Legislators beginning data centers debate: Incentivize them or add major rules?

Colorado legislators will be asked this session to choose between two bills on data centers that approach the burgeoning industry sector in starkly different ways — one that offers significant incentives to attract it and the other that seeks to enact significant guardrails.

The bills come as data centers, the high-energy-consuming locations where organizations storing information on the cloud house the physical infrastructure for their applications and data, are generating attention from economic developers and environmentalists. Job attractors say they are can help to fund needed energy-grid updates and can supply construction jobs for years as they are being built, while green advocates worry that they overconsume water and electricity at the cost of higher utility rates for everyone.

Thirty-seven states currently offer incentives to attract data centers, but Colorado isn’t one of them. And that, industry leaders say, is a big reason why the Centennial State serves as headquarters to eight data-center-development companies, yet none of them are investing in projects in this state as they seek to build elsewhere in the country.

To that end, House Majority Leader Monica Duran and fellow Democratic Rep. Alex Valdez introduced a bill as the session began Wednesday that would offer 100% state sales- and use-tax rebates for 20 years for data centers making at least $250 million investments. The bill also would require data-center operators to meet energy-efficiency standards and to implement water-free or closed-loop water cooling systems and to get approval from a new board that would ensure there is adequate grid power to supply them.

Why supporters say incentives are needed

Backed by a coalition of data-center operators and unions, the bill aims to get Colorado into data-center competition, with United Association of Plumbers and Pipefitters lobbyist Phil Hayes arguing that six major projects could generate as much as $5 billion in wages. Now, though, Colorado is watching states like Wyoming and Utah attract such projects and pull skilled tradespeople out of state to work and earn wages there, leaving a “brain drain” that House Bill 1030 could stop, said Julian Aguilar, a member of IBEW Local Union 68.

“I think far too often recently we have been reading about economic setbacks for our state … We need to be looking at innovative ways to bring jobs to our state, and this is a great way to do it,” Valdez said during an online news conference of supporters Tuesday. “As an environmentalist, putting my name on this is easy to do. It sets new standards for stewardship, and it takes into account the things that haven’t worked in other states.”

What hasn’t worked elsewhere also is driving another pair of Democrats, Sen. Cathy Kipp of Fort Collins and Rep. Kyle Brown of Louisville, to run a competing bill, which Kipp said in an interview Tuesday that she expects to introduce next month. But that bill doesn’t offer incentives; instead, it puts restrictions on data centers meant to ensure that they pay their own way, bring their own renewable energy to the table and ensure the grid can provide power to them without risk of shorting other customers.

Opposing bill seeks to put conditions on building of data centers

According to a Dec. 17 draft, that bill would require any large-load data center to acquire or generate renewable energy equal to the amount of energy needed to operate the facility for one year — and then later to match its renewable energy supplies with the amount of power it uses each hour. Operators of facilities with peak loads of more than 30 megawatts also would have to pay all costs needed for a utility to construct or procure generation, transmission and distribution infrastructure, and the bill would ban utilities from offering special economic-development rates to data centers.

Supporters of HB 1030, including Valdez, have criticized Kipp’s bill as essentially banning construction of significantly sized data centers in Colorado because of the regulatory and cost requirements it would impose.

Kipp said that she has no intention of barring data centers but believes that they must not impede the state’s progress toward its goal of a net-zero-emissions grid by 2050 and that state residents should not have to subsidize Meta, Google and Amazon. While no other sector is required to bring its own 100% renewable energy sources to utilities in order to operate in Colorado, no sector uses the amount of energy as data centers and poses the threats to environmental goals that such consumption can pose, she said.

“It’s not that we’re trying to ban them. We’re trying to put effective guardrails around the industry as we learn of the mistakes of others,” she said, pointing to states that are looking to scale back incentives as the data centers create questions around power-supply adequacy. “We think that we are proposing something that is very reasonable.”

Should the focus be on jobs or energy usage?

A Senate committee last year approved a bill to offer the same sales- and use-tax break as HB 1030 proposes, but that measure died on the clock without getting a further hearing in the Senate Appropriations Committee as worries surrounded its potential impact on the budget. That proposal also included a proposed income-tax break for individuals and companies who invested in data centers, but Sandra Hagen Solin, founder of the DataGrid Consortium in Colorado, said investors said they didn’t need that incentive in order to consider building the facilities in Colorado.

Much like a number of other legislative debates in recent years, this one may come down to a debate between economics and environmental protection. And both sides say the results of that debate could have major implications on the state for years to come.

In addition to creating a significant number of high-paying construction jobs and a smaller number of long-term information-technology maintenance jobs, data centers provide valuable resources to modernize grids, as investors typically help pay for upgrades, said Dan Diorio, vice president of state policy for the national Data Center Coalition. They also tend to help hold down property-tax bills for local businesses and residents because they pay such significant taxes in that area that communities don’t need to seek extra revenue, he said.

Incentives bill has some green requirements of data centers

While Colorado faces an $850 million budget shortfall this year, the state can afford to push forward these proposed data-center tax breaks because they are not taking money out of the budget so much as they are creating new revenue on future equipment purchases, Valdez said. The state can’t lose money on major equipment that it’s not now selling anyway, and while the state will forego its 2.9% sales tax on a lot of equipment, it will generate far more in income and property taxes, he argued.

But the tax breaks, Kipp retorted, would be going to some of the richest companies on the planet at a time when utility ratepayers across the state are facing hikes in their electricity bills because utilities are being forced to modernize infrastructure to serve locations like data centers. And while the same operators who say they boost communities also say that they tend to boost the use of renewable energy where they go, her bill would require transparency around just how much water and energy they use — and require they are not adding emissions as the state seeks to reduce them.

Duran and Valdez noted that their bill also is written to require renewables. Specifically, it requires that any power the data centers contract to acquire must be at a minimum 3-to-1 ratio of renewables to non-renewables through 2040 and then 100% renewable after that. But that is a doable green goal, unlike the hourly-matching requirement that Kipp’s bill would seek to institute by 2031 and would be so expensive that Colorado would not be competitive for data-center construction, proponents of HB 1030 said.

HB 1030 has not been scheduled yet for its first legislative committee hearing.