Data centers are the backbone of the artificial intelligence revolution and the internet itself. AI hyperscalers are demanding access to more and more compute, investing billions of dollars into expanding capacity, while the smaller wholesale operators are also growing capacity to meet the growing demand for data services. Over the last year, however, communities have increasingly resisted data center development, citing concerns ranging from aesthetics and noise to impacts on water and utility costs to environmental quality. Governor DeWine has frozen new tax incentives until a new policy can be created, after it was revealed that current data center incentives had foregone over $2 Billion in revenue throughout Ohio.
With data centers at the front of many minds, the leading candidates for governor of Ohio have made data center policy a key plank in their campaigns. The candidates call for a moratorium on data center development with a series of conditions that would be required for approval. This is in line with a trend seen in several other states that have pivoted from layering data center development with incentives to layering those same developments with conditions. Both campaigns avoid calls for an outright ban on data centers, although it remains to be seen whether data center developers can overcome local resistance. However, the two campaigns take significantly different approaches in their efforts to propose a state-wide policy.
Democratic Candidate Amy Acton Mimics the Pennsylvania GRID Model
This spring, Pennsylvania rolled out the GRID plan, which created a series of conditions that data center developers are required to comply with to access Pennsylvania’s data center incentives. This model is similar in kind to the Community Benefits Agreements (CBAs) that are often used in the real estate development process. The Acton proposal would layer a similar set of conditions onto Ohio data center development:
- Energy: The proposal does not require on-site generation, but it would place the full cost burden of electrical capacity onto the developer.
- Incentives: Incentives would not be eliminated, but they would carry stricter standards, although specifics have not yet been outlined.
- Transparency: NDAs would be prohibited.
- Community Benefits: Local CBAs would be required.
- Workforce: Project labor agreements requiring union labor would be required.
- Siting: Data center siting would be restricted to brownfield and industrial sites, and the conversion of farmland would be prohibited.
Republican Candidate Vivek Ramaswamy Looks South to Texas, with a Twist
In Texas, Governor Abbott imposed a few critical restrictions on data center development. Texas requires data center developers to ensure that they are either self-providing or fully funding electrical infrastructure. In addition, the state’s utilities and electrical grid regulators were directed to audit the applications to determine the extent that they are water-neutral (either through closed-loop or self-provided infrastructure) and impact neighboring properties. Economic incentives are also under review to determine the impact and need for state incentives. The Ramaswamy proposal would track the same categories:
- Energy: Data centers would be required to be self-sufficient for utility infrastructure.
- Water: Data centers would be required to be self-sufficient for water infrastructure.
- Incentives: Incentive programs would be scrutinized, including the elimination of property tax abatements.
- Siting: The proposal would prioritize brownfields and protect farmland.
- Community Benefits: Uniquely, developers would be required to provide free electricity to local residents impacted by a data center development.
Free electricity is a bold proposal, but the details have not yet been released. While directly providing free electricity has some regulatory challenges, there are some plausible paths to creating the same effect through tax rebates or similar financial incentives.
The Local Challenge
Regardless of the result of the Governor’s race and the eventual policy that emerges through legislative action, much of the battles over the location of data centers take place at the local level. Land use regulation, certain tax incentives, and infrastructure are all broadly responsibilities at the local level. Unless a data center can develop a piece of property and interconnect into the infrastructure networks without a single piece of local public spending or approval, a project will have to go through some sort of approval process and be subject to opposition. Many communities are putting government action to a referendum, and, in two rulings made in the last month involving Ashville and Trenton, the Ohio Supreme Court has broadly supported citizens over governments in their right to a referendum to challenge legislative acts. Regardless of policy shifts and conditions at the state level, mass opposition at the local level can still stymie any data center development, absent either complete entitlement or a state preemption as part of the new policy.
What Data Center Developers & Local Governments Should Do From Here
Data center developers in Ohio are dealing with a period of uncertainty. The current incentives moratorium changes the economics of development, but nationwide demand remains high and so some projects may still proceed, even without incentives. The Governor’s race will lead to a shift in policy, although either candidate will still be constrained by the legislature, which has been working through its own process. Developers should be preparing for a future where data center construction will have fewer incentives and additional requirements.
Local communities face a different challenge. The gubernatorial candidates are proposing several local benefits that communities will have to align with their own policies. However, they do not address all of the concerns that residents have expressed about data centers in their own communities. With the economic incentives shifting, new data centers can be a source of significant additional tax revenue for communities. There is very little trust currently around data center development and resident concerns are significant and need to be addressed openly, fairly and transparently. Communities should be examining these proposals and thinking about their own needs and benefits, and doing so in an open and transparent way.
Data centers and the issues surrounding their development are not going away. The current proposals will change the landscape, but they will not address every concern. Developers, communities, and other interested parties should be thinking about future development, proactively siting potential data center projects, addressing community needs, and focused on a clear, transparent process.
Contact
This is an evolving issue and KJK’s Economic Development & Incentives team will continue to monitor it closely. To discuss how these developments may affect your project or investment strategy, contact KJK’s Director of Economic Development & Incentives, David Ebersole (DME@kjk.com).