By Steve Haner

Another analysis of the energy dilemma facing Virginia, this one commissioned by a Democrat-controlled legislative panel, has concluded that the use of natural gas to make electricity is going to have to grow over coming decades, not shrink. Virginia’s anti-hydrocarbon energy laws are doomed to fail because of the data center industry.   

The new 150-page report takes its own look at Virginia’s future energy demand and the best mix of generation to meet it. It reaches the conclusions Dominion Energy Virginia also reached in its most recent integrated resource plan (IRP). Data centers by themselves are driving an enormous future demand curve, as Dominion claimed. The abandonment of coal and natural gas demanded by the Virginia Clean Economy Act (VCEA) creates an energy deficit, even if the data center growth proves slower than the current projections.  

In fact, this report projects natural gas will remain necessary beyond the mandated retirement dates in the VCEA even if the data center growth doesn’t happen. It plugs the gap in some scenarios by using hydrogen in place of natural gas in thermal energy plants. But that remains an unproven, experimental technology not used at scale anywhere. An entire new very expensive infrastructure would be needed to create and transport the hydrogen to power plants.    

Only fantasy technology can comply with the fantasy VCEA. The nuclear plants it envisions are somewhat closer to reality, but still years if not decades away. “In the absence of policy, there is still a significant role for coal and gas generation, comprising another ~30% of demand,” the consultant reports. This on a slide marked “No Data Center Growth, No VCEA.” Carbon emitting sources are even more prominent on scenarios that include the demand growth. 

The energy consulting firm Energy + Environmental Economics (E3) was retained by the Joint Legislative Audit and Review Commission (JLARC) to look at the future electricity demand created by Virginia’s prominent role in the data center industry. It produced several possible scenarios but all included expansion of natural gas and all caused significant rate increases, also a parallel conclusion from the Dominion IRP.   

It also analyzed Virginia’s current rate structure to see if it is fairly allocating costs between the various classes of customers, from residential to commercial up to the largest industrial firms or these data centers. It concluded the rate allocation formula in place is fair and reasonable and so far, data centers have been paying their fair share.   

The 2025 so-called “short” session, scheduled for only 45 days, is likely to be dominated by the issues being forced to the surface by the massive growth of data centers and their appetite for electricity. So far, facilities have been concentrated in Northern Virginia, but projects are proposed all over the state. Both investor-owned utilities and some of the member-owned cooperatives are all dealing with new large projects, which state law requires them to accept on their systems.  

Perhaps it is fitting that the coming debate over the data center industry’s future in Virginia has started with massive data overload. A mind-boggling amount of information and testimony is already available. On December 9, JLARC issued both its own staff report (156 pages) and the supplemental document from E3. Today, the State Corporation Commission is holding a day-long hearing for industry groups and stakeholders. The SCC itself initiated the hearing. There is a growing case file of pre-filed testimony and eventually a transcript of the hearing will be posted.   

Virginia’s average citizen ratepayers, those not advised by utility accountants and lawyers, have every reason to be wary. Just about everybody in the room will have an employer or client they seek to protect or enrich, or a political boss dependent on campaign contributions from the companies present. Utilities and green energy advocates are major funders of what remains of Virginia’s news media.  

Financial rent seeking and political muscle helped put Virginia into this dilemma, a perfect example of the wise warning to be careful what you ask for. Major financial incentives were created as far back as 2010 to lure the data centers to Virginia, as outlined in the JLARC report.  

The state gives a major tax break on the sales taxes it would otherwise collect as the data centers are constructed and filled with computers. The value of that tax subsidy was just under $1 billion in 2023, JLARC reports. In many cases, the state tax lure is coupled with local incentives. Virginia is also attractive because so much of the internet’s fiber backbone runs through the state, and because federal government clients fill the landscape.   

It worked. “Northern Virginia is the largest data center market in the world, constituting 13 percent of all reported data center operational capacity globally and 25 percent of capacity in the Americas,” JLARC reports. There are also significant facilities in the Richmond area, a cluster in Southside Virginia (mostly Microsoft) and even a new giant facility proposed for Appomattox. Here’s a clearer copy of the map above.

JLARC boiled its initial recommendations and policy choices down to a three-page list, bound to get far more complicated as the process proceeds. Some of the policy choices are contradictory, such as the discussion of whether the existing state tax incentives should be retained, ended before the present sunset date of 2035, or allowed to extend more years but with added conditions.   

If utilities cannot say no to a new data center, perhaps they could have the power to impose delays. The rules could change on allowing the largest electricity users to seek an independent source and leave the monopoly. The cooperatives in particular are vulnerable to the unexpected closure of a data center, which could leave a major bill for its other members to cover.    

Most of the ideas on the list are easy stuff. In other forums, some are discussing creating a new customer class just for data centers and seeking to shift more system expansion costs onto them and off everybody else. Currently they are in the same rate category with other major industrial facilities and the cost of new generation is spread among all customer groups.   

Nothing in JLARC’s list of ideas addresses the disconnect between the utopian energy system imposed by the VCEA and the obvious need to retain and expand reliable hydrocarbon generation for decades to come.   

First published this morning by the Thomas Jefferson Institute for Public Policy.