and build new data centers near these sites. As a result, they can reduce transmission costs, minimize community backlash, and fully leverage the state’s abundant coal resources and established energy infrastructure.

To fully understand why households continue to experience higher utility bills each month, it is necessary to examine how Indiana’s current utility rules distribute and recover the costs of new power projects.

Utility Economics – Rising Rates and Cost Shifting

Indiana’s utility framework reveals why households often end up paying higher electricity bills whenever new energy infrastructure is built. Under Indiana Code § 8-1-2-4, utilities are authorized to recover both the cost of constructing new infrastructure—such as generation, transmission, and distribution systems—and a regulated profit. In practice, this means that utilities can build expensive projects and then recover those costs, along with a guaranteed rate of return, from customers across the region where the project is located, regardless of who directly benefits from the investment. As a result, families frequently bear the financial burden for infrastructure that primarily serves large industrial or commercial users.

A recent example illustrates how this cost-allocation system operates in practice. According to Mirror Indy, AES Indiana proposed a $4.4 billion natural gas expansion designed to support the growing electricity demand from new data centers. Although, the House Enrolled Act 1007 requires large users to cover 80% of the cost, the remaining 20%—nearly $880 million—can still be borne by residential ratepayers. Consequently, even when data centers are the primary beneficiaries of such large-scale projects, households end up absorbing part of the financial burden simply because they reside within the same service region.

The effects of this cost shifting are already evident. In 2024, the average residential electricity bill in Indiana increased by 17.5 percent compared with the previous year, marking the sharpest rise in two decades. This record-setting jump illustrates how shifting even a portion of data-center costs onto households can quickly compound monthly expenses and strain household budgets.

Taken together, Indiana’s utility code and cost-allocation mandate have created a system in which households are effectively financing infrastructure that primarily serves the massive energy requirements of data centers. This imbalance in cost responsibility highlights the urgent need for Indiana to adopt stronger “cost-causation” standards—rules that ensure those who drive demand and benefit most from new infrastructure pay a proportional share of its costs. By aligning cost recovery with actual usage and benefit, the state can protect households while still supporting economic growth driven by the digital economy.

Nevertheless, cost shifting is only one of the financial pressures facing households. Additional strain arises when coal plants scheduled for retirement continue operating beyond their planned closure dates. This practice generates hidden costs that utilities can ultimately pass on to everyday consumers.

Retirement of Coal Power Plants

As Indiana’s coal plants approach the end of their operational lifespans, it is important to recognize that most industrial coal facilities are designed to function for roughly 60 years. However, as these plants age, their operating costs increase sharply despite ongoing maintenance. Aging units typically demand higher expenditures for upkeep, regulatory compliance, and efficiency improvements. Historically, utilities have passed these additional costs on to ratepayers, meaning households ultimately pay more to keep outdated plants running beyond their intended retirement dates.

A striking example of this challenge can be seen in the J.H. Campbell coal plant in West Olive, Michigan. The facility was originally scheduled to close on May 31, 2025, but its retirement has already been postponed twice by federal orders intended to address rising energy demand. Operating the plant for just the first thirty-eight days under the Department of Energy’s mandate cost approximately $30 million. This case illustrates the steep financial burden that accompanies efforts to extend the lifespan of coal plants beyond their planned closure dates, underscoring the long-term economic inefficiency of such measures.

This example holds a clear lesson for Indiana. As shown in Table 1, the state currently operates more than 14.2 gigawatts of coal-fired generation capacity, the second highest in the United States. If these aging facilities are compelled to remain online past their intended retirement dates, households will face a predictable outcome: higher electricity bills without any meaningful increase in capacity or reliability. Instead of investing in a modernized, future-ready grid, ratepayers would be forced to subsidize short-term operational extensions that do little to enhance Indiana’s long-term energy security or competitiveness.

Table 1: Top 10 States in the United States by Coal-Fired Electricity Generation Capacity (Measured in Megawatts)

States	Operating	Retired (since 2000)
Texas	16,476	9,283
Indiana	14,204	8,420
West Virginia	13,003	3,089
Kentucky	10,158	7,790
Missouri	8,931	3,873
North Carolina	8,071	5,917
Illinois	7,433	11,673
Pennsylvania	6,703	14,092
Ohio	6,681	17,013
Michigan	6,285	6,075

Source: Global Energy Monitor.

