The Energy Price of Artificial Intelligence: What South Dakota Stands to Gain and Pay

The massive data centers — the factories that process every email, video, and internet search — are coming to the Midwest. South Dakota may not want any within its borders, but part of the bill is already arriving anyway. 

A single data center the size of those proposed in South Dakota consumes as much electricity as 350,000 homes. It’s not a steel factory, it’s a climate-controlled warehouse full of servers, processing the data that powers ChatGPT, Netflix, and Google Maps. And it needs to run 24 hours a day, seven days a week, every day of the year.

That is the scale of the industry knocking on South Dakota’s door. In 2026, two projects of this kind (known as hyperscale data centers, the highest tier in the category, operated by giants like Amazon, Microsoft, and Google) were under review in the state. Together, they represented nearly 930 megawatts of capacity and roughly $7 billion in investment. The 2026 legislative session changed that picture by rejecting tax exemptions for the sector and causing one of the projects to be canceled. The other is moving forward. The debate, however, is far from over.

To understand what’s at stake, it helps to understand what a data center is, and why the world is building so many of them. At its most basic, data centers house the computers that make the internet work. Every photo sent from a phone, every online purchase, every video call passes through one of these facilities at some point along the way. The smallest ones fit in an office. The largest spans hundreds of thousands of square meters and consumes energy comparable to entire cities.

Demand for these data centers has tripled in less than a decade in the United States. In 2014, data centers consumed around 60 terawatt-hours of electricity per year, the equivalent of roughly 5.5 million American homes. By 2023, that figure had reached 176 terawatt-hours. Projections for 2028 range from 325 to 580 terawatt-hours, depending on the pace of artificial intelligence expansion. At that rate, the sector could triple in size again in just five years.

      The cost of this expansion is being distributed across utility customers nationwide. A trend that has prompted regulatory scrutiny and new consumer protections in several states. To accommodate growing demand, utilities across the country filed for nearly $31 billion in rate increases in 2025, more than double the previous year. 

This rapid expansion comes at a cost, though largely one borne by the industry itself. According to the New York Times, tech giants are investing hundreds of billions of dollars of their own capital to build these data centers: Amazon, Google, Microsoft, and Meta spent a combined $130.65 billion in the first quarter of 2026 alone (more than three times the inflation-adjusted cost of the Manhattan Project) and are projected to invest upward of $700 billion over the course of the year. With a combined quarterly profit of $151 billion, analysts say the companies have the cash flow to sustain the pace of investment. ‘They can handle it,’ John Blackledge of TD Cowen told the Times.

The full cost of data center expansion includes more than just physical construction and equipment, though. The accelerated expansion of the power grid required to support them presents an additional challenge for utilities and residential power users. In 2025, U.S. power utilities requested nearly $31 billion in rate increases to fund new generation and transmission projects, a record figure more than double the previous year’s figure. For the consumer, the impact is visible, since residential electricity bills rose 7% in 2025 alone, against a general inflation rate of 2.7%. South Dakota has moved to limit this exposure, since new legislation requires data center developers to reimburse infrastructure costs in full and mandates separate rate structures for large consumers, shielding residential and agricultural users from bearing the cost of grid connections they did not request. 

South Dakota has characteristics that attract this industry. Electricity is relatively cheap; the cold climate reduces cooling costs, which are the primary operating expense for a data center, since servers generate constant heat and must be kept at a controlled temperature; and the state has one of the cleanest energy mixes in the country: roughly 80% of internally generated electricity comes from renewable sources, with wind energy leading at 58% of generation. For companies like Amazon and Google, which have pledged to operate on 100% clean energy, South Dakota’s grid (where roughly 80% of internally generated electricity comes from renewable sources) represents a significant structural advantage over the national average of around 10%. That distinction could translate into long-term investment stability for the state.

But there is one side of the equation that doesn’t depend on local policy decisions. South Dakota is part of a regional electrical grid called Midcontinent Independent System Operator (MISO) — the operator responsible for energy flow across 15 Midwestern states, serving more than 42 million consumers. When that grid expands its infrastructure, the costs are shared among all member states, regardless of where the construction takes place.

In December 2024, MISO approved a $21.8 billion transmission expansion plan: 24 projects, two of which run directly through South Dakota. Part of that bill will be passed on to South Dakota consumers. This will happen even if no data center is ever built within the state. The expansion is driven largely by data center demand in other states across the region.

What the South Dakota legislature did in 2026 was establish rules rather than approve tax incentives. It required developers to cover the costs of regulatory review, water use assessments, and separate rate structures for large consumers, preventing those costs from being spread across other users’ bills. It also protected the right of municipalities to regulate the Data Centers. As a result, one of the two projects was canceled.

Still, the debate goes beyond a simple yes-or-no. Hyperscale data centers generate billions in investment and property tax revenue, and the cold climate offers a natural advantage: outdoor air can substitute for mechanical cooling for much of the year. But their water and energy demands invite scrutiny. Large facilities relying on evaporative cooling can draw between one and five million gallons of water per day — a figure that shaped public debate in Sioux Falls, where residents packed city council hearings with concerns about the water supply.

According to South Dakota Public Broadcasting, the Gemini project, however, intends to use a closed-loop system, in which water is recirculated rather than consumed continuously, and the city has restricted its water use to domestic purposes only — roughly equivalent to that of an office building. Gemini has said it plans to use a closed-loop cooling system, though it has not yet made a full commitment to that design. South Dakota’s new legislation now requires water-use compatibility assessments before any such project may proceed, ensuring that the distinction between the two approaches is resolved before, not after, construction begins.

Other states that moved quickly to open their doors, Virginia and Texas among them, now face grid congestion, upward pressure on electricity bills, and reliability concerns. What their experience suggests is not that the right answer is always no, but that the conditions imposed before construction matter more than any tax exemption offered afterward. The billions in capital investment and property tax revenue these facilities bring can offset costs in other areas of the state budget, making the terms of development, rather than the development itself, the central question. South Dakota appears to have reached that conclusion earlier than most.