Artificial intelligence (AI) is revolutionizing industries, but its voracious appetite for electricity is sending shockwaves through the U.S. energy market. The Financial Times recently highlighted that the nation’s largest grid operator, PJM Interconnection, which serves 65 million people across 13 states and Washington, D.C., is grappling with unprecedented demand driven by AI data centers, particularly in Virginia’s “Data Center Alley.” This surge is pushing electricity prices higher, with PJM forecasting a $16.1 billion payout to power producers to meet demand from mid-2026 to mid-2027—a 10% increase from last year. Customers could see bills rise by up to 5%, outpacing the broader inflation rate of 2.7% reported by the Labor Department for the past year.
This trend directly undermines President Donald Trump’s pledge to cut household energy bills by half, as electricity prices have already climbed 5.6% over the past year. The pressure is compounded by Trump’s own policies, such as global tariffs and a massive infrastructure bill, which are adding to household financial burdens. But what does this mean for the public sector, and how can it navigate the inflationary ripple effects of AI-driven energy demand?
Why AI Is an Energy Hog
AI technologies, especially generative models like ChatGPT, require immense computational power. Data centers hosting these systems operate 24/7, consuming electricity at rates comparable to entire cities. For instance, a single data center can demand as much power as 500,000 households. Virginia, home to the world’s largest concentration of data centers, is seeing its grid strained as tech giants like Amazon scramble for additional capacity. PJM projects a staggering 32-gigawatt demand increase by 2030, nearly all attributed to data centers.
The energy crunch is exacerbated by delays in new power projects and the retirement of older fossil fuel plants. Last year, PJM’s capacity auction saw prices skyrocket by 800%, prompting a price cap at $329 per megawatt-day. Despite this, costs remain near the ceiling, signaling a persistent supply-demand imbalance. The result? Higher bills for consumers and increased pressure on public sector budgets already stretched thin.
Impact on the Public Sector
The public sector—encompassing schools, hospitals, government offices, and other critical services—faces unique challenges as energy costs rise. Unlike private households, public institutions often operate on fixed budgets, making unexpected increases in utility expenses particularly disruptive. Here’s how the AI-driven energy price surge is impacting the public sector:
Budget Strain:
Public facilities like schools and hospitals rely heavily on electricity for lighting, heating, cooling, and critical equipment. A 5% increase in electricity bills, as projected by PJM, could force budget reallocations, potentially cutting funds for staff salaries, educational resources, or healthcare services. For example, a large urban school district could see annual energy costs rise by tens of thousands of dollars, diverting funds from classroom upgrades or teacher training.
Infrastructure Investment Needs:
The public sector often manages its own facilities, such as municipal buildings and public transit systems. Rising energy costs may necessitate investments in energy-efficient technologies, such as LED lighting or smart HVAC systems, which require upfront capital that many municipalities lack. The White House Council of Economic Advisors estimates a $1.4 trillion investment is needed by 2030 to meet AI-driven power demands, a burden that could fall partly on public utilities and taxpayers.
Service Delivery Risks:
Higher energy costs could lead to service reductions if budgets can’t accommodate the increases. For instance, community centers might reduce operating hours, or public transit agencies could scale back routes to offset fuel and electricity costs, disproportionately affecting low-income communities reliant on these services.
Inflationary Feedback Loop:
The public sector is not immune to broader economic pressures. Trump’s tariffs and infrastructure spending are already fueling inflation, and rising energy costs add another layer. Public sector wages, often tied to cost-of-living adjustments, may face upward pressure, further straining budgets. The Labor Department’s data showing electricity price increases outpacing general inflation (5.6% vs. 2.7%) underscores this challenge.
Managing Inflation in the Public Sector
To mitigate the impact of AI-driven energy price rises, the public sector must adopt innovative strategies. Here are actionable approaches, grounded in fresh data and forward-thinking policies:
Energy Efficiency Programs
Public institutions can invest in energy-saving technologies to reduce consumption. For example, retrofitting buildings with smart thermostats or solar panels can lower long-term costs. The U.S. Department of Energy offers grants through programs like the Energy Efficiency and Conservation Block Grant (EECBG), which local governments can use to fund such upgrades. A 2025 report from the International Energy Agency (IEA) notes that AI itself can optimize energy use by shifting high-demand tasks to off-peak hours, potentially saving costs for public facilities.
Public-Private Partnerships (PPPs)
Collaborating with tech companies could alleviate grid strain. For instance, tech giants like Microsoft are exploring nuclear power to fuel their data centers, such as the revival of Pennsylvania’s Three Mile Island. Public sector entities could negotiate agreements where tech firms subsidize grid upgrades or share renewable energy resources in exchange for tax incentives. This approach could reduce the financial burden on ratepayers while supporting AI growth.
Demand Flexibility Initiatives
The Duke University study released in 2025 suggests that existing grid capacity could handle AI-driven demand through “demand flexibility,” where data centers adjust their energy use during peak periods. Public sector facilities could adopt similar strategies, such as scheduling energy-intensive tasks (e.g., laundry in hospitals or HVAC in schools) during off-peak hours to lower costs. The EPRI DC Flex consortium is already exploring this model, offering a blueprint for public sector adoption.
Policy Advocacy
Local and state governments can push for policies that allocate data center costs more equitably. In Ohio, AEP Ohio’s proposal to charge tech companies 85% of their projected energy costs upfront could shield public sector ratepayers from disproportionate burdens. Public sector leaders should advocate for similar measures, ensuring tech giants bear the cost of their energy demands rather than passing it to taxpayers.
Renewable Energy Investments
The IEA projects that renewables will account for half of global data center demand growth by 2035, thanks to their scalability and short lead times. Public sector entities can partner with utilities to prioritize solar and wind projects, especially in regions like Northern Virginia, where solar generation aligns with peak summer demand. Federal incentives, despite potential rollbacks under Trump’s policies, could still support these initiatives if structured as national security priorities, as suggested by the Atlantic Council’s FUEL-AI Act proposal.
A New Angle: Reframing AI as an Opportunity
Rather than viewing AI-driven energy demand solely as a cost driver, the public sector can leverage AI to enhance efficiency and resilience. AI can optimize public sector operations, from predictive maintenance in municipal utilities to real-time energy management in government buildings. For example, AI-driven smart grids can reduce outages, which are critical for public services like hospitals and emergency response systems. A 2025 report from The Conference Board highlights AI’s potential to unlock efficiencies, potentially offsetting its energy costs if implemented strategically.
Moreover, the public sector can position itself as a leader in the “Grid New Deal” proposed by MIT Technology Review, advocating for clean energy investments and grid modernization. By aligning with national security priorities, such as those outlined in the FUEL-AI Act, public entities can secure federal funding to offset costs, ensuring that AI’s growth doesn’t come at the expense of taxpayers.
The Road Ahead
The AI-driven energy surge is a double-edged sword: it fuels innovation but strains grids and budgets. For the public sector, the challenge is to balance service delivery with rising costs while navigating inflationary pressures. By embracing energy efficiency, forging strategic partnerships, and advocating for equitable cost allocation, public institutions can turn this crisis into an opportunity. As PJM’s projected 32-gigawatt demand increase looms, proactive measures will be critical to ensuring that AI’s promise doesn’t come at the expense of public welfare.
