Virginia slaps data centers with big new tax — but no climate rules

Virginia Gov. Abigail Spanberger and her fellow state Democrats romped to a governing trifecta last year, pledging to curtail rising electric bills and ensure power-hungry data centers pay their fair share without undermining the state’s clean energy transition.

But the party now looks poised to fall short on those promises, extracting more money from the tech industry but failing to mitigate its climate impact in the data center capital of the world.

Under a spending plan adopted by the state legislature on June 22, Virginia will impose a new $600 million electricity-use tax on data centers, but it will not follow through on proposals to limit their air pollution or require developers to build their own carbon-free energy sources. A handful of Republicans — two in the Senate and eight in the House of Delegates — backed the measure.

After lawmakers incorporate her technical amendments, Spanberger is expected to sign the budget, which passed days before the July 1 deadline and after months of intraparty fighting. In a statement, she touted the tax as the first of its kind in the country and suggested that more reforms could be ahead.

“This is a compromise proposal — one my administration helped craft,” Spanberger said, ​“and it builds a strong foundation for further discussions about the future of this industry in Virginia on issues like environmental and community impact.”

For clean energy advocates, the budget deal is a rare disappointment in what has otherwise been a productive six months. A slew of other climate and energy bills became law earlier this year, including measures to spur the development of more solar arrays of all sizes, ramp up battery deployment, and maximize use of the electric grid.

“It was a really big session for clean energy. We made a lot of advances,” said Lee Francis, chief program and communications officer with the Virginia League of Conservation Voters. But he emphasized, ​“Data centers are still the gorilla in the room.”

A sales tax break totaling nearly $2 billion annually has helped lure the tech industry to Virginia over the last 15 years, with hundreds of the computer-crammed warehouses in the northern part of the state alone. The facilities require massive amounts of power, and utility Dominion Energy expects they’ll make up over half of its electricity sales by 2035.

To ensure they have electricity at all times, many data centers have their own backup power sources: diesel generators that emit health-threatening pollutants such as carbon monoxide and nitrous oxides. Such pollution from clusters of these facilities has at times surpassed that from Dominion’s Possum Point Power Station, a natural gas plant in Prince William County, according to recent research from Virginia Commonwealth University.

“It’s quite urgent to figure out a way to reduce the amount of emissions that these backup generators are putting into their nearby communities,” said Damian Pitt, the associate professor at the university who conducted the study.

To date, these backup generators have run far less than they are allowed to under Virginia law. 

“The real big-picture concern is that the total amount of permitted emissions is 10 to 20 times greater than what is currently being emitted,” Pitt said.

That’s why Del. John McAulliff, a Democrat whose northern Virginia district is on the edge of so-called Data Center Alley, introduced a bill this year to require batteries as the first resort for backup power, limit diesel generator use to 500 hours per year, and permit only the lowest-polluting generators available.

“Let’s bring relief as quickly as we can, and as clearly as we can, to the folks that live near these things,” he said. ​“They are the ones who are most impacted.”

But only part of McAuliff’s measure, House Bill 507, made it into law — the portion directing brand-new data centers to use lower-emission ​“Tier 4” generators rather than older, dirtier ​“Tier 2” varieties.

Other environmental standards also remained elusive. The spending plan adopted Monday calls for new rules on water use and noise control, but includes no regulations on diesel generators, as in the original version of HB 507. It also lacks a mandate that tech companies develop solar farms, batteries, or other sources of clean energy — a scheme called ​“bring your own clean energy” that’s being considered by lawmakers and regulators around the country.

That lawmakers chose a new tax over tough climate restrictions for data centers is especially galling to critics, who say $1.2 billion over two years amounts to a rounding error for one of the wealthiest industries in the world.

“The new consumption tax is no substitute for real safeguards,” Connor Kish, director of the Sierra Club’s Virginia Chapter, said in a statement. ​“It does not stop the harm this industry is causing to families, their health, and their wallets.”

The budget does direct a study panel to recommend data center reforms before the year’s end. For his part, McAuliff is determined to pursue more solutions in next year’s General Assembly session — including requirements on existing diesel generators.

“I understand folks’ frustrations,” he said. ​“But this is the first time we’ve ever done any data center regulatory work. I don’t think this is a ​‘one and done.’”