Data centers provide tangible economic benefits and can generate substantial tax revenue for Virginia’s localities. But they’re also the primary driver of a forecasted doubling of statewide energy demand over the next 10 years.
Those were two of the overarching findings in a Joint Legislative Audit and Review Commission (JLARC) review of Virginia’s data center industry, which was released Monday.
JLARC examines issues brought to it by the General Assembly and evaluates if legislation is doing what it’s supposed to do and whether resources are being used effectively.
Produced over the course of a year, the data center report included more than 300 interviews, reviews of available reports and data, and forecast modeling of energy demands and impacts.
The 77-page document, entitled “Data Centers in Virginia,” covers economic/fiscal impacts, energy impacts, energy costs, natural/historic resource impacts, local residential impacts, and the state’s use of tax exemptions to attract data centers. JLARC also provided several recommendations and policy options for legislators.
Meeting energy demands ‘will be difficult’
The report notes that while data centers are currently paying the full cost of electrical service, the growing need for energy and the infrastructure to produce it will likely raise costs for customers.
Modern data centers use substantially more energy than other commercial or industrial operations, the study found. A small 18-megawatt (MW) data center’s power capacity is roughly equal to that of a mid-sized automobile assembly plant, 60 large commercial office buildings or 4,500 homes.
The largest data centers draw somewhere from 100 to over 200 MW more than most industrial consumers, and planned campuses are expected to consume well over 1,000 MW. By comparison, Virginia’s largest nuclear reactor has a generation capacity of 950 MW.
Due to data center development, “building enough new generation and transmission infrastructure to address demand will be difficult,” the report states.
It examined two scenarios: unconstrained demand and half of constrained demand. With unconstrained demand, a natural-gas-powered electrical plant would need to be added every 1.5 years, supplemented by nuclear plants utilizing technologies not yet available, wind exceeding all offshore capabilities and solar energy added at twice the 2024 rate.
With half of the constrained demand, new solar and natural gas would be needed, and similar wind and nuclear power would meet demand.
Both scenarios, the report states, “would require many new transmission lines, especially in and around Northern Virginia, and could require new gas pipeline capacity.”
A recurring issue brought by opponents to data centers is the need for backup generators, which mainly run on diesel fuel. JLARC states that while the generators do emit pollutants, the use of the generators is “minimal” and “existing regulations largely curb adverse impacts.”
Water use has also posed concerns for localities and their residents. Data centers require a way to cool the facilities. JLARC found that current data center water use is “sustainable, and the state ensures future sustainability through regulation.”
A ‘substantial’ source of revenue
The primary source of revenue from data centers comes in the form of business personal property and real estate taxes. The report analyzed five markets with “relatively mature” markets and found that revenue generated ranged from 1 to 31 percent of total local revenue.
The report notes that some localities have drastically lowered their personal property tax rates in an effort to court data centers, which reduces revenue potential. Several years ago, Fredericksburg-area localities (Stafford County, Spotsylvania County, Caroline County, King George County and the City of Fredericksburg) set an equalized tax rate of $1.25 per $100 of assessed value for the computer equipment used by data centers.
Northern Virginia is now the largest data center market in the world, according to the JLARC analysis of Cushman & Wakefield’s 2024 global data center market comparison. Most of the industry is expanding along the Interstate 95 corridor.
The Fredericksburg region will soon be home to at least a dozen data center campuses.
Most of the direct economic benefit comes during the construction phase of a project, the study reports, when a job site can employ up to 1,500 workers. For daily operations, however, most facilities will employ less than 50 people.
The report noted that large, flat tracts of land are desirable for data centers, putting hilly and mountainous Southwest Virginia at a disadvantage in attracting them. Many of the state’s distressed localities are also far removed from data center customers and the population centers they service.
Since 2010, Virginia has offered a sales and use tax exemption for data centers. The report notes that the exemption resulted in $928 million of tax savings for data centers in Fiscal Year 2023, and roughly 90 percent of the industry utilized it to some extent.
The report offers three options regarding the tax exemption. It can be extended to maintain growth and economic benefits; legislators could allow the exemption to expire to slow growth and reduce energy impacts; or, third, it could be modified to balance both priorities.
It also suggests the exemption be changed to address concerns such as energy efficiency, natural resources and residential impacts but notes such a measure could make an exemption a less attractive option for the industry.
Recommendations and policy options
In terms of legislative action, the report included five recommendations, including amending the state code 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.”
The report also recommends legislation empowering local governments to set and enforce sound-level ordinances for data centers.
Another recommendation is that legislators 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.”
Policy options included requiring data center companies to meet an established energy management standard, such as the International Organization for Standardization’s 50001 standard for energy management, as a condition of receiving the sales tax exemption.
