Data centres, the massive facilities that power artificial intelligence (AI), are among the largest consumers of electricity in an economy. As the AI boom drives up the demand for computing power, governments are increasingly being forced to rethink how these facilities access and procure electricity.
The Andhra Pradesh government, which has lofty AI ambitions for the state, has announced a first-of-its-kind policy move to address this issue — let data centres function under the tag of a power distributor by granting them a deemed distribution licence (DDL).
DDLs are not a new concept in India’s electricity framework. They have largely been issued to government entities, special economic zones, ports, airports and industrial enclaves. Even the Railways, until recently, was a deemed distribution licencee for around a decade.
Extending such a licence to private data centre developers is a major departure from the norm.
But what exactly are these licences and how will it help data centres? Very simply put, it will allow them to procure electricity at a relatively lower cost and distribute it within their own campuses.
But there’s more to this. Here’s a deeper dive into the mechanics of how this policy will work.
Data centres’ massive electricity needs
AI runs on algorithms, but those algorithms require vast computing power housed in data centres. Data centres, in turn, run on massive quantities of electricity. This is why data centres are identified not by the number of servers they house, but by the amount of power they require.
As AI adoption accelerates, the demand for computing capacity is driving a surge in data centre construction — and with it, a sharp rise in electricity requirement.
In the US, home to more than half of the world’s data centres by both numbers and power consumption, the rapid expansion of hyperscalers has emerged as a political and regulatory issue, with concerns that growing power demand from data centres is contributing to higher electricity prices in regions where data centres are located.
Such concerns could surface in India as well. The country’s installed data-centre capacity currently stands at around 1.2 gigawatt (GW) but is estimated to quadruple by 2030.
Among Indian states, Andhra Pradesh is leading the race to become a major data centre hub.
Google is setting up a 1 GW data centre campus in Visakhapatnam in one of the largest such projects in the country. And the state is planning to create 5 GW of data-centre capacity in Visakhapatnam alone.
How will the deemed distribution licences help?
Unlike the US, electricity tariffs for industrial and commercial consumers in India are substantially higher than those for residential and agricultural users. This is largely because industrial and commercial consumers essentially subsidise agricultural and domestic consumers.
To understand why DDL status matters for data centres, it is important to understand how electricity tariffs are structured.
Broadly, a consumer’s electricity bill has two components: fixed charges and energy charges. Fixed charges have to be paid irrespective of how much electricity is consumed, while energy charges vary with actual consumption.
The fixed-cost component covers expenses such as capacity payments made to power generators, transmission infrastructure costs, salaries of utility employees, and maintenance of the electricity network. When a distribution company (discom) acquires a large new consumer, it must ensure adequate power supply for that consumer by contracting additional generation capacity and, where necessary, expanding transmission and distribution infrastructure. These costs eventually find their way into consumer tariffs.
This becomes particularly relevant in the case of data centres, whose electricity demand can run into hundreds of megawatts — comparable to that of a medium-sized city. Andhra Pradesh’s policy allows data centres with a minimum connected load of 300 MW to obtain DDL status, with investors permitted to aggregate loads from multiple facilities to meet the threshold.
By granting DDL status, the state effectively allows these large consumers to arrange their own power procurement and develop electricity distribution infrastructure within their project boundaries. As a result, the local discom is not required to make fresh generation capacity commitments or undertake network investments specifically to serve these energy-intensive facilities.
For data centre operators, the benefits could be substantial. DDL holders can procure power from any lawful source, including through open-access arrangements, while being exempted from the cross-subsidy surcharge and additional surcharge that are typically levied on open-access consumers. This allows them to avoid the higher tariffs that commercial consumers usually pay to subsidise residential and agricultural users.
Not a free pass
In its April order, the Andhra Pradesh government said that granting DDL status to data centres is necessary because power procurement and development and maintenance of a power distribution network for data centres are specialised activities.
However, DDL status does not give data centres the powers of a conventional electricity distributor. The licence is tightly ringfenced: holders can supply electricity only to data centre loads within the notified project boundary and are barred from distributing power to consumers outside the licensed area.
The policy also comes with sustainability obligations. Data centres granted DDL status must source at least 51% of their total electricity consumption from renewable energy.
Further, the responsibility for securing connectivity to the power grid rests entirely with the licensee. Data centres granted DDL status must obtain connectivity from both the Central Transmission Utility and the State Transmission Utility and pay all applicable transmission charges approved by the Andhra Pradesh Electricity Regulatory Commission (APERC) and the Central Electricity Regulatory Commission (CERC) whenever state or inter-state transmission networks are used.
Similarly, the full cost of developing interconnection infrastructure also rests with the licensee. While transmission charges payable to the state-owned Andhra Pradesh Transmission Corporation will apply as per APERC-approved tariffs, the policy exempts DDLs from paying wheeling charges for their internal distribution infrastructure.
Meanwhile, the policy also seeks to protect the financial interests of existing discoms by not allowing existing consumers to migrate to DDL status. The provision is restricted to new greenfield data centre projects, ensuring that discoms do not lose existing high-paying consumers or face stranded investments.
The framework also recognises that data centres may require backup power support from local discoms. In such cases, the DDL must enter into a standby supply agreement with the distribution company concerned, specifying the contracted standby demand. Any standby or backup power availed from the discom would be subject to charges and conditions prescribed under APERC’s prevailing standby supply regulations.
Google's data centre in The Dalles, Oregon (Wikimedia Commons) 
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