The United States holds a commanding lead in data-center capacity, hosting 37% of the world’s facilities, and being home to the largest data center providers — Amazon.com, Microsoft, and Alphabet. These data centers are more than just infrastructure; they are the backbone of artificial intelligence (AI), driving innovations from personalized healthcare to automated supply chains. They are also a critical engine of the U.S. economy, generating 3.5 million jobs and contributing $2.1 trillion to the nation’s GDP between 2017 and 2021.

Continuing this success depends on a crucial factor: electricity.

Data centers are energy-intensive, with their power demand potentially doubling U.S. electricity consumption within the next decade, according to one study. This rapid growth comes with significant challenges for the U.S. electricity grid. Without decisive action, this surge in demand could lead to significant challenges for the grid, including congestion, higher costs, and reduced reliability, threatening America’s competitive edge not just in AI, but in all industries.

Electricity isn’t just an operational necessity for data centers; it’s a strategic imperative. Power costs represent up to 60% of operating expenses for some facilities. More importantly, these centers cannot tolerate downtime, leading them to install power backup systems. The failure of uninterruptible power systems is responsible for nearly half of all data center outages, which cost operators over $100,000 per incident. Less reliability from the electric grid means centers must spend more on internal systems, putting them at a competitive disadvantage.

Unfortunately, there are problems in the regulatory framework governing the electricity sector. In some states, utilities are vertically integrated in the traditional utility structure, providing generation, transmission and distribution. In others, generation has been unbundled from transmission and distribution, creating wholesale markets designed to foster competition for generation. Unbundling began roughly 25 years ago in response to some large electricity users wanting to obtain lower prices.

Each model presents its own challenges. Vertically integrated markets offer low-risk investment environments for generation but limited incentives for efficiency. Meanwhile, unbundled markets have driven generation costs down but struggle with reliability and long-term investment. For example, in the PJM system in the Northeast U.S. and the MISO system in the Midwest, fossil fuel plants, which can be dispatched when demand surges, are exiting the systems at a faster pace than new generation is being added, causing reliability problems — a costly problem for data centers.

Also, the competitive generation markets are costly to operate and difficult to navigate, and their focus on short-term price signals often overlooks long-term infrastructure needs. As a result, the cost savings that the competition provided have not found their way into lower retail prices but for a few customers.

Unbundled markets have also not been tested in situations where demand grows rapidly. Electricity production grew nearly 95% over the 25 years before unbundling began. The country’s vertically integrated industry responded well, except in a few situations, such as California. Then growth slowed, with production increasing less than 1.5% in the past 15 years. It’s unclear if these unbundled markets will adapt to a roughly doubling of demand in less than 10 years.

The regulatory challenges don’t end there. Meta Platforms, for example, has encountered delays and higher costs due to environmental regulations when attempting to use nuclear power. Amazon faced a different hurdle with the Federal Energy Regulatory Commission (FERC). A proposed agreement to co-locate a data center with a Talen Energy nuclear plant was rejected, sending the companies back to the drawing board and delaying progress. Such regulatory uncertainties risk steering data center investments out of the U.S. or to states with more adaptable, state-regulated transmission systems like Florida and Texas.

To maintain its leadership in AI and data centers, the U.S. must be flexible about how utilities respond to new data-center demand. The Trump administration and state policymakers should consider easing restrictions that limit utility investment opportunities and pricing. This includes streamlining permitting processes, clarifying FERC regulations, and relaxing generation ownership restrictions.

The stakes are high. As AI reshapes the global economy, data centers will only grow in importance, especially cloud service providers and their customers. Ensuring a reliable, flexible and affordable power supply is essential to keeping America at the forefront of technological innovation.