Michigan environmental groups have been voicing alarm about proposed tax incentives for tech companies like Google and Microsoft to locate massive data centers in the state. They say the facilities will consume massive amounts of water and energy, effectively killing the state’s climate plan.

To understand what the bills could mean, Michigan might look to Virginia, home to Loudon County’s “data center alley,” where more than 4,000 backup diesel generators could dirty the air if there’s a blackout and the utility Dominion Energy utility has kept coal power online and looks to add more gas generation to meet power demands.

“I don’t think anybody realized how big this was going to get,” Julie Bolthouse, director of land use for the nonprofit Piedmont Environmental Council, told Planet Detroit. She noted that the state has had tax breaks in place for years, with the Virginia General Assembly offering the first statewide incentive in 2008.

“This has been a situation where the demand has exploded because of the pandemic and the move to remote work, and then also AI (and) cryptocurrency,” she said.

Virginians now have around 300 data centers whose power demands jeopardize the state’s goal of decarbonizing its energy grid by 2045. These buildings are as large as football fields and contain millions of servers that make the internet work. By 2030, the facilities could use up to 9% of the total electricity generated in the United States. 

In Michigan, data centers could derail the state’s 2023 legislation, which aims to achieve 100% renewable energy in electricity generation by 2040. The legislation contains an “offramp”  provision that allows coal or gas plants to stay online if there’s inadequate generation to meet demand.         

Meanwhile, diesel and natural gas generators could pollute the air in southern Michigan, where ozone poses a major threat. Although communities like Benton Harbor hope to benefit from property taxes raised from data centers, advocates voice concern that the facilities’ water and energy demands could increase residents’ utility bills.

“The last thing we need are higher utility bills and worse air quality,” said Christy McGillivray, legislative and political director for the Sierra Club Michigan Chapter.

Diesel generators could add to Michigan’s ozone problems

Many industrial facilities have backup generators, but their use at data centers, which operate around the clock, is especially concerning, Bolthouse said.

“These data center facilities are using more generators than any other facility I’m familiar with,” she said, adding that each building in Virginia has about 25 generators the size of train cars that will automatically turn on during a power outage.

Diesel generators can emit pollutants like carbon monoxide and nitrogen oxides, which contribute to ozone formation. This makes their use especially problematic during summer when ozone pollution is more likely and electricity demand is especially high.

Currently, facilities only run generators for maintenance or during blackouts. But last year the Virginia Department of Environmental Quality proposed a variance to allow data centers in several northern Virginia counties to run generators longer and more frequently from mid-March through July when the regional grid operator PJM issues a warning of a strain on the power system.

Bolthouse said the proposal would mean more pollution from diesel engines. By allowing these generators to help meet power needs on high-demand days, the change would have allowed many recently constructed or under-construction data centers that are waiting for power service to come online to further stress the grid. Following a public outcry, the DEQ walked back the proposal.

Michigan’s electric reliability problems could drive use of backup generators, although the state currently has less grid stress than Virginia. Michigan’s regional operator, MISO, has only had one “maximum generation emergency” alert since 2006, a warning that indicates the grid is near capacity, according to Michigan Public Service Commission spokesperson Matt Helms. PEC found Virginia had over 100 between 2019 and 2022.

But Michigan is already seeing increasing grid stress, which data centers could add to. Michigan also experienced the second-highest number of power outages, affecting 50,000 or more customers between 2011 and 2021, events that could trigger generator use.

Michigan industrial facilities can use gas, diesel or dual fuel generators as backup power during a blackout, according to Michigan Department of Environment, Great Lakes and Energy spokesperson Jill Greenberg. If data centers are located in southern Michigan, the generators could add to already high ozone levels and particulate matter pollution in several counties.

For example, Benton Township has been pitched as a location for a data center, which local leaders say could bring in $21 million in property taxes annually to the area. But Berrien County, home to Benton Harbor and St. Joseph, is in nonattainment for ozone, along with portions of several other west Michigan counties. 

Michigan data center contracts could kill state climate plans

Some in Virginia say that by signing contracts with data centers, Dominion Energy determines the state’s energy future.

As with Michigan’s clean energy legislation, Virginia’s plan contains an “escape clause” allowing utilities to build more fossil fuel generation if they can’t meet demand.

According to a financial report from Dominion, data centers represented 24% of its energy sales in 2023. The utility has said it received requests for data center campuses that would need several gigawatts, equal to the energy output of a large power plant. This has coincided with a proposal to build a new natural gas “peaker” plant in Chesterfield County, Virginia, to run when energy demand is high.

Nate Benforado, senior attorney for the Southern Environmental Law Center, wrote in an editorial that through its contracts with data center customers, “Dominion is effectively dictating Virginia’s energy future.”He said it makes sense for the State Corporation Commission, which regulates utilities, to review large projects that might require building a power plant. Dominion did not respond to Planet Detroit’s request to comment on this story.

According to Amy Bandyk, executive director of the nonprofit advocacy group Citizens Utility Board of Michigan, a similar approach is needed in Michigan. Currently, utilities only have to issue integrated resource plans every four years, plans that show how utilities will meet customers’ power needs. Bandyk said this process is not equipped to evaluate large and rapid increases in demand from data centers.

She said a new process is needed to ensure large projects don’t increase costs for all customers or make it harder for Michigan to meet its clean energy goals.

Politicians see revenue, while advocates say to look at the bigger picture

Support for the data center tax breaks remains strong in some quarters despite the passage of the legislation being halted before the Michigan Legislature’s summer recess.

On a July investor call, DTE Energy CEO Jerry Norcia said Michigan’s abundant water, which could be used to cool facilities, and low industrial energy rates make the state a promising location for data centers. “The governor has indicated a great willingness to sign these bills if they come to her desk,” he said.

Some lawmakers looking to increase local property taxes have a strong motivation to support the Michigan legislation. Although data centers create few jobs, Virginia’s Loudon County, where many of the state’s facilities are located, received more than $581 million in property taxes from data centers in 2023.

State Sen. Kevin Hertel, a sponsor of one of the Michigan data center bills, said the legislation would increase local tax revenue to fund roads and schools. He didn’t respond to questions about efforts to amend the legislation. But he previously told Planet Detroit that draft amendments would protect consumers from paying for maintaining or building gas plants to power the data centers.

Hertel also shared draft legislation with a provision requiring data centers to hook up to municipal water systems that use surface water. Some environmental groups concerned about drawing down on groundwater supported this, although the move could increase rates for other water customers.

Bolthouse said data centers could be developed in a way that protects climate goals and other environmental priorities, which could include requiring companies to match their energy needs with local, 24/7 renewable energy and battery storage. She said Michigan should also plan for transmission infrastructure that may be needed and ensure it has full transparency around energy needs for the facilities.

“If you don’t have all the facts, and all you’re considering is taxes that are going to be collected, then you’re not getting the full picture,” she said.