Managing Data Center Uncertainty Part II — Phantom Data Centers: How Strategic Opacity Drives Overbuild

Preface

This article is part of an AIxEnergy article series: Managing Data Center Energy Uncertainty, drawn from the author’s full research paper, “Managing Data Center Energy Uncertainty: A Framework to Prevent Overbuild, Control Costs, and Unlock Grid Flexibility” (Leifman, 2025). The complete version, which provides more detailed analysis, policy design frameworks, and full citations, is available directly from the author by request at michael.leifman1@gmail.com and may be shared at his discretion..

Article Summary

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U.S. utilities are planning and permitting gigawatts of new generation capacity based on speculative signals from data center developers. Yet industry insiders acknowledge that developers file five to ten times more interconnection requests than projects they intend to build. These “phantom data centers” distort demand projections, inflate capital spending, and entrench fossil generation. The problem is structural: developers profit from optionality, utilities profit from capital investment, and regulators—rewarded for caution—approve capacity to avoid blame for shortages. The result is a feedback loop of overbuild and excess cost.

This part of the Managing Data Center Uncertainty article series examines the political economy of opacity that drives this dynamic. It argues that overbuilding is not a product of greed or error but of rational behavior within a flawed system. Developers, utilities, and regulators each act logically under misaligned incentives that collectively yield irrational outcomes. The solution lies in governance reform—through mandatory disclosure of interconnection data, queue accountability, and performance-based regulation that rewards accuracy, not expansion.

The Illusion of AI Demand

Utilities across the United States are forecasting unprecedented growth in load, much of it attributed to artificial intelligence and data centers. Yet a significant share of that projected demand may never materialize. Data center developers routinely submit multiple interconnection requests—often five to ten times more than they plan to construct—to secure positions in congested queues and retain future options. Under current market rules, there is little cost to doing so.

The Federal Energy Regulatory Commission (FERC) reports that total queued load for U.S. data centers now exceeds 120 gigawatts—more than double any plausible buildout by 2030. In some regions, more than 80 percent of proposed projects will never reach construction. Still, utilities must plan as if every request is real. Rate-of-return regulation further distorts this process: utilities earn profits on capital expenditures, not on the accuracy of their forecasts. When in doubt, they build.

Regulators compound the problem by approving generation and transmission projects aligned to the upper bounds of demand projections. No public official wants to be blamed for a shortfall. The result is systemic overbuild—tens of billions in new capacity justified by speculative demand.

Rational Behavior, Irrational Outcomes

Every actor in the current framework behaves rationally. Developers overfile because queue positions are valuable options in an opaque and competitive market. Utilities build because their profit models reward capital expansion. Regulators approve because they are structurally risk-averse. The irrationality lies not in any individual decision but in the incentive structure itself.

Virginia’s “Data Center Alley” illustrates this cycle. Between 2022 and 2025, Dominion Energy revised its 15-year load forecast upward by more than 40 percent, driven largely by speculative data center proposals in Loudoun County. Internal estimates reported by The Economist (September 2025) indicate that fewer than half of those proposed facilities had secured financing or land. Yet these forecasts underpinned billions of dollars in new infrastructure investment, including gas peaking plants with decades-long lifespans.

In Georgia, the Public Service Commission approved more than 6 GW of new natural gas generation in 2025 to serve projected AI-related load. Within six months, developers had delayed or withdrawn nearly half of the associated data center projects. These plants—built for phantom demand—now risk becoming stranded assets.

This cycle is not driven by greed but by governance. Every participant acts prudently under a system that mistakes uncertainty for growth.

The Queue Problem

Interconnection queues, once designed as planning tools, have become instruments of speculation. Developers can secure queue positions with minimal financial commitment, often long before securing land or financing. Because queue data are not publicly verified, utilities and regulators lack the transparency needed to separate speculative projects from real ones.

