Data-center developers are turning to utilities and grid operators for unprecedented amounts of electricity. The power industry is countering with a perhaps surprising question of its own: Are you for real?

The artificial-intelligence boom is driving a once-in-a-generation surge in electricity demand that should translate to a heyday for utilities. Yet the race has accelerated so quickly that it has become challenging to distinguish projects that are ready to build from those that might never materialize.

To plan their own investments and shield other customers, utilities are trying to filter out legitimate projects from wannabes by imposing higher electricity rates, longer-term contracts, collateral requirements and steep fees for engineering studies.

Utilities face a predicament: Underbuilding grid infrastructure risks missing a huge opportunity, but overbuilding could also be problematic. Because grid costs are shared, other electricity customers would be left to pick up the tab -- and help a utility recoup its investment -- if a data-center project falls through.

Jeanne Jones, executive vice president of finance and strategy at Exelon, said her utility tries to identify "real growth that's going to happen versus speculative growth" before it invests to build out the grid.

"For our customers it is obviously important," Jones said. "Because if we build out the grid and then that data center walks away, someone's got to pay for it and that's not fair to them."

When scouring the country for the best location to build a data center, developers often request power from multiple utilities. That means the electricity needs of the same project might be double, triple or quadruple counted by different providers. In some cases, the wait time to connect to the grid is so long that data centers resort to building their own on-site power.

Research firm Wood Mackenzie said 23% of disclosed data-center requests to utilities are considered "high confidence." The rest are more speculative. The uncertainty of not knowing if or where a project will be built has earned the nickname "phantom" data center.

Inquiries to electric utilities started ballooning in 2024, Jones said. Common requests for electric service for a new data center rose from about 50 megawatts, roughly enough to power 50 Walmart stores, to 1,000 megawatts or more. That's roughly the output of a large nuclear reactor.

Initially, Exelon, which operates across the Mid-Atlantic and Midwest, ran engineering studies of each project individually, she said.

But as service requests from large customers tripled to 18,000 megawatts, the company started to study potential projects in clusters to see how they would collectively affect the grid. Even after the utility spent money on grid improvements, it faced the risk that data-center projects would fall through.

"We would get these questions internally but also externally: 'How do you know what's real?'" Jones said.

When Exelon began requiring binding financial commitments and collateral before moving forward with more detailed engineering and construction, the list of what it considered high probability dropped to 11,000 megawatts. Those projects have now posted about $1 billion in collateral with the company.

"It did kind of help weed out the speculative projects," said Jones. "It might not be glamorous. Hey, our pipeline went down from 18 to 11. Investors are like, 'Wait, why?' But it's the smart thing to do."

State regulators and ratepayers want assurance that a data center requesting infrastructure from a utility will be on the hook on the investment. Otherwise, costs could shift to other customers, raising their electric bills. Soaring electric costs from the AI build-out are already a hot political issue.

"When I'm out there telling the investors about our capital, I need to have certainty that it's real and durable growth," Jones said.

Many utilities are raising electricity rates for data centers, requiring minimum years of service or imposing early termination fees.

Average minimum contract lengths for big utility customers have grown to about 10.8 years since 2024, according to utility filings aggregated by AI startup Halcyon, from about 4.6 years previously.

Texas has become the country's busiest market for data-center construction, with about 12,800 megawatts of projects under way, according to Cleanview, which tracks data-center projects. The queue of requests to connect to the grid has grown even faster, swelling to more than 400,000 megawatts.

Although Gov. Greg Abbott has paused grid connections and environmental permitting for data centers, analysts say decisions on grid connections and other permits could resume before the end of the year.

The state recently started requiring large customers to pay a $50,000-a-megawatt deposit for complex engineering studies to assess the project's impact on the grid. A 500-megawatt data center, for instance, would pay $25 million.

Jim Burke, chief executive of Texas-based power producer Vistra, told investors recently that despite the huge volume of requests, new data centers requiring about 12,000 to 15,000 megawatts of power are likely to connect to the Texas grid by 2030.

"When you have numbers overstated by more than 20x, it causes problems for policymakers," he said. "So we support the thinning of the queues and getting the better, realistic decisions to make sure we can all move forward."