Data centers in Virginia are causing a surge in energy demand that will be very challenging to accommodate in the coming decades, according to a new state report.
The Virginia Joint Legislative Audit and Review Commission has been studying data center impacts over the past year as directed by the General Assembly.
These power-hungry centers, sometimes the size of sports arenas, warehouse thousands of computer servers that process internet transactions and algorithms worldwide.
This week, the commission presented its report to state lawmakers. It was highly anticipated, as officials at the state and local levels grapple with how to handle the industry’s rapid growth.
Mark Gribbin, JLARC analyst and project leader, said one issue looms large: “The data center industry is driving an immense increase in energy demand.
“And building enough infrastructure to address that demand will be difficult.”
Here are some of the report’s key takeaways.
Economic trade-offs
Virginia is a global hub for data centers. At least 70% of the world's internet traffic runs through Northern Virginia alone.
“So we're definitely the leader, and we're dealing with these issues before most other states are,” Gribbin said.
The area became a strategic location partly because of its proximity to federal agencies and contractors. Several projects are also underway in Virginia Beach, taking advantage of subsea fiber cables that run all the way to Spain.
Once the facilities started springing up in Northern Virginia, it was a domino effect because being clustered together speeds up web capabilities, Gribbin said.
“When you start putting more and more data centers with more and more business customers next to each other, they can communicate very fast,” he said.
But perhaps the biggest thing attracting data centers to Virginia is generous financial incentives.
Since 2010, the state has exempted large-scale data centers from retail sales and use taxes, allowing them to purchase equipment like computers and generators without paying taxes on them. About 90% of the industry uses the exemption, JLARC said.
Data centers were “by far the largest beneficiary” of Virginia’s overall incentive spending over the past decade, according to a separate report from JLARC last month, accounting for 42% of all such incentives in Virginia.
Officials want to see jobs and tax revenue in return. Data centers do provide those benefits, but they are not evenly distributed, JLARC reports.
Overall, the commission estimates data centers add about $9 billion annually to the state’s GDP.
Most job creation happens during construction of data centers, Gribbin said. An average of 1,500 people are hired while building each facility.
Once they’re built, there are relatively few staff, though the remaining jobs tend to be higher-paying.
Tax revenue from data centers could be a boon to economically distressed localities, but those localities do not tend to attract the industry because they lack as much access to transmission lines and companies prefer to be near their business customers, Gribbin said.
“Immense” demands on energy supply
Data centers consume massive amounts of electricity, both to power computers and equipment that run 24-7, and to cool it all down.
The industry’s now the biggest driver of rising energy demand in Virginia.
“Power demand in Virginia is growing at higher levels than any time since World War II,” Dominion Energy spokesperson Aaron Ruby previously told WHRO.
One data center campus can use more power than is generated by a large nuclear reactor at Dominion’s existing North Anna Power Station.
If the industry grows as currently projected, Virginia would need to increase the power it generates by 150%, as well as import 150% more energy from out of state, JLARC says in the new report. The state would also need about 40% more transmission capacity.
The Commonwealth would need to double the rate at which it’s currently creating solar facilities, expand wind power beyond what Dominion is already building, build a large natural gas plant roughly every one and a half years — and get nuclear power from small-scale reactors that have not yet proven commercially viable in the U.S.
Even under a scenario in which only half of projected demand materializes, “we’re still looking at doubling existing generation,” Gribbin said.
This all comes while Dominion is racing to meet the terms of the 2020 Virginia Clean Economy Act, which says that all of the state’s power generation must come from carbon-free sources by 2045.
The utility now plans to build new fossil fuel plants to meet demand, drawing outcry from environmental groups.
The big investments needed to build all this infrastructure will be felt by the average consumer, too.
Dominion expects to raise residential energy bills by a few percentage points each year over the next 15 years, Ruby said. That would fund both renewable energy and natural gas projects.
JLARC estimates unconstrained demand from data centers could add nearly $40 to Virginians’ monthly electricity bills by 2040.
Environmental groups and lawmakers have also raised concerns about data centers’ strain on the supply of water, which is often used in their cooling systems.
The state’s recent analysis said this water use is currently sustainable, but regulations could be improved to ensure localities with less access to water do not disproportionately direct the resource to data centers.
Effects on surrounding communities
Data centers are increasingly being built or proposed closer to residential neighborhoods, and that can negatively impact residents, JLARC said.
Noise is one of the biggest nuisances.
Data centers sometimes “have this loud humming noise that sounds like air conditioning,” Gribbin said.
The problem can be hard to resolve because local ordinances aren’t designed to address it, Gribbin said.
Then there are air quality concerns.
Data centers have dozens of backup power generators on site that run on diesel fuel, which emit harmful pollutants.
JLARC’s study found that these are not a significant threat because they rarely run for long periods of time. But during a prolonged regional power outage the generators could temporarily pollute the air, analysts found.
How to move forward
JLARC’s study gives lawmakers a lot to think about.
Several proposals to regulate the data center industry failed at prior General Assembly sessions.
The commission now outlines several ways that Virginia officials could choose to take action.
That could mean asking more of data center companies that take tax incentives, such as requiring they improve energy efficiency or participate in demand response programs meant to manage the electric grid.
While those types of requirements could have a “marginal effect” on data centers’ energy impacts, they are unlikely to make a dent in growing energy demand, JLARC said.
Another option is to let the sales and use tax exemption expire in 2035.
Other recommendations include allowing local governments to update data center zoning policies and impose noise limits.
Virginia could also dangle more carrots, like expanding a program that allows large energy customers to claim credits for buying renewable power.
Josh Levi, president of the Data Center Coalition industry group, said in a statement Monday that "the JLARC study validates Virginia’s leadership in attracting and nurturing this dynamic, critical industry over the past 15 years."
Levi added that the study provides a "fact-based assessment that will facilitate important and informed dialogue."
