Colorado continues to sit out the data center boom as tax policy and power problems push developers elsewhere.

As the artificial intelligence data center gold rush increasingly spreads across the Rockies, Colorado has largely remained on the sidelines. CBRE has identified the Mountain West as one of the fastest-growing frontiers for data center development, but Denver — despite its status as a hub for telecommunications firms — has remained largely stagnant.

The Denver market added just 6.5 megawatts of data center capacity in the first half of this year, according to CBRE. By comparison, Northern Virginia alone added more than 1,000 megawatts.

For years, many in the data center sector have attributed Colorado’s surprisingly limited growth to the absence of a critical data center tax incentive available in most other states and widely considered a prerequisite for large-scale development. But with the prospect of the state implementing these tax breaks fading, attention is turning to other factors keeping data centers away — and whether policymakers will be able to address them.

Speaking at Bisnow’s DICE: Rockies event in Denver last month, leaders from the state’s data center and energy sector said an overwhelmed power grid and outdated regulations make Colorado a particularly difficult place for developers to quickly acquire large chunks of power. That makes the state a tough sell in an industry where “speed to power” is now the largest site selection criterion for hyperscalers.

Without addressing the “multilayered” barriers developers face in Colorado, the market that is home to data center giants like Vantage, CoreSite and Flexential will continue to see development go elsewhere, said Capitol Solutions founder Sandra Hagen Solin.

“We have a tremendous number of companies corporate-headquartered here in Colorado … none of whom are investing in Colorado because we aren't competitive on the economics,” Hagen Solin said at DICE: Rockies, held at The Westin Denver Downtown.

Hagen Solin, along with a majority of other panelists, still points to the lack of a targeted sales-and-use tax exemption as the primary factor keeping data centers away from Colorado. Such incentives, which limit the tax liability on equipment housed in data centers, can be worth billions to the largest data center users and are now available in the majority of U.S. states, including most of Colorado’s neighbors.

Although the data center industry had lobbied aggressively for tax incentives in Colorado, DICE panelists said the political outlook for such legislation has become increasingly bleak. A legislative package that would have created the tax breaks — as well as imposing new regulations on the industry — failed in the state legislature in May.

Since then, the national narrative around data centers has become increasingly hostile. With data centers becoming a political liability for both Republicans and Democrats, panelists said there is little chance lawmakers approve incentives any time in the foreseeable future.

Facing this reality, Hagen Solin said there has been a shift in attention toward other factors keeping data centers out of Colorado and what needs to change to address them.

“It's not so much about walking away from those incentives — we need to have that in order for Colorado to be competitive — but you have to layer that onto the overall political environment and state policy that provides the certainty that the industry needs to operate here,” Hagen Solin said.

The main source of uncertainty in Colorado for data center developers is power — specifically, how long it will take to get it from utilities.

Colorado is hardly alone in having a grid that isn’t ready for an unprecedented wave of gigawatts of demand from data centers. Nearly every region with significant data center development has seen demand from data centers far outstrip the system’s capacity. Similarly, utilities, grid operators and state regulators across the U.S. have had to reform how new data centers connect to the grid to bring new capacity online while avoiding reliability issues and rising prices for consumers.

But industry leaders say Colorado presents one of the more challenging environments to address both the structural and governance issues facing its power grid and make it a place where data center developers would be able to quickly get large blocks of power.

In terms of physical infrastructure, Melissa Almond, corporate economic development manager at Xcel Energy, says Colorado’s grid was already close to its limit even before the global data center boom began. While other markets had excess generation and capacity on their transmission infrastructure that early data center developers could snap up, there were few such opportunities in Colorado. Now, there is little opportunity to build large-scale data center projects that don’t involve significant grid upgrades.

“It's a little bit more difficult in Colorado,” Almond said. “We have traditionally built what we call the system minimum, so we don't have gobs of excess generation and we don't have gobs of excess transmission capacity.”

Yet adding new generation to the grid can be difficult in Colorado, largely due to the state’s stringent environmental laws. A state law mandates that utilities reduce greenhouse gas emissions by 80% by the end of the decade compared to a 2005 baseline, according to Will Toor, executive director of the Colorado Energy Office. He says this legislation prevents easy steps that could be taken to align power generation with demand, such as bringing retired fossil fuel power plants back online.

At the same time, industry leaders said the state’s permitting rules make it difficult for developers to pursue behind-the-meter power generation or participate in flexible load programs in which data centers temporarily disconnect from the grid and rely on on-site generation during periods of peak electricity demand.

According to Almond, developers typically want to use diesel or natural gas generators for flexible load programs, while behind-the-meter projects are normally powered by natural gas. Both face significant permitting hurdles in Colorado.

State law also requires renewables for certain behind-the-meter projects, a bad fit for most data centers. Taken together, panelists said, these restrictions are a major factor slowing power acquisition and pushing AI infrastructure investment to other states.

“Building base-load, behind-the-meter gas plants in a state like Colorado is incredibly challenging,” Tim Hall, vice president for commercial at Guzman Energy, said at DICE: Rockies. “Places like Texas or others, it's easier.”

Developers looking for power from the grid also face an unusually slow process in Colorado, industry executives said at the event.

While few data centers have been built in Colorado, the state’s utilities have still received a deluge of requests for power from data center developers. Lisa Tiffin, chief commercial officer at utility Tri-State Generation and Transmission Association, said the power provider is contending with 11 gigawatts of power requests across 30 individual projects.

Tiffin acknowledged that, like many utilities across the U.S., Tri-State was unprepared for this demand surge and lacked the resources to study and process these requests in a timely manner. On top of that, the utilities, state regulators and grid operators didn't have the systems in place not only to evaluate these requests but to ensure the data centers could be connected without risking the grid’s reliability or driving up customers’ electricity bills.

While these are the same challenges facing data center hubs across the U.S., Colorado has been particularly slow to respond. It is only now that utilities like Tri-State are creating special rate classes for data centers and taking other measures to allow faster data center grid connections while protecting reliability and consumers’ wallets. These steps have been taken much earlier in other markets.

Still, Tiffin sees Colorado’s large interconnection queue as an indicator that, regardless of tax breaks, developers are interested in building data centers in the state. And with reforms underway, she believes the faster path to power will spark the data center development wave that has continued to elude Colorado.

“Once we start to do that, we’ll start to get some data center developers in this region and in this state,” Tiffin said.