Virginia’s Rapid Data Center Growth Faces Possible Speed Bumps

Virginia has more than 450 data centers, mostly concentrated in the Washington beltway region, and that number is expected to rise. As data centers proliferate, scrutiny will increase and stakeholders, including utilities and existing or future data centers, should proactively address potential legal and regulatory challenges.

Data centers are flourishing in Virginia because of its four transoceanic fiber cables, its proximity to east coast economic centers and federal government facilities, its large volume of reasonably priced clean energy, and a top-tier talent pool. These strategic benefits have made Virginia well-positioned to benefitfrom the $500 billion in private data center development related to the “Stargate” project from OpenAI.

Federal agencies, state lawmakers, and local officials in the Commonwealth have tried to balance the economic benefits of data centers with their effect on communities and the environment. Proposed legislation and rules could limit the size, location, operations, and economic benefit to data center operators.

Here are four key issues that stakeholders should monitor as data center development continues in Virginia.

Infrastructure Strain

Virginia’s data centers growth has raised concern from residents and lawmakers that the facilities may strain local water and power infrastructure.

PJM Interconnection, LLC, the regional transmission operator, estimates 20 gigawatts of load growth in Virginia by 2040, nearly double the current use. This has prompted calls for more stringent regulations to ensure the infrastructure can support the demands of data centers and that costs aren’t unduly shifted to other consumers.

The growth has also created disputes before the Federal Energy Regulatory Commission between states, ratepayers, and others over issues such as who should pay for the transmission infrastructure nneeded to serve northern Virginia’s growing data center load.

State lawmakers across the political spectrum have proposed legislation addressing data center issues. One bill requires data centers to pay all distribution costs that primarily serve their load. Another proposal requires data centers to report their energy usage, by generation source, consumed by the data center in that quarter. That report would be aggregated by the Secretary of Commerce and Trade to estimate future energy demands of the data center industry.

A similar bill would require data centers to disclose water and power usage, as constructed, and assess the effect on “water usage, the regional electric grid, and carbon emissions, as well as any impacts on agricultural, historic and cultural resources within the locality.”

The Virginia State Corporation Commission separately initiated a technical conference to learn about data center power issues, including: direct assignment of transmission and generation costs for new large use-customers; collateral requirements for data centers; exit fees for early termination of service; and emergency curtailment conditions.

Some legislative proposals would direct the SCC to implement cost allocation or require a certificate for large loads. The outcome of this process could well effect how Virginia’s electric utilities provide service, and at what cost.

Some shareholders expressed concern about visibility into data center water consumption. Though most data centers use minimal amounts of water, and Virginia overall is water rich, some legislators shared concerns that certain areas reliant on groundwater may be harmed by data centers.

Zoning and Land Use

Local governments are scrutinizing where data centers can be built more than ever. Fairfax County recently began requiring that data centers be built at least 200 feet from an abutting property line and undergo a noise study. Loudon County is considering eliminating by-right zoning for data centers, which would require each project to receive individual approval.

On a state-wide level, some bills have aimed to prohibit data center construction within a certain distance from historically significant sites, national or state parks, schools, and residential areas to prevent potential damage. Other proposals have required data centers to incorporate sound mitigation methods, which would shrink the areas where data centers can be built.

A proposal to address postulated emissions impacts of data centers, including restrictions on backup generators, failed to gain support. However, the Joint Legislative Audit and Review Commission, a non-partisan group that conducts policy analysis for the Virginia General Assembly, found data centers typically are supported by diesel generators and run only during emergencies or for routine maintenance testing.

Sales Tax Changes

Data centers in Virginia are exempted from sales tax on purchases of computers and other equipment valued at $928 million for the industry in 2023. The exemption is set to expire in 2035. Some legislation has proposed only permitting data centers that meet certain energy efficiency standards or sourcing requirements.

JLARC suggested that modifying this sales tax would be an appropriate way to control the growth rate of data centers within Virginia, in line with the legislature’s policy goals. If this exemption is modified or extended, the economics of new data centers built in Virginia will likely be affected.

As the data centers industry continues to grow in the Commonwealth, so will scrutiny. Stakeholders in Virginia will benefit from staying informed about changing state and federal regulations and market rules, as well as local zoning laws, to safeguard their investments and contribute to the sustainable growth of the industry.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Michelle Kallen, the former solicitor general of Virginia, is partner at Steptoe and co-chairs the firm’s appeals and advocacy practice.

William Keyser is partner at Steptoe and focuses his practice on regulatory litigation and transactions involving US electricity and capacity markets.

Joe Bower is associate at Steptoe and represents electric utilities and natural gas market participants in front of the Federal Energy Regulatory Commission.

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