(The Center Square) — If lawmakers want to slow the growth of the data centers in Virginia, they’ll likely have to change the tax incentive the state offers to the industry, according to a new report.
Staff from the legislative watchdog, the Joint Legislative Audit and Review Commission, presented to legislators their highly anticipated findings on the projected growth of the data center industry in Virginia and its expected impact on energy consumption, infrastructure and customer costs.
Data centers appear to be among the most contentious energy and environmental issues in the commonwealth. While they serve an essential role in modern life – housing all of the computing equipment and hardware that powers the internet, cloud computing and artificial intelligence – they’re massive, monolithic buildings that use disproportionate amounts of energy and generate a low-frequency hum that can bother nearby communities.
Northern Virginia already has the largest data center market in the world, comprising “13% of global operational capacity and 25% of capacity in the Americas,” – in part because of a strong fiber network and proximity to “the birthplace of the internet” and federal agencies, according to JLARC Project Leader Mark Gribbin.
Despite its dominant position in the global market, Virginia continues to court data centers, largely because they’ve become a “significant source of capital investment” ($24 billion in fiscal year 2023) and the local tax revenues they generate. One way it continues to attract the industry is through a sales and use tax exemption.
JLARC found that, in most cases, most of the economic benefits occur during construction. A data center’s construction can employ up to 1,500 people and use materials and resources made in Virginia. Once built, they typically employ about 50 people, though the jobs are relatively high-paying.
The commission also found that most economic benefits are concentrated in Northern Virginia.
“For relatively mature data center markets, revenues ranged from <1% to 31% of total revenues,” according to the report.
However, besides the aesthetic and noise objections from residents, the main problem data centers pose is the outsized strain they place on the grid. One hyperscale data center can use as much energy as 40,000 homes, and they’re essential to the AI boom.
To meet the unconstrained demand for data center growth in the commonwealth through 2040, Virginia would need to increase its in-state energy generation by 150% and its net imported energy by 150%, according to the commission.
The skyrocketing energy demand driven almost entirely by data centers, according to JLARC, is unprecedented.
“Virginia is experiencing the largest growth in power demand since the years following WWII. Power demand is growing more than 5% annually and will double in the next 15 years. That’s nearly 5 times more than the growth we experienced over the last 15 years,” spokesperson for Dominion Energy Aaron Ruby told The Center Square.
To meet just half of the unconstrained demand, Virginia would need to increase its in-state energy generation by 90% and its net imported energy by 55%.
Complicating matters is that Virginia codified goals for retiring fossil fuel power plants and transitioning to solely renewables by 2050 in the Virginia Clean Economy Act of 2020. However, regardless of whether the state complies with the requirements of the VCEA or decides to amend it, supplying the needed increase in energy in the allotted time frame won’t be easy, according to the commission.
“Building enough infrastructure to meet unconstrained energy demand will be very difficult to achieve, with or without meeting the Virginia Clean Economy Act requirements,” JLARC wrote in its report. “Meeting half that demand is still difficult.”
Virginia has offered an exemption to its retail sales and use tax for data centers since 2010, which will expire in 2035. Many other states offer a similar incentive to the industry, according to JLARC, and industry higher-ups have said it plays a role in their decisions of where to build new data centers.
“Data center representatives unanimously reported that expiration of the exemption would negatively affect the state’s ability to attract new data centers and keep existing ones,” the commission wrote.
As a result, JLARC provided several recommendations of ways the General Assembly could potentially balance the industry’s growth in the commonwealth with meeting energy needs in the coming years.
The General Assembly could “allow the exemption to expire only in certain regions, like Northern Virginia,” “allow the full exemption to expire in 2035 (or end it before then) and apply a partial sales tax exemption until 2050,” as well as several other ways the exemption “could be modified to address energy, natural resource, historic resource, and residential impacts.”
