Hello and welcome to Energy Source, coming to you from New York.

Iran on Wednesday said it had reached an agreement with Oman on the details of a shipping route through the Strait of Hormuz. The hope of a breakthrough leading to the reopening the strategic waterway kept oil prices below $80 a barrel on Wednesday.

The international benchmark, Brent crude, settled 0.1 per cent higher at $79.70 a barrel on Wednesday.

With US midterm elections in November, the Trump administration desperately needs to make progress on lowering inflation. Energy prices have been volatile this year, largely due to the conflict in the Middle East.

My colleague Myles McCormick reported that the average price for US diesel since Donald Trump returned to office has exceeded the levels seen during Joe Biden’s presidency and have driven up fuel costs that are critical to industries such as agriculture and transport.

In today’s Energy Source, we look at the economic risks of utilities overinvesting in natural gas resources to meet surging energy demand from data centres.

Thanks for reading. — Alexandra

<img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/t/2/8610/rod.janssen@gmail.com/7565508080128382/0/0'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/8610/rod.janssen@gmail.com/7565508080128382?pid=1'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/8610/rod.janssen@gmail.com/7565508080128382?pid=2'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/8610/rod.janssen@gmail.com/7565508080128382?pid=3'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/8610/rod.janssen@gmail.com/7565508080128382?pid=4'>

As data centres spring up across the US, many utilities have resorted to building new gas infrastructure to meet the explosion of power demand. But analysts caution that many of these data centres may never be built, leaving customers on the hook to pay for pricey new gas plants that may not be needed.

A new report shared exclusively with Energy Source found that meeting data centre demand primarily with gas — a long-lived, high-cost asset — creates financial risks for utility customers.

According to the RMI, a sustainability think-tank formerly know as the Rocky Mountain Institute, some utilities are making large investment decisions before determining, through system-wide planning, what combination of generation, storage and transmission would be the most cost-effective in meeting new demand.

RMI estimates that over-investment in gas resources could raise the power bills of an average US household by $94 to $118 a year, worsening affordability for Americans who are already struggling with soaring electricity costs.

“As data centres’ requests come online really fast, the utilities and sometimes the large load customers themselves are proposing very large individual plants to serve that demand, and that is a bit different from doing a system-wide planning portfolio approach,” said Jesse Cohen, a senior associate at RMI.

“The speed at which things are happening is breaking the traditional planning process,” he added.

The scale of this build-out has made the US the international leader in gas-fired capacity development, surpassing China for the first time, according to Global Energy Monitor. Entergy Louisiana plans to build 10 gas-fired plants to support Meta’s data centres in the state. The utility Northern Indiana Public Service Company plans to build two gas plants to serve Amazon’s planned data centres in Indiana.

The sudden proliferation of data centres has already affected how utilities make investment decisions. Georgia Power traditionally files a full system-wide planning document every three years, but recently has filed updates every year as it faces unprecedented power demand from data centres.

In 2023, the Georgia utility received approval to build 1,300 megawatts of new gas infrastructure, one year after it filed its official planning document. By 2025, it received approval to build another 3,692MW of new gas capacity.

Gas plants can be risky assets because they are exposed to rising construction costs, delays associated with turbine backlogs and exposure to volatile fuel prices, among other complications. Overinvesting in gas infrastructure based on uncertain demand forecasts creates a risk because fixed costs must be recovered from fewer customers than expected, RMI’s report said. Portfolio planning can reduce this risk because utilities are able to anticipate the mix of resources that would be the cheapest price for customers.

Lauren Shwisberg, a principal in RMI’s carbon-free electricity practice, said she has seen many utilities commit to building new generation that is not aligned with system plans or typical planning cycles.

“A lot of what is planned to be procured in a lot of those out-of-cycle procurements is gas,” she added.

Utilities can manage the risk of over-investment by improving forecasting of large load demand, speeding up system-wide planning cycles, staging procurement so utilities commit gradually to new resources and allocating remaining risks through tariffs and contracts, according to the RMI report.

Utility Exelon recently improved the forecasting of its data centre load growth after it restructured agreements with new large load customers to include real financial commitments. Exelon ultimately revised down its data centre growth pipeline by about 11 gigawatts, helping it to filter out speculative requests before investments are made.

Tariffs on large load customers such as data centres can also protect households from some of the costs of over-investment, though both groups would ultimately benefit from lower prices with improved system planning.

“It’s still more expensive for the large-load customer to build a big gas plant than to do system planning,” Cohen said. “It is better for everybody to just pursue the lowest-cost solutions.”

• UK Green Party leader Zack Polanski has called for oil and gas companies that have made large profits during the Iran war to be taxed at a higher rate to fund climate mitigation across the UK.

• UK oil major BP has put its $4bn US biogas business up for sale.

• Russia has been quietly increasing its shadow fleet of LNG tankers, allowing Moscow to keep shipping gas despite EU sanctions.

Energy Source is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Rachel Millard, Malcolm Moore, Ryohtaroh Satoh and Stephanie Findlay with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.

<img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/t/2/7012/rod.janssen@gmail.com/7915762631800366/0/0'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/7012/rod.janssen@gmail.com/7915762631800366?pid=1'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/7012/rod.janssen@gmail.com/7915762631800366?pid=2'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/7012/rod.janssen@gmail.com/7915762631800366?pid=3'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/7012/rod.janssen@gmail.com/7915762631800366?pid=4'>