The underlying causes of this issue can be understood through two interrelated factors.

1. Mandated operation overrides market efficiency:

When plants become economically unviable, utilities would ordinarily retire them and invest in newer capacity. However, federal or state mandates may require utilities to keep aging plants operational even when continued operation is no longer financially justified. 

2. Cost recovery shifts the burden to customers:

Older plants generate lower returns yet demand higher maintenance and compliance costs. To maintain profit margins, utilities often seek rate increases to recover these expenses, effectively transferring the financial burden to residential consumers.

A report by Grid Strategies confirms that these “mandated” or “fixed cost recovery” charges are ultimately distributed across all customers, driving up household electricity bills while providing minimal additional benefit to reliability or capacity.

This recurring cycle—aging plants, costly extensions, and shifting expenses—demonstrates the urgent need for Indiana to pursue a more sustainable path forward. Rather than relying on mandates that impose unnecessary costs on households, the state should adopt policies that attract private investment to repurpose retiring coal sites into modern energy hubs. Such an approach would not only reduce financial pressure on families but also enhance grid resilience and support the energy demands of a rapidly digitizing economy.

Beyond these fiscal concerns, communities across Indiana are beginning to raise broader questions about the social and environmental implications of rapid data-center growth.

Data Centers Backlash

Community Concerns

The rapid growth of data centers in Indiana has generated significant community concerns. Much of the public backlash has centered on three key issues: high water usage, rising household electricity costs, and noise pollution. These concerns have prompted local debates, often contentious and, in some areas, calls to slow or restrict new data center developments across the state.

• Concern 1: High Water Usage

A recently proposed Google data center in Franklin Township was projected to consume up to one million gallons of water per day, sparking opposition from residents who feared strain on local supplies. A report by WestWater Research projects that data center water consumption in the United States could rise by 170 percent by 2030. In regions vulnerable to drought or peak summer demand, this raises serious questions about sustainability.

• Concern 2: Rising Household Electricity Costs

Research from Harvard has shown that utilities often sign special rate agreements with data centers that provide discounted electricity prices or long-term guarantees. While these deals help attract investment, they frequently fail to cover the full cost of new infrastructure. The uncovered portion is then shifted onto households through higher utility bills. In Indiana, where families have already seen steep rate hikes in recent years, many are understandably frustrated at the idea of subsidizing large industrial users.

• Concern 3: Noise Pollution

Data centers operate 24 hours a day and rely on equipment such as servers, HVAC systems, cooling fans, and backup generators. Residents living near these facilities have reported nighttime noise levels of around 65 decibels, the equivalent of a passing car. Public health research from Boston University links prolonged exposure to noise above 65 decibels with increased risks of hypertension and heart disease. For nearby communities, the constant sound raises legitimate quality-of-life and health concerns.

Why These Concerns Are Overstated

Such concerns are entirely understandable. Communities are right to be cautious about water, costs, and noise. Yet Indiana is also facing an unprecedented surge in energy demand from data centers, and this moment calls for deeper thinking. Instead of accepting these concerns at face value, we should ask:

1. How can the water use of data centers be managed so it becomes sustainable rather than overwhelming?
2. How can household electricity costs be shielded instead of shifted upward?
3. How can the noise of nonstop operations be contained so that communities are not forced to bear it?

The rebuttal below in the next section answers these questions, which reveal that the concerns, while valid, can be shown to be largely unwarranted or exaggerated when Indiana adopts the right approach. The key is finding models that both address these concerns and ensure that families are not burdened with higher electricity bills. One promising path can be found by looking at how other states are managing the dual challenge of coal plant retirements and growing energy demand from data centers.

