Massive energy use by data centers could lead to higher electric bills

Energy demand is soaring in Virginia due to the boom in data centers, and that could result in higher utility bills for residential customers, according to a report released Dec. 9 by the General Assembly’s Joint Legislative Audit and Review Commission (JLARC).

An independent forecast commissioned by JLARC found that “unconstrained demand for power in Virginia would double within the next 10 years, with the data center industry being the main driver.”

The JLARC study is expected to inform legislators drafting data center bills in the 2025 session of the General Assembly.

Rising utility costs

A typical residential customer of Dominion Energy could expect a monthly cost increase of $14 to $37 a month by 2040, the report predicts.

That increase would be needed to offset Dominion’s rising infrastructure costs for new power generation and transmission infrastructure.

Without considering the mandate for alternative energy sources in Virginia’s Clean Economy Act, JLARC states, new natural gas facilities would need to be added at the rate of about one large 1,500-megawatt plant every two years for 15 consecutive years.

The report suggests the General Assembly could require data centers to address their energy impacts by promoting the development of renewable energy generation, but that “would have only a marginal impact on decreasing data center energy demand.”

Impact on residences

The JLARC study also says: “The industrial scale of data centers makes them largely incompatible with residential uses. One-third of data centers are currently located near residential areas, and industry trends make future residential impacts more likely.”

It’s ultimately up to local governments to consider more restrictive zoning ordinances, rezoning requests, and permits to minimize the impact on residential neighborhoods, it says.

The report also cites the negative impact of noise emitted by data centers on residents.

“Data centers emit low-frequency noise that is not loud enough to damage nearby residents’ hearing and rarely loud enough to violate noise ordinances,” JLARC notes. “However, some nearby residents report that the constant noise generated by some data centers affects their well-being.”

The report recommends that local governments be authorized to require sound modeling studies for proposed data center developments.

It also calls for local governments to “establish and enforce maximum allowable sound levels for operational data center facilities using alternative low-frequency metrics and zoning ordinances.”

Tax exemption

Since 2010, Virginia has offered an exemption to the state’s retail sales and use tax to attract large-scale data centers. That allows data centers and their tenants to purchase computers, servers, network infrastructure, cooling equipment, and generators without paying sales tax.

The exemption provided the industry with $928 million in tax savings in FY 2023.

JLARC suggests that the tax exemption could be used as an incentive to get data centers to address some of the problems they cause, such as environmental impacts and noise.

The exemption is set to expire in 2035. The report says the General Assembly could let the exemption expire if it wishes to slow the data center industry’s growth in Virginia because it determines that the increased energy costs to customers outweigh the industry’s economic benefits.

As an alternative, it says, the General Assembly could allow the exemption to expire in 2035 and then apply a partial sales tax exemption until 2050.

A huge market

Northern Virginia is the largest data center market in the world, JLARC notes, “constituting 13 percent of all reported data center operational capacity globally and 25 percent of capacity in the Americas.”

The tax incentive has help drive that growth, along with the region’s strong fiber network, supply of reliable cheap energy, available land, and proximity to major national customers.

While data centers provide economic benefits in Virginia, that’s mostly during construction, the report says. Data centers employ fewer people than other industries, but those jobs tend to be high paying.

Overall, the data center industry is estimated to contribute 74,000 jobs, $5.5 billion in labor income, and $9.1 billion in GDP to Virginia’s economy annually, JLARC states. However, “most of those economic benefits derive from the construction phase rather than data centers’ ongoing operations.”