2024 - JLARC Data Center Study: Unconstrained Power Demand Will Require 150% New Generation

Loudoun Now December 20204
By Hanna Pampaloni

State leaders are gearing up to tackle a challenge Loudoun County has been grappling with for the past few years – how to manage the impact of unprecedented data center growth.

The Joint Legislative and Audit Review Commission on Monday morning heard a report showcasing work conducted over the past 12 months to study the data center industry and make policy recommendations.

“The data center industry is growing rapidly in Virginia,” JLARC Staff Director Hal Greer told the commission. “This growth is creating unprecedented challenges for the state's energy infrastructure. Today's briefing will highlight the trade-off the state faces between the economic benefits of data centers and the energy challenges that they pose.”

The report resulted in 12 findings, eight recommendations, and 10 potential policy changes in focus areas ranging from water usage and environmental impact to energy demand and grid reliability.

Project Leader Mark Gribbin said data centers brings economic benefits during their initial construction and in the form of substantial local tax revenue.

“In recent years, the industry supported 74,000 jobs on average, including direct jobs building or working in data centers, and the indirect jobs created to support those workers in sectors like retail and housing,” he said. “Altogether, industry-related jobs brought an estimated $5.5 billion in annual labor income, and the industry added $9.1 billion to the state's economy.”

During construction a data center site can employ up to 1,500 workers ranging from construction jobs like concrete and steel workers to electricians, pipe fitters and other trade workers, he said.

The industry’s growth also presents a series of challenges, Gribbin said. Those include, most notably, the immense increase in energy demand as well as the need for increased infrastructure to support that demand and associated cost allocation, backup generator pollution, water usage and proximity to residential neighborhoods and associated noise concerns.

The Challenge of Energy Demand

An independent forecast conducted by JLARC shows that unconstrained demand for power in the state will double in the next 10 years. That is in line with estimations by the regional power coordinator, PJM Interconnection.

That is almost entirely attributable to data center growth, Gribbin said, with campuses using far more energy that they used to. A small 18-megawatt facility uses roughly as much power as 60 large office buildings or 4,500 homes. Most data centers built now draw between 100 and 300 MWs of power.

“The industry trend is to build campuses composed of several large facilities, and their total draw can be well north of 1,000 MWs. By comparison, that's more than the entire generation capacity of one of the 950 MW nuclear reactors up the road at North Anna,” he said.

A substantial amount of new power generation and transmission infrastructure will be needed to support unconstrained energy demand, or even half of the estimated unconstrained energy demand, Gribbin said.

“Under both scenarios, they would require many new transmission lines, especially in around Northern Virginia and other places where data centers are concentrated. Building new natural gas plants could also require building new gas pipeline capacity,” Gribbin said.

Meeting unconstrained demand would require 150% more in state generation capacity, 40% more transmission and 150% more energy importing. Meeting half the unconstrained demand would still require doubling existing generation, 35% more transmission and 55% more imports, according to Gribbin.

Meeting the unconstrained energy growth would require adding new solar facilities at twice the rate expected in 2024, adding large natural gas plants every year and a half, more offshore wind sources and some nuclear power, which is not expected to be viable in the form of small modular reactors until 2035, he said.

“The unprecedented pace of demand growth raises concerns about one, the availability of sufficient generation on the grid, and two, the availability or the ability of the transmission system to reliably deliver power,” Gribbin said.

While utility providers have an obligation to serve new data centers customers, they don’t have to serve them immediately, he said. Loudoun experienced this earlier this year, when Dominion Energy sent a letter to high demand potential users telling them to expect four to seven year timelines for power connections.

“So those regulatory requirements, combined with planning, help reduce the reliability risks. On the transmission side, risks appear to be effectively managed through existing planning. The bottom line on transmission is any new load additions are studied and planned for, and utilities aren't going to connect new data centers if they can't be supported,” Gribbin said.

The larger challenge comes from the need for more generation, which is not centrally planned for by a regional entity.

“Instead, it relies on individual utility planning and market price signals to get people to build new stuff,” he said. “The concern is that demand could increase faster than new generation is being added, and, in fact, regional reserve capacity is expected to be insufficient by 2030.”

The Cost

Concerns frequently voiced in Loudoun amid plans for additional infrastructure required to support data centers, focus around the costs, which ratepayers fear they will be subsidizing through their monthly bills.

Gribbin said to date that has not been the case, but it could be.

“Looking at generation and transmission, we found that those costs are either passed through to individual data center customers or are allocated to a customer class that largely consists of data centers and other large users,” he said. “Because of how costs are passed through, there's no crossing over to other customers. Looking at distribution, we found that costs are either directly charged to a data center customer or collected through contractually obligated minimum payments. So, if a substation is built for data center X, the cost of that new substation gets recovered from that customer, and it's not being picked up by others.”

