JLARC on Data Centers

In 2023, the Joint Legislative Audit and Review Commission directed staff to review the impacts of the data center industry in Virginia. Below are excerpts from the Commission’s recently released draft report .

Northern Virginia is the largest data center market in the world, constituting 13 % of all reported data center operational capacity globally and 25 % of capacity in the Americas. The data center industry is growing rapidly in Virginia, both in established markets and newer ones.

Just to give you a snapshot of Prince William County data center growth, currently there are 34 data centers in operation in Prince William County with an estimated square footage of around 10,400,000 square feet of space.  Currently under construction or development is an additional 59,000,000 square feet of data centers. This excludes the digital gateway project which would add more than 22,000,000 square feet of data centers.

from W Wright, Gainesville VA

Modern data centers consume substantially more energy than other types of commercial or industrial operations. Consequently, the data center industry boom in Virginia has substantially driven up energy demand in the state, and demand is forecast to continue growing for the foreseeable future. The state’s energy demand was essentially flat from 2006 to 2020 because, even though population increased, it was offset by energy efficiency improvements. However, an independent forecast commissioned by JLARC shows that unconstrained demand for power in Virginia would double within the next 10 years, with the data center industry being the main driver.

from JLARC report

JLARC found that a substantial amount of new power generation and transmission infrastructure will be needed in Virginia to meet this energy demand or even half of this unconstrained demand. Building enough infrastructure to meet energy demand will be very difficult to achieve and cannot be accomplished while meeting the Virginia Clean Economy Act (VCEA) requirements. We either must slow or limit the construction of data centers in Virginia or repeal the VCEA. You can’t do both that is a recipe for grid failure.

Building enough infrastructure to meet half of unconstrained energy demand would also be difficult. If VCEA requirements were not considered, the biggest challenge would be building new natural gas plants. New gas would need to be added at the rate of about one large 1,500 MW plant every two years for 15 consecutive years, to meet just half of the demand. To meet the VCEA requirements would require more wind, battery storage, and natural gas peaker plants than could conceivably be built over the period.

Data centers’ projected energy demand growth has raised concerns about whether enough infrastructure can be built to keep pace. Currently, PJM attempts to protect our regional grid reliability by requiring utilities to secure sufficient generation capacity plus a reserve margin, and the state requires utilities to develop plans that describe how generation capacity needs will be met. If utilities are unable to build enough new infrastructure to keep pace with demand, one of the main ways they can protect grid reliability is by delaying the addition of new large load customers until there is adequate generation and transmission capacity. Virginia will not be permitted to increase its dependency on imported power.

According to Dominion Energy and JLARC data centers’ increased energy demand will increase system costs for all customers, including non-data center customers, for several reasons. A large amount of new generation and transmission will need to be built that would not otherwise be built, creating fixed costs that utilities will need to recover. It will be difficult to supply enough energy to keep pace with growing data center demand, so energy prices are likely to increase for all customers. Neighboring states also are seeing a data center boom and legislative and regulatory pressure to close fossil fuel generation, they might not be able to continue to sell power to Virginia-sooner or later you run out of other people’s generation. Virginia currently gets more than 20% of its power from outside the state. Finally, if utilities remain reliant on importing power, they may not always be able to secure lower-cost power and will be more susceptible to spikes in energy market prices.

To protect the grid in times of high demand, due to weather or disruptions Data centers have not been willing to voluntarily reduce their power draw. No data centers in Virginia participates in Dominion Energy’s demand response program, in which organizations agree to reduce their power load if there is a shortage. Data center operators said that’s because they have no control over their customers’ power demands.