The opacity of interconnection data converts manageable forecasting uncertainty into systemic volatility. Without transparency into project status, workload type, or operational timeline, planners treat every interconnection request as an impending load. The consequence is a generation pipeline sized for a future that will not exist.

FERC’s proposed reforms to interconnection procedures—such as milestone-based deposits and queue audits—are steps in the right direction, but they remain limited in scope. True accountability requires that speculative projects bear the financial risk of inaction.

Load Underwriting: A Governance Mechanism for Accuracy

A practical response to speculative interconnection is load underwriting—a regulatory mechanism requiring developers to backstop interconnection requests with proof of intent or partial financial commitment. This approach mirrors the project-finance discipline used in generation development, where offtake agreements and milestone deposits ensure credibility.

Load underwriting can take multiple forms:

1. Milestone Deposits: Developers post refundable deposits tied to project progress; funds are forfeited if milestones are missed without cause.
2. Disclosure Requirements: Developers report site control, financing status, and estimated operational timelines.
3. Queue Audits: Regulators or independent system operators regularly review interconnection data to remove inactive or speculative projects.

These measures would replace speculation with accountability and convert interconnection queues from opaque wish lists into transparent planning tools. ERCOT in Texas and Dominion Energy in Virginia have already begun testing such mechanisms, linking queue access to verified site control and equipment procurement. Early results suggest these reforms can significantly reduce phantom projects without slowing legitimate development.

The Cost of Overbuild

The financial and environmental costs of speculative overbuild are substantial. Each gigawatt of unnecessary capacity costs between $1 and $2 billion to construct. With 40 to 50 GW of phantom load in U.S. forecasts, the potential stranded investment exceeds $70 billion.

The environmental implications are equally significant. Utilities frequently meet speculative demand with gas-fired generation because it can be deployed quickly. Once built, these plants operate for decades, locking in emissions and crowding out renewable investment. Overbuild also diverts capital from grid modernization and flexibility—undermining the very resilience the investments are meant to create.

Governance Reform: From Expansion to Accuracy

To manage speculative demand, governance must shift from rewarding expansion to rewarding accuracy. Three reforms are critical:

1. Queue Accountability: Require deposits and milestone verification for interconnection rights. Projects that fail to progress forfeit their positions.
2. Transparency and Disclosure: Mandate public reporting of project viability indicators—site control, financing, workload composition, and operational timelines.
3. Performance-Based Regulation (PBR): Align utility incentives with forecasting accuracy. Compensate utilities for cost savings achieved through deferred or avoided capital investment.

Together, these reforms would build a market where truth, not speculation, drives infrastructure decisions.

Conclusion: From Phantom to Real

Phantom data centers are a symptom of structural misalignment, not individual misconduct. As AI accelerates energy demand, the temptation to overbuild will persist. Governance must therefore evolve to distinguish between potential and probable demand.

The challenge is not to eliminate uncertainty but to ensure that uncertainty no longer rewards excess. Each megawatt planned should correspond to a verifiable commitment. Each dollar invested should map to a real, not imagined, future.

The next installment, Part III — The Utilization Paradox: Scarcity and Waste Inside AI Infrastructure, will look inside the data center itself—where underutilized GPUs and flexible workloads reveal how the grid’s next 100 gigawatts of capacity could come not from new generation, but from smarter governance of what already exists.

References

1. Brian Martucci, “A Fraction of Proposed Data Centers Will Get Built,” Utility Dive, May 15, 2025.
2. The Economist, “The Murky Economics of the Data Center Investment Boom,” September 30, 2025.
3. Lawrence Berkeley National Laboratory, Data Center Energy Use Forecast 2024 (Berkeley, CA: LBNL, 2024).
4. International Energy Agency, AI Is Set to Drive Surging Electricity Demand from Data Centres, April 10, 2025.
5. Duke University Nicholas Institute, Curtailment-Enabled Headroom: Integrating Large Loads with Existing Capacity (Durham, NC: Duke University, 2024).