Balancing Coal Plant Retirements, Data Center Energy Demand, and Household Electricity Costs

As Indiana confronts the twin challenges of rising electricity demand from data centers and the scheduled retirement of coal plants, it can look to real-world models for guidance. Several states have already begun experimenting with strategies that integrate retiring coal assets with new digital infrastructure. One notable example is the Homer City power project in Pennsylvania, where a 1.8-gigawatt coal plant is being converted into a 4.5-gigawatt gas-fired facility designed to serve data centers built on the same site—a model known as “colocation.” The $10 billion project is financed entirely through private capital.

This approach advances two critical goals simultaneously:

1. It replaces retiring generation capacity while attracting major data center investments—all without shifting costs onto households. Because the project is privately financed, ratepayers are shielded from the cost increases that typically accompany utility-led expansions.

2. At the same time, this model promotes economic development by consolidating energy generation and high-tech infrastructure within a single, strategically located site.

Reusing retiring power plant sites also brings major cost and efficiency advantages. These locations already possess essential infrastructure, including transmission connections, substations, and industrial zoning. Leveraging these existing assets avoids the high costs and lengthy permitting timelines associated with building entirely new facilities in undeveloped areas.

For Indiana, the Homer City project demonstrates how private capital can turn retired energy sites into hubs for both power generation and data centers, meeting modern electricity demand without burdening families with higher bills. By adopting a similar model, Indiana can align economic growth with affordability and grid reliability goals.

Direct Rebuttals to Community Concerns

Each of the concerns outlined earlier—water use, household costs, and noise—has a direct and practical solution when Indiana leverages existing coal plant sites and requires private investment:

• Rebuttal 1: Managing Water UsageRedeveloped coal plant sites already have industrial-scale water infrastructure in place. By colocating new data centers at these sites, Indiana can minimize new withdrawals and avoid placing additional stress on community water supplies.

• Rebuttal 2: Protecting Household Costs
  Requiring private data center companies to directly fund coal plant redevelopment and cover the cost of new infrastructure ensures that households are protected. Instead of families subsidizing industry, the companies pay their own way.

• Rebuttal 3: Containing Noise Pollution
  Coal plant sites are already zoned and developed for heavy industrial use. Building data centers there keeps noise within areas accustomed to large-scale operations, reducing the risk of disruption for residential neighborhoods.

When considered in this light, the three major concerns—water, costs, and noise—are far less threatening than they first appear. Rather than creating new problems, Indiana can turn potential risks into practical solutions by leveraging existing coal plant sites and requiring private investment. This model protects families, reassures communities, and secures the energy infrastructure needed for a rapidly digitizing economy. To achieve this, Indiana would need to combine financial incentives with clear requirements for data center developers.

It is also necessary to evaluate whether data center developers can feasibly allocate the capital required to redevelop retiring coal plants into modern energy hubs.

Data center cost allocation 

Data centers can and increasingly do invest in redeveloping retiring coal plants to secure stable and long-term energy supplies. To understand why this investment strategy is both feasible and logical, it is important to examine how data center costs are allocated.

According to McKinsey, more than 60% of AI data center capital expenditures, as seen in Table 2, are directed toward computing hardware, primarily GPUs and AI accelerators, compared with roughly 25% for energy infrastructure and 15% for real estate. In other words, the majority of spending is already tied to energy-intensive equipment that depends on scalable and reliable baseload electricity. This makes investment in power infrastructure not only practical but strategically essential. Without dependable and affordable energy, even the most advanced AI servers and GPUs cannot operate efficiently or continuously.

Table 2: AI Data Center Capital Expenditure Breakdown by Category (Projected through 2030)

Category	Description	Projected Share
Computing hardware (chips and servers)	Includes GPUs, AI accelerators, CPUs, storage, and networking equipment that drive data processing and model training. These components represent the largest single driver of AI data center spending, reflecting the exponential growth in computational demand.	~60%
Energy infrastructure	Covers investments in on-site generation, transmission interconnections, substations, transformers, uninterruptible power supplies (UPS), cooling systems (HVAC, chillers, liquid cooling), and grid upgrades. Reliable and scalable power systems are strategically essential to ensure 24/7 uptime and operational efficiency.	~25%
Real estate and site development	Includes land acquisition, construction of building shells, zoning compliance, permitting, and environmental mitigation. While it represents a smaller portion of total capital spending, real estate remains critical for site scalability, cooling integration, and long-term expansion.	~15%

Source: McKinsey & Company. 

