Overview:
- Michigan lawmakers passed tax breaks to attract large-scale server farms, but environmental advocates are concerned about AI and data center impacts.
- The tax breaks could cut state and local tax revenue by over $90 million by 2065, though some communities might gain from property taxes.
- Data centers could affect Michigan's climate plan by keeping fossil fuel plants online, raising water and energy bills and risking water resources.
- However, news of DeepSeek's low-cost, open-source AI system that may need less power has raised questions about future data center developments.
The environmental impacts of AI (artificial intelligence) and the water and energy-intensive data centers needed to power it emerged as a major concern last year as Michigan lawmakers passed tax breaks to lure large-scale server farms to the state.
Environmental advocates warned that data centers could effectively kill Michigan’s climate plan by keeping fossil fuel power plants online, raising water and energy bills for Michigan ratepayers, and jeopardizing water resources.
Michigan lawmakers introduced sales and use tax exemptions for data centers in 2023, which Gov. Gretchen Whitmer signed in late 2024 and early 2025. DTE Energy has been a major supporter of this legislation, with DTE executives telling investors that Michigan could be an attractive location for data centers and a significant growth opportunity for the company.
A Senate Fiscal Agency analysis that looked at both bills estimated the tax breaks would reduce state and local tax revenue by more than $90 million by 2065. However, some local communities would benefit from the property taxes brought in by data center developments.
Environmental advocates have questioned the political wisdom of giving tax breaks to some of the wealthiest companies in the world after an election where many cited cost of living concerns as an essential issue.
Microsoft and Google, which have been cited as likely beneficiaries of the tax breaks, are currently valued at $3 trillion and $2.5 trillion, respectively.
However, recent news that the Chinese-based company DeepSeek released a low-cost open-source AI system that may require less power has raised questions about future data center developments.
As things evolve rapidly, Planet Detroit wanted to take a beat to revisit the environmental impacts of AI and data centers in Michigan. Here’s what you need to know.
How could data centers and AI impact Michigan’s climate plan?
Environmental advocates have said that by passing tax breaks for data centers, Michigan Democrats essentially killed their climate legislation, which looks to achieve 100% renewable energy.
“They just blew a hole in their own clean energy package,” Christy McGillivray, legislative and political director for the Sierra Club Michigan Chapter, told Planet Detroit after a bipartisan majority of lawmakers in the Michigan House passed the sales tax in November.
Michigan’s climate law contains an “offramp” provision that allows fossil fuel production to stay online if there’s not enough capacity to meet demand.
Data centers in other states have kept coal generation online and led to proposals for new gas plants.
In November, Consumers Energy said in testimony related to its pending electric rate case that AI’s power demands could make it difficult to meet state climate goals.
“The rapid advancement of artificial intelligence and the need for more large data centers to support this technology has had an impact on the Company’s delivery forecast (and) could create challenges to the Company’s ability to achieve the (renewable portfolio standard) compliance targets,” the company wrote.
What would data centers mean for Michigan’s water?
An individual data center can use as much as 5 million gallons of water a day to cool servers. This is far more than water bottling operations like the proposed Nestle facility in Evart, Michigan, which would draw roughly half a million gallons a day. Environmentalists had warned that Nestle’s large extractions could cause creeks in the area to dry up.
Amendments were added to the tax break legislation requiring data centers to draw water from municipal systems. But facilities could still impact groundwater if municipal systems use significantly more.
Data centers could also use air conditioning or closed-loop water systems for cooling. But drawing on groundwater for cooling is the cheapest option, Sean McBrearty, Michigan director for the nonprofit Clean Water Action, said in May.
How could data centers impact Michigan’s air?
If data center developments keep coal and gas online or require new plants to be built, there would be more air pollution from these power plants, which have been concentrated in low-income areas and communities of color.
Additionally, data centers often employ dozens of train-car-size diesel generators for backup power during outages. This may pose a special risk in Michigan, where frequent power outages could force data centers to draw on dirty generators in areas already dealing with poor air quality.
For example, Benton Township has been pitched as a location for a data center. But Berrien County, home to Benton Harbor and St. Joseph, is in nonattainment for ozone, along with portions of several other west Michigan counties.
How would more data centers impact Michigan’s water and electricity bills?
Ratepayer advocates and regulators are concerned that data centers could add costs for Michigan water and energy customers. The facilities require massive amounts of electricity and could use millions of gallons of water daily to cool servers, which could hike utility costs for Michiganders.