Public health impacts from data centers primarily comes from the emission of operating on-site backup generators. Data centers are mission-critical facilities as a result, to maintain operation during emergencies such as grid outages, Data centers require highly reliable backup power sources and use almost entirely diesel generators.  There is limited experience with cleaner backup alternatives that can provide comparable reliability in real-world settings, as highlighted by the U.S. Department of Energy in its recent recommendations regarding AI data center infrastructures. Consequently, data centers, including those newly built by major technology companies, primarily depend on on-site diesel generators for backup power. In northern Virginia (mostly in Loudoun, Prince William, and Fairfax), the number of permits for data center diesel generators has increased by about 70% since 2023 compared to the total number of permits issued between 2000 and 2022. Diesel generators are known to emit significant amounts of air pollutants and even hazardous emissions during operation. For example, they emit 200-600 times more NOx than new or controlled existing natural gas-fired power plants for each unit of electricity produced. The recommendations from JLARC are actually to increase operation of diesel generators.

from JLARC

However, data centers bring economic activity. Capital investment in Virginia data centers is substantial, exceeding $24 billion in FY23, and primarily consists of equipment purchases from Virginia-based and out-of-state companies. Data center investment represented 84 percent of the total capital investment across all economic development projects announced by the Virginia Economic Development Partnership (VEDP) between FY22 and FY24. However, like capital investments made by other industries, only a portion of data center capital investment benefits the Virginia economy. The primary benefit to Virginia’s economy is related to data center construction, which comprises about 20 % of total data center capital investment. Virginia primarily benefits from data centers when we keep building. Virginia-based businesses performing key construction services such as clearing and grading sites, erecting steel frames, installing high voltage electrical equipment, installing industrial-scale cooling systems, and running miles of cable, conduit, and piping. Materials used in data center construction are often also sourced from Virginia businesses throughout the state. So, there is an incentive to build beyond any reasonable level.

Virginia’s data center tax incentives totaled about $928.6 million in savings in 2023. These tax incentives  went primarily to  Amazon Web Services, Google, Meta and Microsoft, according to JLARC. Local governments with data centers in their jurisdictions can collect substantial tax revenues from data centers who pay several types of local taxes, primarily business personal property and real property (real estate) taxes. The business property tax, in particular, can generate substantial revenue. A single data center typically has business personal property valued in the millions, a large portion of which is computer equipment that is typically replaced every five years.

from JLARC

JLARC Recommendations:

 RECOMMENDATION 1 The Virginia Economic Development Partnership should clarify in site characterization and development guidelines that potential data center sites are eligible for grants under the Virginia Business Ready Sites Program.

RECOMMENDATION 2 The General Assembly may wish to amend the Code of Virginia to clarify that electric utilities have the authority to delay, but not deny, service to customers when the addition of customer load cannot be supported by the transmission system or available generation capacity

RECOMMENDATION 3 The General Assembly may wish to amend the Code of Virginia to expand the Accelerated Renewable Buyers program, which allows large customers of energy utilities to claim credit for purchases of solar and wind energy to offset certain utility charges, to also allow customers to claim partial credit for purchases of capacity from battery energy storage systems based on the current PJM electric load carrying capacity rating.

RECOMMENDATION 4 The General Assembly may wish to amend the Code of Virginia to require that utilities establish a demand response program for large data center customers and to require that these customers participate in the program. (This unfortunately will have the potential to increase backup generator usage and significantly impact northern Virginia air quality during periods of use.) Diesel generators are known to emit significant amounts of air pollutants and even hazardous emissions during operation. This could effect public health in Northern VA.

RECOMMENDATION 5 The General Assembly may wish to amend the Code of Virginia to direct Dominion Energy to develop a plan for addressing the risk of generation and transmission infrastructure costs being stranded with existing customers and file that plan with the State Corporation Commission as part of its biennial rate review filing or as a separate filing. Dominion has already filed with the State Corporation Commission to recover exploratory and development cost for a modular nuclear project with Amazon ahead of a possibility of generating power.

RECOMMENDATION 6 The General Assembly may wish to amend the Code of Virginia to expressly authorize local governments to (i) require proposed data center developments to submit water use estimates and (ii) consider water use when making rezoning and special use permit decisions related to data center development.

RECOMMENDATION 7 The General Assembly may wish to amend the Code of Virginia to expressly authorize local governments to require sound modeling studies for data center development projects prior to project approval.

RECOMMENDATION 8 The General Assembly may wish to amend the Code of Virginia to expressly authorize local governments to establish and enforce maximum allowable sound levels for data center facilities, including (i) using alternative low frequency noise metrics and (ii) setting noise rules and enforcement mechanisms in their zoning ordinances, separate from existing noise ordinances.