But, the growing demand is still likely to increase system-wide costs, with a portion being covered by other customers.

“Our consultant found that generation transmission costs could be $10 billion to $18 billion higher by 2040. That's depending on which scenario you're looking at, with most of the cost increases attributable to growing data center demand. So, a lot of that cost comes from fixed costs associated with building new infrastructure. For example, if a utility builds a new gas plant, everyone gets charged for a portion of it.”

In addition to that, because energy will become scarcer, its price will likely go up.

“Utilities would need to import more power, and they may need to buy some of it from the regional energy market. Those market prices fluctuate, and the more utilities buy from the market, the more susceptible they are to price spikes from things like heat waves and winter storms. Again, those higher energy prices get spread across all customers,” Gribbin said.

The typical Dominion Energy bill averages $90 a month for transmission and generation. Under unconstrained load growth that could go up $23 by 2030 and $37 by 2040. Those numbers do not account for inflation, he said.

Additional Concerns

The report also addressed the tension currently felt in Loudoun from concerns about building data centers near residential neighborhoods, their high water usage, and generator pollution.

“Data center backup generators emit pollutants, but their use is minimal, and existing regulations largely curb adverse impacts,” Gribbin said.

The average data center site in Virginia has 54 back up generators. However, their use is regulated by the Department of Environmental Quality.

“In 2023, emissions were only 7% of the ceiling that's allowed under the permits, again, because they're usually run for maintenance and occasional outages and regional air quality in Northern Virginia has actually improved while the industry has grown.

The amount of water used by data centers is currently sustainable, but could still be better managed, according to the report.

“While some data centers can use a lot of water, most use about the same amount or less as an average large office building,” Gribbin said.

The amount is primarily dependent upon the type of cooling system used by the center. Evaporative cooling systems require much more water than dry-cooling systems.

“Data center water use accounted for less than 0.5% of total state withdrawals” he said.

The DEQ regulates water withdrawals, Gribbin added.

“If modeling finds withdrawals aren't sustainable, then a permit isn't issued unless the problem can be addressed, for example, by building a new reservoir,” he said. “That said, some localities do have limited water resources. For example, they might not be near a large river or in a groundwater management area. Localities should therefore consider how proposed data center projects could affect their ability to meet future residential demand or to pursue other development opportunities.”

Because of their large industrial size, data centers are incompatible in proximity to residential use, according to the report. The noise generated from cooling systems, generators and visual appearance, as well as the need for substations and other infrastructure, are all contributing factors.

“We found that about one-third of operational data center properties in Virginia are within 200 feet of residentially zoned properties. Now that doesn't mean a data center and a house are exactly 200 feet apart, but they are close by. It also doesn't include a number of data centers that are planned or under construction close to residential areas,” Gribbin said.

Moving Forward

With all of this in mind, Gribbin presented eight recommendations and 10 potential policy actions the General Assembly could take to address the concerns.

Key recommendations could results in large energy users being allowed to claim credit for purchases of solar and wind energy to offset certain changes, as well as partial credit for purchased capacity in battery storage systems; requiring utilities to establish a demand response program for large data center customers; direct Dominion Energy to develop a plan to address the risk of generation and transmission infrastructure costs; authorizing local governments to require water use estimates and consider water use when making rezoning decisions; allowing local governments to require sound modeling studies for data center projects; and allowing local governments to establish maximum allowable sound levels in developments.

Additional policy options could require data centers to meet a variety of standards to receive sales tax exemptions.

“[The tax exemption] is pretty valuable to the industry,” Gribbin said. “It’s a big amount of savings. Most of the folks in the industry use it. They indicate it's important to them. So, for those reasons, it is a big policy lever that the state has for addressing any concerns that they have about the industry.”

Those conditions could include meeting energy management standards, using Tier 4 generators, meet environmental management standards, conduct phase one historic resource studies and viewshed analysis of proposed sites and conduct sound modeling studies for applications planned within a certain distance of areas zoned for residential homes.

The General Assembly could also either extend the expiration date for the state’s sales and tax use exemption for data centers from 2035 to 2050 or extend a partial exemption through 2050.

“If you want to try and balance this question of the economic benefits and the energy impacts of costs, you can do one of several things with the exemption. You can extend it to keep on promoting economic growth, you could allow it to expire, which would slow down the industry, and potentially, over the long term, could stop or even contract the industry, that would obviously reduce energy impacts … And the third option would be to try to balance those by letting the full exemption expire but having a partial exemption kind of ratcheted one way or the another, depending on what your priorities are,” Gribbin said.

The report will likely shape the upcoming General Assembly session after several bills proposed during the 2024 session were punted to this year pending the JLARC report.