This story by Morey Wolfson appeared on BigPivots.com on September 25, 2024.
The digital age, now supercharged by artificial intelligence, has resulted in the inevitable growth of huge “hyperscale” data centers.
These companies are free to come to Colorado. They are not, however, inevitable, beneficial, or necessary.
Colorado should discontinue the invitation to hyper-scalers that legislators created in 2018 when they enacted a mandate that the Colorado Public Utilities Commission must offer a deeply discounted economic development rate. New hyper-scale data centers will imperil the state’s goals for emissions reductions and the need to conserve our limited water supplies. The misguided 2018 law needs to be repealed or amended so that the PUC can protect ratepayers.
Over the next six years, Colorado utilities will close our remaining coal plants, taking almost 4,500 megawatts of firm generation out of our resource mix. Will the growth in data centers place the state at risk of setting back our hard-fought policies aimed at cutting greenhouse gas emissions?
Will the unrestrained arrival of large data center electric loads threaten our ability to meet air quality, water conservation, and rate stability objectives?
Will data centers pull power resources away from beneficial uses of power in the building and transportation sectors?
Ought we employ the precautionary principle?
Mapping by datacentermap.com shows that Colorado has 29 small “enterprise” data centers that collectively consume about 100 megawatts of electricity. This is a negligible amount compared to Xcel’s approximate 9,500 megawatts of peak demand.
Now comes Blackstone-owned hyperscale data center in Aurora with a great hunger for power and water. QTS-Aurora will initially need 177 megawatts. That will be Colorado’s largest electric load, larger even than Evraz Steel in Pueblo and Climax Molybdenum.
The QTS building will consume electric power roughly equal to the power capacity required to serve 32,000 residences, assuming a typical residence requires 5 kilowatts of utility installed capacity. Data centers represent the opposite of demand-side management. Because they operate 24/7/365, they are not candidates for interruptible load-shedding programs.
QTS’s 177 megawatts may not be its ultimate demand, however. QTS paid $28 million for a dual-circuit 230 kV line to connect their building to a nearby Xcel Energy substation. The line is capable of supporting almost 1,000 megawatts of transfer capacity. That may be what this hyper-scaler will eventually need.
In 2018, Colorado legislators, in line with the lobbying from Big Tech and local economic development boosters, passed HB18-1271. It requires the PUC to give investor-owned utilities — Xcel Energy and Black Hills Energy — the ability to offer a sweetheart economic development rate to large commercial or industrial customers, under certain conditions, primarily that the rate must exceed the marginal cost of power. The marginal cost of power is the cost of additional electricity. It is the most expensive electricity you buy.
The PUC-approved discount rate now offered by Xcel to QTS is confidential, so we can only speculate on what that rate is. I suspect it is far below Colorado’s average industrial rate, which according to the Energy Information Administration is 8.8 cents per kWh. Recent bids by renewable suppliers in response to an Xcel solicitation for the Colorado Power Pathway were less than 3 cents/kWh. A potential source of estimating the marginal cost would be the generation cost of about 5 cents/kWh, as reported in Xcel’s 2021 electric resource plan that was filed with the PUC.
Legislative bills that proposed to exempt data centers from paying state sales tax were submitted in 2023 and again in 2024. Fortunately, they were pulled before getting heard in committees, let alone passed. Apparently, some lawmakers had reservations about the wisdom of short-changing Colorado taxpayers by handing out money to data centers while the state budget was under stress.
Big Tech will undoubtedly return to seek advantages in 2025. In political influence, they may be less visible but just as muscular as oil and gas. The U.S. Chamber of Commerce has lobbied Colorado legislators to pass incentive legislation in the past. Its written lobbying narrative on data centers does not once mention electric power requirements, water requirements, and ratepayer impacts.
The QTS case sends a clear signal — and the wrong signal — to companies like Microsoft (which has purchased property just south of DIA), as well as Meta, Google, Amazon, and other limited liability companies who may also be buying property for data centers. Because of the discounted rate authorized by the 2018 law and the PUC’s decision regarding QTS, these companies can now expect to get discounted rates worth multi-million dollars in electric cost savings.
While Xcel offers deep discounts to massive data centers, the company is seeking rate hikes to all other customers. In late June, the company filed a wildfire mitigation plant that would cost $1.9 billion. In addition, ratepayers may soon face increased costs due to the need to contain methane emissions, and price hikes caused by supply chain challenges.
Platts Commodity Insights, dated August 2, 2024, reports that Xcel Energy’s 5-year electric sales forecast is expected to rise, in large part due to data center load growth. Platts reported that Bob Frenzel, the Xcel CEO, said the conditions are ripe for the company to attract large numbers of data center customers.
“When we speak with hyper-scalers and other data center developers, we have what they’re looking for: low-cost clean energy, access to fiber, access to water and other infrastructure, human capital and land that makes us attractive,” Frenzel said.
A major concern is that a steep spike in the electric demand forecast may cause Xcel and other utilities to ask to extend Colorado’s 2030 target for retiring polluting coal-fired generating power plants, or cause the addition of more natural gas plants on the system.
Water is also of concern. Data centers use large amounts of water for cooling towers, chillers, pumps, pipes, heat exchangers, condensers, and computer room air handler units. Data centers also need water for their humidification systems and facility maintenance. They also indirectly consume substantial amounts of water off-site, if powered by fossil-fired plants.
Although the 2018 legislation declared that giving EDR rates is needed for the “expansion of opportunities for employment in Colorado,” data centers are the opposite of labor-intensive. By way of comparison, the $1 billion QTS facility will employ only 70 to 85 permanent workers, about the same number of workers employed at 10 Starbucks.
More data centers in Colorado will produce winners and losers. Investor-owned utilities will gain because the increased demand will lead to increased investments in infrastructure. Those investments provide the basis for earnings by Xcel, for example, which would achieve a presumed guaranteed annual rate of return of 9.3% on new capital investments. Data center growth will come around to arrive on the backs of ratepayers.
Data center developers will gain, as will Big Tech. The other winner will be local jurisdictions that site data centers, welcoming them as a lucrative new sources of tax revenue. Some local and state elected officials may prioritize campaign contributions from utilities and Big Tech over reaching energy and water conservation objectives.
There is no doubt the world will see a dramatic AI-powered spike in data centers. However, they need not come to Colorado. Other less environmentally aware jurisdictions may elect to contend with the negative environmental and ratepayer consequences.
At a minimum, Colorado legislators should repeal the misguided 2018 law that created the economic development rate. They should also continue to reject legislative proposals to give tax rebates to data centers. These corporations are well-heeled, and state policy should operate on the principle that they must pay their full freight.
Morey Wolfson, now retired, was executive assistant to the Colorado Public Utilities commissioners for 15 years, the utilities group manager for the Federal Energy Management Program for four years at the National Renewable Energy Laboratory, and the utilities program manager for five years at what was then called the Colorado Governor’s Energy Office.