This cost distribution helps explain why data centers are well positioned to invest directly in redeveloping power generation sites. A strong example can be seen in Pennsylvania, where the former Homer City coal-fired plant is being converted into a 4.5-gigawatt natural gas facility designed to power a cluster of data centers. The project, initially valued at $10 Billion, is part of a larger $25-billion-dollar initiative to transform legacy coal infrastructure into an advanced AI and data center hub. It has already attracted over $60 billion dollars in additional private investment, showing how the integration of data infrastructure with power generation can attract significant private capital while protecting households from higher utility costs.

Indiana is particularly well positioned to replicate this model. The state’s many retiring coal sites, existing transmission capacity, and industrial zoning provide an ideal foundation for similar redevelopment. By converting these aging facilities into productive and revenue-generating energy hubs, Indiana can meet rising electricity demand, attract digital infrastructure investment, and protect families from increasing energy costs. 

With the right policy framework, the interests of data center developers, grid reliability, and household affordability can align within a single sustainable model for Indiana’s energy future.

Policy Recommendations for Indiana

Redirecting Costs Through Coal Plant Redevelopment

The most effective step Indiana can take is to require or incentivize data centers to fund upgrades at retiring coal power plant sites. This approach ensures that existing infrastructure is reused while costs are carried by the companies creating new demand rather than being shifted onto families. By placing financial responsibility on private investors instead of households, Indiana can modernize its energy system without raising utility bills. This directly addresses the cost-shifting problem outlined earlier, where families were left paying for infrastructure built primarily to serve large industrial users.

Making Indiana Competitive for Investment

To attract and direct private investment toward these redevelopments, Indiana must position itself as a competitive destination for large-scale data centers. The state can achieve this by implementing several policy measures:

1. Offering targeted tax incentives for projects that repurpose or redevelop retiring coal plant sites into data center and energy hubs. These incentives would reduce upfront capital costs for developers while stimulating local job creation and property tax revenue.

2. Streamlining the permitting process for projects that colocate data centers alongside existing or former coal plants. Expedited reviews would minimize delays and provide investors with the regulatory certainty necessary for energy infrastructure projects.

3. Simplifying regulatory requirements for developments at existing industrial sites. By easing redundant compliance steps and enabling adaptive reuse of infrastructure, Indiana can lower barriers to entry while maintaining environmental and safety standards.

Together, these measures would not only attract investment but also guide data centers toward industrially zoned areas with existing transmission lines, water resources, and cooling systems. Leveraging these assets allows Indiana to reduce costs, avoid community opposition, and strengthen its position as a national hub for digital infrastructure—all while protecting families from higher electricity bills.

Balancing Incentives with Responsibilities

To ensure long-term balance, data centers receiving these benefits must also accept specific operational responsibilities that safeguard both households and the power grid. These include:

1. Providing their own backup generation through microgrids, turbines, or comparable systems to prevent reliance on the public grid during peak demand.

2. Signing Curtailment Agreements that commit them to reducing electricity consumption during periods of system stress or extreme weather.

These requirements, commonly referred to as “Bring Your Own Generation” and “Curtailment Agreements,” place accountability directly on companies driving new demand. They ensure that the financial and operational burdens of growth remain with those who create them, not with households.

Why AI Data Centers Fit This Model

Artificial intelligence data centers are particularly suited to this model. Unlike traditional computing, AI workloads can be paused or shifted with minimal disruption. Research from Goldman Sachs confirms that AI computing tasks are more flexible and can be scaled down when the grid is under stress. This flexibility makes Curtailment Agreements both practical and effective.

Under this model, data centers would operate at full capacity using their own power under normal conditions. During extreme situations such as heat waves, severe storms, or unexpected plant outages, they would reduce electricity use in a coordinated and pre-agreed manner through a Curtailment Agreement with the grid operator.

