Political Storm Brews For Data Centers As States Propose Tougher Rules

Data center developers and industry groups are scrambling to respond to a sudden surge in policy proposals targeting the industry in a growing number of U.S. states. 

From a Georgia bill that would pin data centers with higher power costs to proposed sustainability mandates in California, the past year has seen a dramatic increase in the volume of legislation and other initiatives from state governments focused explicitly on data centers — many that could have significant consequences for the industry’s growth. 

In part, this rising tide of regulatory risk is a product of the sector’s success and expanding geographic footprint. No longer are data centers only a policy issue in a handful of industry hubs like Northern Virginia or Silicon Valley — they’re on the political radar in places like Utah, Washington, Minnesota and other emerging markets where data center construction is booming. 

At the same time, there are also a broader array of policy issues placing data centers in officials’ crosshairs. While the industry’s engagement with state-level lawmakers was once largely limited to advocacy for tax breaks and debate around emissions restrictions for on-site generators, states are now considering a wide range of legislation and policies focused on limiting the impact of data centers’ skyrocketing energy use, imposing new environmental regulations and reforming data center land use rules. 

“We’re seeing a broader geography, but also a broader array of issues,” said Josh Levi, president of the Data Center Coalition, an industry advocacy group. 

Just over a year ago, the Data Center Coalition had five employees. Today it has 14, Levi said, with plans to continue scaling up in the months ahead.

The organization now has a dedicated energy team as well as a four-person state policy team that engages with lawmakers and stakeholders and provides testimony at legislative and regulatory hearings. It has active advocacy efforts in around a dozen states and has contracted with lobbying firms in seven of them. 

Until recently, the growing political risk for the sector was largely at the local level, with a wave of organized community opposition jeopardizing individual data center projects across the country. The rise of state-level political risk could close entire markets or strand billions of dollars of investment.  

In response, data center firms and industry groups have been rapidly developing new strategies and partnerships to amplify the industry’s voice in more state capitals. 

“The local community stuff has been brewing for a while, but it seems like all the state legislation popped up at lightning speed,” said Adam Waitkunas, president of Milldam Public Relations, a longtime data center PR firm that operates a dedicated community relations practice for developers.

“With all the attention data centers have been getting over the past few years, there’s more and more attention at the state level now.”

Nearly a dozen states have some form of legislation or other regulatory effort focused on data centers. In some cases, these are bills intended to attract data center development, such as efforts to expand data center tax exemptions in Mississippi and Kentucky. But more often than not, legislation that has emerged over the past year has sought to create new restrictions or raise costs for data centers in ways that could change the site selection math for developers.

Many of these data center bills pertain to the industry’s skyrocketing energy consumption and the subsequent impact on regional power grids. Specifically, lawmakers are increasingly concerned that data centers’ seemingly insatiable appetite for power could lead to grid instability and escalating electricity prices for consumers. 

Laws being considered in Virginia, California, Texas, Utah and Georgia — as well as proposed utility rates requiring approval from regulators in states like Ohio — aim to make data center firms cover a larger share of the billions of dollars needed for grid infrastructure upgrades to support them, preventing those costs from being passed on to other ratepayers.

The Texas bill also includes a “kill switch” provision through which grid operators could cut off data centers from the grid to avoid a blackout. 

Bills in Virginia and California would make critical tax incentives contingent on data centers meeting certain energy efficiency standards or procuring a certain percentage of their power from renewable sources. Another California bill would require data centers to disclose detailed power consumption data — a measure industry leaders say would result in significant security risks. 

The Virginia legislature has seen more than 40 data center bills proposed for this year's legislative session, running the gamut from attempts to tie the state’s data center tax exemption to energy efficiency to bills that would give counties more authority to block development.

Georgia also considered ending its data center tax breaks, while in Washington state, an executive order created a data center working group tasked with making policy recommendations to manage the industry’s growth. 

Additionally, major projects in Maryland and Minnesota have been delayed or derailed because of state refusals to permit diesel backup generators.

This sudden torrent of state policy debates led the Data Center Coalition to beef up its government relations and policy staff, Levi said, as it seeks to avoid policies that — intentionally or not — could close markets to new development and strand existing capital investments.

At the same time, individual data center developers are increasingly aware of the political risk they face at the state level, according to Waitkunas. He said more companies are creating government relations and public affairs roles within their organizations or hiring firms that can provide that expertise. 

“With these laws coming out at the state level, data centers need a larger strategy,” Waitkunas said. “That means bringing on public affairs and government relations teams who can orchestrate that, anticipate what's coming, have the pulse of the political environment, and who can be a voice at the table when decisions are being made.”

But the industry’s rapid geographic expansion means it is increasingly engaged in high-stakes political processes in states where data center developers and industry groups have little previous experience or established relationships with policymakers. 

Beyond just hiring state-specific lobbying firms, industry leaders who spoke with Bisnow all pointed to the importance of partnerships with other organizations and stakeholders that are more firmly entrenched in a given political ecosystem and have credibility with lawmakers and regulators.

The Data Center Coalition has partnered with trade groups from sectors like manufacturing that share many of the same policy goals and have an established presence in new data center markets. The organization also leverages its relationships with trade unions, which often support data center development.

The most critical partners are often utilities, said John Cordisco, vice president of acquisitions at CleanArc Data Centers.

Utilities typically have robust government relations apparatuses that are consistently engaged with state leaders on many of the same issues that concern data center firms, particularly as state legislation increasingly focuses on the power constraints that have emerged with the industry’s growth.

Cordisco said electric utilities are central to CleanArc’s bottom-up approach to engaging with state-level policymakers. The firm establishes credibility and a strong relationship with a utility around a specific project, then leverages that relationship to establish credibility and access in higher levels of government.

“That sets you up for a greater avenue of success at the state level - it’s what is going to happen more often than not as we all are trying to work through what the heck is going on with all this demand happening in the market,” he said.  “It's definitely a core part of our strategy to make sure that we have buy-in with the right groups at the onset, and then you can deal with the macro.”

In the months ahead, Waitkunas sees opportunity for the data center industry to be more proactive in shaping state policy relating to the sector.

Rather than simply reacting when new state legislation poses a risk for data centers, the industry could be proposing its own legislation that addresses lawmakers’ concerns but protects developers’ interests, Waitkunas said. 

He sees the greatest opportunity in this regard around sustainability and environmental issues, particularly as the federal government's retreat from environmental regulation puts more of the onus on states. This approach could position the data center industry as a problem solver, rather than the problem that needs to be solved. 

At the Data Center Coalition, Levi says the group isn't prioritizing a specific policy area at the state level but instead is primarily concerned with proactive outreach and education with state lawmakers. Data center development is a highly technical sector and is new to many states, and state-elected officials are often part-time lawmakers with limited bandwidth. 

As advocates for the industry try not to be stretched thin by an increasingly broad array of political and regulatory challenges, he said this type of proactive approach is critical to putting out fires before they begin. 

“It’s not that any individual policy area is most concerning,” Levi said. “It’s the need to educate policymakers about the industry, as well as intended and unintended impacts across various issues and proposals.”