Critical Considerations for Regulators on Data Centers

By Christelle Khalaf, Associate Director of the Government Finance Research Center at the University of Illinois Chicago

December 17, 2024

Recently, the Great Lakes region (defined here as Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin) has seen an influx of data centers as well as plans for development or expansions of these types of facilities, e.g., Microsoft’s $3.3 billion planned complex in Racine, Wisconsin. To illustrate further, in Illinois, establishments within the data centers industry have increased from 942 in 2019 to 1,591 in 2023. Similarly, corresponding employment increased from 10,977 to 15,886 employees. The surge in data centers siting in the Great Lakes region, as well as the push toward economic development incentives and favorable legislation, has caused some concern as these establishments consume large amounts of energy and water.

In fact, the national growth in commercial demand for electricity has been driven by states (e.g., Virginia and Texas) with increasing numbers of large-scale computing facilities. Further, while the U.S. power demand has been stagnant for the last decade with increases in efficiencies compensating for increases in population and economic activity, about 40% of the expected increase in the demand for power by 2030 is tied to data centers.

In addition, data centers use large amounts of water through two channels: directly to cool servers and equipment as well as indirectly through the purchase of electricity. In a highly publicized instance in The Dalles, Oregon, where the town of about 16,000 residents agreed to share data on Google’s water consumption after a lawsuit was filed by a local newspaper, the public learned that the company’s data centers consumed more than one-quarter of the town’s annual water consumption. Nationally, data centers are among the top 10 water-consuming industries, as they directly or indirectly (through the purchase of electricity) draw water from 90% of U.S. watersheds.

For the most part, data centers indicate a commitment to renewable energy, energy efficiency, and sustainable practices, although specific goals vary by ownership. To illustrate, Digital Realty which owns most data centers in the U.S., has a 100% renewable energy long-term goal and is currently at 66% globally, while 43% of their direct water usage is non-potable water. Moreover, Meta, which owns the Dekalb data center in Illinois, has a 100% renewable energy goal for operations, which includes supporting four new renewable energy projects in the state. Further, the company’s sustainability goals include restoring 200% of the water consumed in high water stress regions and 100% of the water consumed in medium water stress regions. Not all data center companies publicly report their water and energy consumption, making it difficult to verify whether sustainability goals are being met.

Notably, when data centers rapidly cluster in a geographic area, a lack of sufficiently available renewable energy to power these projects leads to purchases of fossil fuel powered energy, as seen in Virginia. In water-stressed communities, these activities can deplete aquifers. As such, when siting data centers, it is important to consider the economic and fiscal impacts of these projects in addition to their share of energy and water demand as well as how these activities interplay with system capacity and characteristics. In fact, for some communities that have been struggling with declining water demand over the last decade, which led to higher user rates, an increase in demand could be welcome if there is available system capacity and a suitable rate structure that benefits the water system.

Here, in Illinois, tax incentives for data centers were adopted in June 2019. As with most economic development strategies, legislators must carefully evaluate whether the benefits outweigh the costs. This is particularly important when considering industries with significant resource demands, such as data centers. If the full cost, including the substantial water and energy burdens associated with this industry, is not adequately accounted for, the economic impact may be less favorable than anticipated. In such cases, offering tax incentives could lead to unintended consequences, such as overburdened local utilities or environmental strain, which could offset the intended economic gains.

Additionally, it is important to consider electricity and water rate structures that not only promote efficiency but also protect valuable resources and safeguard residential customers. These rate structures can incentivize businesses, particularly resource-intensive industries, to reduce consumption and adopt more sustainable practices. This approach can foster a balance between economic growth and environmental stewardship, ultimately supporting both business development and community well-being. There are a handful of proposed electricity rate structure changes currently under consideration, e.g., AEP Ohio is proposing a new rate category for data center customers and cryptocurrency mining/mobile data center operations and Duke Energy is proposing a “minimum take” clause.

Technological advancements are poised to significantly reduce electricity and water usage in data centers, making them more sustainable and efficient. Innovations such as advanced cooling systems can lower the energy required to maintain optimal operating temperatures. Additionally, water-saving technologies, e.g., closed-loop cooling systems and water reclamation strategies, are helping data centers minimize their water usage. These advancements coupled with, if not spurred by, a proactive regulatory agenda can enable data centers to reduce their environmental impact while providing the essential services needed to support most of our daily activities.

The contents of this blog post reflect the author’s views, and not necessarily those of the GFRC.