Charting a sustainable path for data center development in Virginia

The internet requires data centers, and data centers use a lot of energy. As part of our Cardinal Way project on promoting civil discussions, we invited two writers, from opposing perspectives, to address how Virginia should deal with these increased energy demands.

See the other article: “ A pragmatic approach to energy to keep Virginia the top state for business. “

We rely on data services originating in data centers every day. Telehealth appointments, online shopping and banking, and communicating with your colleagues are all examples of how data center usage shows up in our lives.

The large warehouses that are home to computer servers that store, process and distribute digital information to enable services like those mentioned above are more frequently on the minds of Virginians. And it makes sense. The commonwealth is the data center capital of the world — with about 300 facilities in Northern Virginia alone.

According to Dominion Energy’s financial reporting, data centers represented 24% of Dominion’s electricity sales in Virginia as of 2023, with the utility connecting 94 data centers in Northern Virginia alone since 2019 . And the growth appears to be continuing; Amazon Web Services (AWS), for example, has announced it is investing $35 billion by 2040 to build more data centers across Virginia.

This growth — primarily in Northern Virginia — comes with challenges, one of the biggest being how to keep Dominion Energy from continuing to use data center growth to disregard Virginia’s commitment to a carbon-free electric system by 2050 and instead build new polluting power plants and infrastructure.

Yes, data center growth is taxing an already-strained system, but it is possible to get Virginia back on track. Here’s how.

Revamp the state tax incentive

A key factor in the data center industry’s growth has been Virginia’s sales and use tax exemption. Virginia was an early adopter of such a policy in 2008 and has since expanded its scope to include a variety of data center types and include provisions focused on capital investment, job development, and wage/earning thresholds.

Virginia needs to be far more selective in the types of data centers it is attracting. Foremost, the tax incentive should only be offered to data center companies that commit to carbon-free electricity with hourly matching . A carbon-free tariff would require data centers to match the amount of energy demand from their facilities with the energy supply from clean energy projects. And critically, this matching must be done on an hourly basis to ensure system-wide emissions reductions; research has shown that matching on an annual basis has proven ineffective.

The tax incentive should also set a high standard for a data center’s energy efficiency, including the efficiency of its cooling systems. Data center companies — many of which have multi-billion or even trillion-dollar valuations — should be required to utilize highly efficient systems, which may have a higher upfront cost but will help ensure electrons aren’t being wasted by these energy hungry facilities.

The existing incentive structure is also likely contributing to the over-saturation of data centers in Northern Virginia. The current tax exemption is conditioned on a capital investment of at least $150 million, with at least 50 employees and a certain level of wages. But to meet the conditions, the law allows companies to aggregate their data center investments and employees across multiple facilities in the same locality. If a data center company is already tax-exempt in a certain locality, it will be more inclined to site new projects in that same locality. Expanding to a new locality would mean starting back at square one in terms of the required investment and jobs.

This structure should be revisited. More geographic diversity could spread some of the benefits of data center development to other parts of the state and could potentially reduce some of the negative impacts being driven by the concentrated Northern Virginia development.

Cheaper, cleaner, and more transparent solutions from our utilities

Much of the data center growth is happening in areas served by Dominion, one of our two regulated monopoly utilities. Subject to oversight by the State Corporation Commission, Dominion is granted a limited monopoly service territory. The utility needs to provide reliable electricity service, and in exchange is allowed to recover its costs plus a fair rate of return. This last element is key: because of that guaranteed rate of return, monopoly utilities like Dominion are inherently biased toward capital-intensive projects — even when there are cheaper and cleaner solutions for customers. (Disclosure: Dominion is one of our donors, but donors have no say in news decisions; see our policy.)

When changes in electricity needs were slower and steadier, it was easier to gloss over certain deficiencies in this regulatory system. But the scale and pace of today’s data center development is a different ballgame. In a recent earnings call, Dominion stated that it is now receiving data center campus requests ranging from 300 megawatts to several gigawatts — which is on the scale of the entire electricity output from a large power plant.

Knowing that Dominion stands to make more money from rapid growth, we need better transparency into the commitments it is making to data center companies. As it stands, a company developing a data center project will begin early negotiations with Dominion, and eventually enter into an agreement in which Dominion commits to provide electricity on a certain timeline. These contracts are negotiated behind closed doors and viewed as confidential. Dominion then uses these agreements to inform and validate its forecast of electricity needs, which in turn forms the basis for Dominion’s requests to build new power plants and infrastructure.

This process begs several questions. How is Dominion setting the parameters in these contracts? How does Dominion determine when it can provide electricity to a large new data center customer?

Through these contracts, Dominion is effectively dictating Virginia’s energy future. As such, the State Corporation Commission and the public must have more transparency over this process and should consider whether it would be appropriate to review and approve large contracts. Dominion can’t just build a new power plant before undergoing a rigorous review at the Commission, so it would make sense for large contracts — which might necessitate the construction of a new power plant — to have some sort of review.

Dominion’s next rate case should include a cost-of-service study that fully captures the costs driven by data center customers. Ultimately, it may make sense to separate data center customers into their own rate class.

Data centers also need to commit to help reduce peak electricity needs, and utilities need to work with data centers to develop and offer smart programs to do that. These sorts of programs (often called “demand response”) help reduce the strain on the grid during the few hours of the year when electricity needs spike to maximum levels (typically the hottest summer days or coldest winter days). Although not every type of data center works well with demand response programs, widespread adoption of meaningful and non-polluting demand response programs wherever possible could drastically reduce peak grid demands — which could avoid or minimize the need for new generation and transmission projects and provide huge potential savings to customers.

And while this won’t solve all the problems being driven by rapid data center growth, Virginia needs to rapidly upgrade the existing transmission system.

Virginia, like many other parts of the United States, has a huge opportunity with advanced grid solutions and other grid enhancing technologies. The Department of Energy recently released a report showing how these sorts of solutions can significantly increase the capacity of our existing electric system at a fraction of the cost of more traditional transmission projects. For example, just shifting 20% of the dollars a utility spends on traditional transmission upkeep to advanced gird technologies would increase transmission capacity by 1.8x without any additional cost to ratepayers. But monopoly utilities like Dominion do not have an incentive to choose these efficient solutions. While Dominion must now consider these sorts of grid-enhancing solutions in its long-term planning, lawmakers need to send strong directives to utilities to rapidly deploy these technologies across their systems.

Improve the local approval process

Localities are generally interested in generating revenue for constituent services — funding schools and improving roads, for example — and attracting businesses is one to way to do that. Although some localities have pushed back against data center proposals, other localities offer even greater incentives like lower tax rates for data center businesses. The opportunity to bring in millions of dollars in taxes every year — without the need to directly invest in substantial infrastructure development to support the new business since data centers require a relatively small number of employees — is simply too good to pass up for some localities. For example, last year Loudoun County received more than $581 million in personal property taxes from data centers .

Localities should be presented with better information about potential grid impacts, including energy demand, required infrastructure and interconnection conditions, and be required to consider these factors prior to approval. Similarly, early in the locality’s development review process, data center applicants should be required to disclose the amount and source of water they will use so that localities can get a firmer handle on how such proposals — both individually and cumulatively — could impact local water supplies. For particularly large projects, a state-level review could also be beneficial to help ensure continued grid reliability and adequate water availability and to prevent excessively high costs falling to utility customers.

While there is no silver bullet to solve the data center issue, targeting each step of the fragmented process would go a long way toward charting a sustainable data center market in Virginia.

Nate Benforado is a senior attorney leading energy advocacy and policy work in the Southern Environmental Law Center’s Virginia office.

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