A Policy Parallel: New Hampshire’s HB 672

New Hampshire’s HB 672, enacted in August 2025, offers a valuable policy precedent. The law allows off-grid electricity providers to operate independently of traditional utility regulation, encouraging private investment in energy infrastructure. Its guiding principle is straightforward: those who create new demand must also create and pay for the supply. This ensures that families are protected from higher electricity bills while fostering faster and more innovative energy development.

Indiana does not need to adopt an off-grid model to capture the benefits of this approach. Instead, it can apply the same principle within the public grid. HB 672 demonstrates that when private actors fund and manage their own infrastructure, projects are completed faster and costs are not shifted to ratepayers. Indiana can draw on this lesson by requiring data centers to finance the redevelopment of coal plant sites, provide on-site backup generation such as microgrids or turbines, and enter into Curtailment Agreements that reduce electricity use during periods of peak demand. Indiana can also simplify permitting and regulatory approvals for projects built at existing industrial sites, just as HB 672 reduced delays for off-grid providers.

The key difference is that Indiana would keep these projects connected to the public grid rather than separating them from it. This means that new capacity would not only serve the data centers themselves but also strengthen the reliability of the grid for households. Retired coal plants would become hubs for both power generation and digital infrastructure, providing shared benefits for companies and communities alike.

In essence, HB 672 reinforces a simple truth: costs should remain with those who cause them. By applying this principle to coal-site redevelopment, Indiana can attract private investment, expand its energy capacity, and protect households from rising costs while maintaining the strength of its public grid.

Two Major Benefits

This model solves two challenges simultaneously:

1. Protecting households from rising costs by ensuring that companies driving new demand pay for the infrastructure they require.

2. Strengthening grid reliability through a combination of on-site generation and flexible consumption agreements that prevent system overloads.

This dual benefit aligns with the Federal Energy Regulatory Commission’s “cost-causation” principle, which requires that those who cause or benefit from new infrastructure bear its costs rather than spreading them across all customers.

Steps Indiana Policymakers Should Take

To implement this model effectively, Indiana should take two decisive steps:

1. Legislation: Lawmakers should enact a bill enabling data centers to colocate at retiring coal sites, bring their own backup generation, and enter binding Curtailment Agreements with the grid operator.

2. Regulation: The Indiana Utility Regulatory Commission should update its cost-allocation rules so that project expenses are assigned to the users creating demand rather than to ordinary households.

Together, these steps would protect families, attract private capital, and secure the reliable energy supply necessary for Indiana’s digital economy.

Conclusion

Indiana is at a crossroads. On one hand, the state wants to attract major investments in data centers to drive economic growth and establish itself as a hub for emerging technologies like artificial intelligence. On the other hand, households are experiencing some of the highest electricity rate increases in decades.

Balancing these goals requires a strategy that promotes growth without imposing new costs on households. The framework outlined in this paper demonstrates how Indiana can meet rising electricity demand by redeveloping retiring power plant sites, attracting private capital, and modernizing its energy infrastructure through partnerships that ensure growth pays for itself. By requiring those who create new demand to finance the capacity they rely on, Indiana can protect families, strengthen its grid, and become a national model for affordable, innovation-driven energy development.

Reference

Our Site

Full use of this site, including access to the search function and the archive of past articles and journals, is now available to everyone.

Connect with Us

 

Our mission is to marshal the best thought on governmental, economic and educational issues at the state and municipal levels. We seek to accomplish this in ways that:

• Exalt the truths of the Declaration of Independence, especially as they apply to the interrelated freedoms of religion, property and speech.
• Emphasize the primacy of the individual in addressing public concerns.
• Recognize that equality of opportunity is sacrificed in pursuit of equality of results.

The Indiana Policy Review Foundation is a non-profit education foundation focused on state and municipal issues. It is free of outside control by any individual, organization or group. It exists solely to conduct and distribute research on Indiana issues. Nothing written here is to be construed as reflecting the views of the Indiana Policy Review Foundation or as an attempt to aid or hinder the passage of any bill before the legislature or to further any political campaign.

The foundation's white papers are intended to make scholarly research on Indiana issues more widely available to policy analysts and researchers. White Papers represent research in progress and are published to invite comment and discussion as preparation for their submission to academic journals and other professional publications. The authors are solely responsible for the content of their research and analysis.