Like many cities, Tucson is drawing interest from developers of large data centers. Our reliable and affordable power, growing population, and lack of natural disasters like hurricanes or floods make our region attractive for such facilities.
Large data centers can provide significant tax revenue for local schools and governments. They also bring significant energy needs. That’s why TEP must conduct detailed system studies of potential data center projects to determine if they could be served without impacting reliability or affordability for our other customers.
If we can provide service, the next step is to develop contracts to ensure any new data center would pay its own way, fully covering all service costs and any new infrastructure built dedicated to serving it.
Last month, TEP asked the Arizona Corporation Commission (ACC) to approve an energy supply agreement for the first phase of a potential data center development southeast of Tucson.
This project has prompted a robust discussion with a focus on energy use and TEP’s potential role as a service provider. If you’ve been following this discussion, here are a few things we think you should know:
1. Reliability is front and center
Our agreement would provide up to 286 megawatts of energy to this project, making it TEP’s largest customer. That maximum energy use won’t be affected by the project’s recently announced shift to air-cooling to reduce water use. While you might worry if that level of use could strain the grid, it’s our responsibility to make sure it doesn’t. Any time a new customer emerges with higher energy demand, we work to ensure we can meet those additional energy needs without compromising service to our existing customers.
The energy supply agreement we filed covers only the first phase of the project. TEP can serve this first phase with our current energy portfolio, plus solar and battery storage projects already under development. The agreement includes a gradual ramp-up of energy needs, ensuring no reliability impacts on other customers. Any future phases would be governed by separate agreements subject to separate regulatory review.
2. Energy for everyone.
TEP does not pick and choose which customers to serve or determine whether projects move forward. Our role is wholly focused on energy delivery to homes and businesses.
As a regulated utility, we have exclusive responsibility for electric service in a specific geographic area. We have an obligation to serve any customer in our area and to make adequate investments to provide that service at rates set by the ACC. Regulated utilities have no discretion to refuse service, unless such service is essentially impossible to provide or would compromise reliability for others.
3. Public oversight in plain view.
Our proposed energy service agreement with this data center project was filed in a public docket maintained by the ACC. This body of five elected commissioners has a constitutional obligation to set just and reasonable rates and will review the contract to ensure it is reasonable and prudent.
TEP provided advance notice to key officials to inform them of the filing and posted information about the agreement online at tep.com/data-center-esa. Our representatives also participated in public meetings held by Pima County and the City of Tucson to answer questions about the project’s potential energy use.
4. Protecting energy affordability.
It’s important to make sure data centers don’t negatively impact electricity rates for other customers. While news reports suggest this may have happened in some other areas of the country, the ACC is focused on ensuring it doesn’t happen here. Our regulators require large customers to pay rates designed to cover the costs of serving them.
Additionally, the agreement we submitted builds in additional customer protections that will be vetted by the Arizona Corporation Commission, including a termination fee, credit security requirements, minimum billing payments, and other terms that mitigate risk if the project is not built or does not operate as anticipated. While every customer has unique energy needs, we anticipate this project would use energy at consistently high levels, which ensures its rates would more than cover its share of the cost of infrastructure needed to serve it. While most of our service costs are fixed, they are recovered mostly through usage-based charges. So, the additional, steady consumption from new industrial-scale customers allows TEP to spread out those costs across more usage.
Watch a short video about how large industrial customers help keep costs lower for everyone.
5. TEP’s request for new rates in Fall 2026 is unrelated to data centers.
Our rates are designed to reflect historic costs, not potential future expenses. Even though TEP’s most recent request for new rates was filed with the ACC amid public discussion of this data center project, the two topics are unrelated.
The proposed rates would recover $1.7 billion in grid upgrades that have been completed since 2021. Those costs were impacted by cumulative inflation of 15 percent – not future anticipated expenses. The proposed data center will pay for its own grid connection costs and, over time, will result in lower bills for customers than if the datacenter was not taking service from TEP.
