Policy & Regulation

How can Virginia keep up with extreme data center demand?

Northern Virginia is the largest data center market in the world, constituting 13% of all reported data center operational capacity globally and 25% of capacity in the Americas.
How can Virginia keep up with extreme data center demand?
(Image by Michal Jarmoluk from Pixabay )

From leaving co-ops stranded and scrambling to recover costs to accidentally building out too much generation and transmission infrastructure, a lot can go wrong when trying to serve the demand for thousands of new megawatts to feed data centers. A new report examines how Virginia, the data center capital of the world, could both benefit and suffer from the large investments required to meet growing demand.

In 2023, the Joint Legislative Audit and Review Commission (JLARC) directed staff to review the impacts of the data center industry in Virginia. Now, JLARC has released its findings in the report, Data Centers in Virginia.

In the U.S., data center demand is expected to reach 35 GW by 2030, up from 17 GW in 2022, McKinsey & Company projects. Grid operators and utilities expect to see significant load growth driven by electrification, new manufacturing, and data center development. According to EPRI, 15 states accounted for 80% of data center capacity in 2023, led by Virginia, Texas, California, Illinois, Oregon, and Arizona. That concentration creates economic opportunities for states hosting data centers, but could also stress the grid.

Northern Virginia is the largest data center market in the world, constituting 13% of all reported data center operational capacity globally and 25% of capacity in the Americas. According to recent analysis from Upwind, Northern Virginia has a future power requirement of 11,077 MW. Multiple factors have contributed to Northern Virginia’s market prominence, including a strong fiber network, supply of reliable cheap energy, available land, proximity to major national customers, and the creation of a state data center tax incentive.

Dealing with ‘unconstrained’ demand

In addition to the benefits associated with new data center development, like tax revenues and construction investments, they are unsurprisingly also expected to drive an “immense” increase in energy demand, the report said. Energy demand in Virginia was “essentially flat” from 2006 to 2020 – and although the population increased during this time, this was offset by energy efficiency improvements, the report said. A report commissioned by JLARC found that “unconstrained demand for power” in the state would double within the next 10 years, mostly from the data center industry.

Courtesy: JLARC

JLARC argues that building the infrastructure to meet unconstrained data center demand would be “very difficult,” and even trying to meet half of that demand would likely be a struggle. New solar facilities, wind generation, natural gas plants, and increased transmission capacity would all be required to meet unconstrained demand, and the number of projects needed would be “very difficult” to achieve, the report said. New solar facilities would need to be built at twice this year’s annual rate, and the amount of new wind generation required would “exceed the potential capabilities of all offshore wind sites that have so far been secured for future development.”

Estimated generation mix needed to meet demand scenarios, with and without meeting VCEA requirements. Courtesy: JLARC

Even if the state only tries to meet half of unconstrained energy demand, and Virginia Clean Economy Act (VCEA) requirements are not considered, a bottleneck would likely arise in gas generation. New natural gas plants would need to be added at the rate of about one large 1,500 MW plant every two years, for 15 straight years – a cadence not seen since between 2012 and 2018. With VCEA requirements in mind, JLARC says the biggest challenges would be building enough wind, battery storage, and natural gas peaker plants, with no changes to wind generation needs.

Utility requirements and processes could help limit risks

The report notes that the projected energy demand increases from data centers have raised concerns about whether enough infrastructure can be built to keep up. PJM currently requires utilities to secure “sufficient generation capacity” plus a reserve margin, and the state requires utilities to develop plans describing how generation capacity needs will be met. However, JLARC argues that individual electric utility planning does not guarantee that the generation resources needed for the whole PJM region will be built since regional generation is not centrally planned.

If utilities can’t build enough infrastructure to keep up with demand, they could choose to delay the addition of new large load customers until there is enough generation and transmission capacity on the grid, the report said.

The costs of high demand

JLARC commissioned an independent study of electric utility cost recoveries under current rate structures and found that data centers are already paying the full cost of service, but growing energy demand is likely to increase costs for other customers as well. The large amount of new generation and transmission that needs to be built will create fixed costs that utilities will need to recover, and the difficulty associated with supplying enough energy to keep pace with growing data center demand means energy prices will likely increase for all customers, the report said. Additionally, if utilities rely on importing power, they will be at the whims of the market and its spikes in prices.

Data centers also pose a financial risk to electric utilities and their customers, the report found. For example, utilities could end up building more generation and transmission infrastructure than is needed if forecast demand does not materialize, or if several large data centers close – essentially “stranding” utilities with infrastructure costs they would have to recoup from existing customers. One risk is unique to electric co-ops: if a data center customer delays, disputes, or fails to pay an energy generation bill and the co-op cannot recoup these costs from the customer, all of the other co-op members would have to foot the bill. Finally, if data centers participate in the state’s retail choice program and purchase generation through third parties instead of their incumbent electric utility, generation costs could begin to shift to other customers, the report said.

The report also included several recommendations and policy options meant to help address data center demand in Virginia, including:

  • Clarify that electric utilities have the authority to delay, but not deny, service to customers when the addition of customer load cannot be supported;
  • Direct Dominion Energy to develop a plan for addressing the risk of infrastructure costs being stranded with existing customers, and file that plan with the State Corporation Commission;

Read the full report here.