Maryland People’s Counsel David Lapp, a state appointee who monitors utilities, predicted utility bills would increase in his state because of growing energy demand from Mid-Atlantic data centers, saying residents could pay $40-$50 more monthly.
Michigan legislation adopted in 2016 has allowed residential electricity rates to climb while industrial and commercial rates have remained relatively low. Residential customers already pay for infrastructure upgrades, costs that could grow as more data centers come online.
Municipal water systems supplying data centers could also cut their own deals with the facilities, leaving other customers to pay more.
An amendment to the sales tax exemption, HB 4906, protects residential energy customers from subsidizing lower energy rates for data centers. However, advocates said the language did not shield ratepayers from higher costs.
Water and energy costs “will be passed on to ratepayers,” Abby Clark, Midwest campaign manager for the Natural Resources Defense Council, told Planet Detroit in November.
Dan Scripps, chair of the Michigan Public Service Commission, also raised concerns in December that utility customers could end up paying for stranded assets if utilities build new power generation to accommodate data centers that don’t end up located in the state.
Ohio recently moved to protect residents from stranded costs with an agreement involving the Ohio utility AEP, the Public Utilities Commission of Ohio, consumer advocates ,and businesses that require data centers larger than 25 megawatts to pay for 85% of the power they expect to need each month, even if they end up using less.
The agreement requires companies to show they are financially viable and pay an exit fee if they cancel a project or can’t meet obligations in their electric service contracts. These requirements would last 12 years, including a 4-year ramp-up period.
Why are so many data centers needed all of a sudden?
AI is the primary driver for data center growth, although cryptocurrency, cloud computing and other digital services also require these facilities to operate.
As a result, data center developments have been booming in places like the Bay Area and northern Virginia, with hundreds of facilities in Virginia’s “Data Center Alley.”
Who benefits from data centers?
Supporters of the legislation argue it would be a lifeline for places like the Benton Harbor area, which could see an estimated $21 million in annual property taxes from a proposed data center development. Virginia’s Loudon County, where many data centers are located, received more than $581 million in property taxes in 2023.
Utilities could be big winners if companies locate data centers in the state. On an earnings call in July, Dave Rudd, DTE executive vice president and CFO, said data centers and electric vehicles would be important sources of growth going forward.
Reuters reported in May that data centers could use up to 9% of the total electricity generated in the United States by 2030. However, DeepSeek said its AI model uses 10% to 40% less power, although there remains considerable uncertainty over these numbers.
Would data centers bring jobs to Michigan?
Data centers generally create few full-time jobs, although they may provide short-term construction work for contractors. The Switch Inc. data center near Grand Rapids received tax breaks in 2015 after promising to create 1,000 jobs in 10 years. But by 2022, the company had only hired 26.
Frustration with data centers’ preferential energy rates, climate impacts, and poor return on investment has led lawmakers in South Carolina, Georgia and Connecticut to rethink their tax breaks.
South Carolina State Rep. Shane Massey (R-Edgefield) said in 2024 that data centers were “electricity hogs that aren’t providing a whole lot of jobs.”
How could DeepSeek change energy use projections for data centers?
The news that DeepSeek could deploy AI to match U.S. models’ performance at a lower cost was accompanied by estimates that it could use significantly less energy.
Eric Gimon, a senior fellow at the think tank Energy Innovation, told Inside Climate News that he expects data centers to continue to expand in the U.S. and use more energy. But he said this growth could be more erratic, and some companies could fail as they face competition from DeepSeek.
The competition to provide AI more cheaply could also drive companies to rely on renewables more, which are often the cheapest source of electricity. However, an article in the MIT Technology Review cast doubt on expectations that DeepSeek would use less energy than U.S. models like OpenAI. It found that more intensive processes for answering questions offset the energy the model saves in training.
learn more
Are Virginia’s power-hungry data centers a warning for Michigan?
As Michigan considers tax breaks for data centers, Virginia environmental advocates warn data centers could kill state climate goals while thousands of generators may cause a spike in air pollution.
Michigan data centers would destroy state’s nation-leading climate plans, opponents charge
Data centers would give Michigan tax credits to tech giants while potentially providing electric utilities an “off-ramp” from the MI Healthy Climate Plan.
DTE touts passage of data center bills as its political spending draws scrutiny
Environmental advocates call on Gov. Whitmer to veto the bills, but DTE expects the Governor’s support.
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