Colocation & the Bypass Economy: Building Next to the Power
The mill-owners who waited for the king’s road grew old waiting. The ones who prospered built their wheels where the river already ran — and thought nothing of the villages downstream, who woke one morning to find the water lower than it had ever been.
The Bypass Logic
The previous piece ended on a bottleneck: a grid connection now takes four to seven years, while the data centre that needs it can be built in one. When the wait is that lopsided, the rational move is not to wait — it is to build the data centre where the power already is, and skip the grid entirely.
That is colocation. Instead of connecting a data centre to the grid and drawing power across it, you site the facility directly beside a generator — a nuclear plant, a gas plant, a solar-plus-storage complex — and wire it straight in. In the purest form, the load sits “behind the meter”: it never touches the public grid at all, so it never joins the interconnection queue, never waits on new transmission, and can energise in a year or two rather than half a decade. For a hyperscaler racing rivals for compute, that time saving is the entire game.
The appeal is obvious, and so is the problem hiding inside it. A plant that used to sell its output to the grid, serving everyone, now sells it to a single data centre behind a fence. The electrons haven’t changed — but who they serve has, and that is where a straightforward engineering shortcut turns into one of the most contested questions in US power policy.
The Case That Wrote the Rules: Talen, Amazon & Susquehanna
No single deal has shaped this debate more than Amazon’s arrangement with Talen Energy at the Susquehanna nuclear plant in Pennsylvania. Its two-year journey — from quiet acquisition to national test case — is effectively the story of how colocation went from clever workaround to regulated activity.
AWS buys a 960 MW data-centre campus on a 1,200-acre site from Talen for $650 million, powered directly by the adjacent 2.5 GW Susquehanna nuclear plant under a behind-the-meter agreement. At the time, it reads as just another data-centre deal.
In a 2–1 decision, federal regulators reject the amended interconnection agreement that would have expanded the behind-the-meter draw toward 480 MW. Rival utilities (Exelon, AEP) had challenged it. The core objection: the deal hadn’t shown why colocated load should get a special contract — or how it would pay its fair share of the grid it still leans on for backup.
Talen and AWS come back with a bigger, differently-shaped deal: a 17-year, $18 billion power-purchase agreement for up to 1,920 MW of nuclear power, ramped over roughly seven years. Crucially, it moves from behind-the-meter to front-of-the-meter — the power now flows through the grid under a retail structure, and pays grid charges.
FERC issues a unanimous order directing PJM to write clear rules for colocating large loads at power plants — three new transmission-service options, reformed behind-the-meter rules, and compliance deadlines from January 2026. The workaround now has a rulebook.
The single most important detail in that whole arc is the move from behind the meter to front of it. Behind-the-meter is faster and cheaper for the buyer, but it removes capacity from the shared grid and dodges grid charges — which is exactly why regulators balked. Front-of-the-meter keeps the plant connected to everyone, and makes the data centre pay for the network it relies on. The restructured Talen–AWS deal got done because it crossed that line. For any colocation investment, the meter line is the risk line: behind it lies speed and regulatory fragility; in front of it lies durability and cost.
The Fight Underneath — and Who Pays
Colocation has quietly split the power industry in two. On one side are the independent power producers — Constellation, Talen and their peers — who own generation and see colocation as the fastest way to sell it at a premium to credit-worthy hyperscalers. On the other are the regulated utilities — Exelon, FirstEnergy, PPL, AEP — who own the grid and argue that behind-the-meter colocation lets data centres free-ride on a network they still depend on for reliability.
The utilities’ strongest argument is physical, not commercial. When a nuclear plant that used to serve the grid is redirected behind the meter to a single data centre, that capacity effectively leaves the shared system. Everyone else’s supply just got tighter — and in a market already short of power, tighter supply means higher prices for every other customer. The data centre gets its electrons; the ratepayer gets the bill.
This is what turns a Build-thread topic into a Strain-thread problem in the same breath. The speed that makes colocation attractive is inseparable from the cost-shift that makes it politically radioactive — and the politics is now the primary risk to the economics.
Reading It Through the Frameworks
How does it get paid? A colocation deal is a bilateral contract between a generator and a single, usually investment-grade, buyer — closer to a long-dated corporate PPA than to merchant power. That contracted, take-or-pay shape is genuinely attractive. The catch is that its regulatory standing, not its counterparty, is the swing variable: the Talen saga showed that a signed deal can be unwound by a regulator who decides the structure shortchanges the grid.
What stage is it at? Colocating at an existing plant is brownfield on the generation side — the reactor already runs — but greenfield on the load side, and the combination sits in value-add territory. The economics lean heavily on the speed premium, which erodes the moment the regulatory path lengthens.
Here, the regulator doesn’t influence the return. The regulator is the return.
A colocation deal’s entire value rests on whether FERC and the grid operator permit the structure, at what cost allocation, and on what timeline. The same plant, the same buyer and the same contract are worth wildly different amounts behind the meter versus in front of it — and only a regulatory ruling decides which. This is the primer’s “policy is the return” principle in its purest form: the cash flow is real, but a commission’s vote sets its size.
The Investment Map — and the Tail Risk
If the scarce asset is generation sited next to demand, the winners are the owners of that generation — and the losers are whoever gets stuck holding a structure the regulator later rejects.
The durable value in colocation sits with whoever owns firm power next to demand — that scarcity is real and re-rating regardless of how the rules settle. The fragile value sits in the structure: a specific behind-the-meter arrangement whose economics depend on a regulatory reading that can change. Underwrite the asset, treat the structure as contingent, and assume the meter line moves in front of the load before it moves behind it.
Colocation is the market routing around a grid that can’t connect fast enough — and in doing so, forcing a fight over the oldest question in utility regulation: who pays for the shared network. The speed is real, the demand is real, and the owners of firm power near load are holding a genuinely scarce asset. But the workaround’s defining feature is that a regulator’s vote, not a contract, sets its value.
Read every colocation deal at the meter line. Behind it: faster, cheaper, and regulatorily fragile. In front of it: slower, costlier, and durable. The Talen saga is the whole lesson in miniature — the deal only got built once it stepped in front of the meter and agreed to pay for the grid it had tried to bypass.
In the end the wisest of the millers did not fight the river or flee it. They paid the villages downstream their due, and were left in peace to turn their wheels — while the ones who took without paying found their dams broken in the night.
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