US natural gas power costs hit 17-year high as AI data center demand surges.
According to Lazard's latest Levelized Cost of Energy report, the cost of generating electricity from natural gas-fired plants in the United States has reached its highest level in at least 17 years. This increase is driven by rising fuel prices, construction costs, and operational expenses, and is expected to climb further amid surging power demand from data centers and artificial intelligence infrastructure.
Natural gas remains the dominant source of electricity generation in the U.S., accounting for a significant share of the power mix. However, the economics of gas-fired plants have deteriorated in recent years as renewable energy costs have fallen and fuel price volatility has increased. The 17-year high reflects a combination of inflationary pressures on construction and higher expected fuel prices, influenced by domestic production trends, liquefied natural gas exports, and global supply dynamics.
Data center demand is a primary driver of the projected increases. Technology giants are investing billions in new facilities across the country, many in regions reliant on natural gas for reliable baseload power. The AI boom has accelerated these builds, with hyperscalers seeking constant, high-volume electricity to power servers and cooling systems. Analysts estimate that data centers could double or triple power consumption in certain markets over the next decade. States like Texas, Virginia, and Georgia have seen massive investments, straining grids and prompting new generation proposals.
Despite challenges, gas plants continue to provide essential dispatchable power, particularly during periods of peak demand or when renewable output is low. Many utilities and grid operators rely on them to ensure reliability, especially in regions with growing peak demand from electrification of vehicles, buildings, and industry. Data center operators are increasingly signing power purchase agreements with various generators, with some pairing renewables with storage and gas backup to achieve both cost efficiency and reliability.
Renewable energy sources, particularly solar and onshore wind, continue to offer lower levelized costs in many scenarios. Battery storage costs are also declining, improving the economics of intermittent renewables. However, the full system costs of integrating high levels of renewables, including transmission upgrades and backup capacity, complicate direct comparisons. While solar and wind have achieved record-low costs in many regions, the intermittency of renewables requires backup from flexible sources like natural gas.
Regional variations play a significant role. In areas with abundant renewable resources and supportive policies, solar and wind often undercut gas on cost. In other markets, particularly those with constrained transmission or high reliability needs, gas retains an edge.
The power sector faces a capacity crunch in coming years. Retirements of older coal and nuclear plants, combined with rising demand, require significant new buildout. Natural gas is often the fastest option to bring online, though environmental regulations and permitting delays can extend timelines. Transmission remains a bottleneck—upgrading the grid to move power from resource-rich areas to demand centers is essential for optimizing the system cost-effectively.
The Lazard report arrives as policymakers debate the future of the U.S. energy mix. The Inflation Reduction Act has accelerated renewable deployment through tax credits, but recent proposals in Congress could alter incentives. Utilities are navigating these tensions by pursuing diverse portfolios, many adding solar, wind, and storage while maintaining or expanding gas capacity for reliability.
Longer-term forecasts suggest electricity demand growth will outpace recent decades due to AI, electrification, and manufacturing reshoring. Meeting this demand affordably and reliably will require coordinated investment across the energy value chain. As data center demand accelerates, power costs across the board are under scrutiny, with companies exploring everything from on-site generation to long-term contracts with diverse suppliers to manage expenses and risks.
Environmental groups have criticized reliance on gas, citing methane emissions and long-term climate impacts. Advocates for gas argue that modern combined-cycle plants are far cleaner than older facilities and serve as a bridge to a lower-carbon future. Policymakers face difficult trade-offs—supporting rapid renewable deployment can lower long-term costs and emissions, but ensuring reliability during the transition may require retaining or adding gas capacity.
The interplay between gas power costs and data center economics will shape corporate decisions in the coming years. The energy transition is entering a more complex phase. While renewables dominate new capacity additions, dispatchable resources like natural gas remain critical for grid stability. Balancing these elements will determine the cost and reliability of U.S. electricity in the coming decade.