Tapping bonds to pay for data center energy needs

Opponents of data centers frequently point to concerns over how the energy gobbling buildings will affect local utility rates. 

Processing Content

“We tracked around 70 bills in 2025 introduced concerning the energy usage of data centers,” said Alex McWard, a senior policy analyst with the National Council of State Legislators.  

“So far in 2026, we’ve tracked over 200 bills introduced. Obviously, this is a topic that continues to expand and gain attention.” 

According to numbers from NCSL, data centers account for a little more than 4% of energy consumption in the U.S., but forecasts suggest it could more than double by the end of the decade.  

The infrastructure upgrades needed by data centers often require utility companies to upgrade the grid. The costs are sometimes passed onto local ratepayers. 

Many community benefit agreements now require data center developers, power companies, or states to fund the build-out costs for grid improvements which sometimes loops in renewable energy goals and specialized lenders. 

“Green banks first started emerging around 15 years ago with the Connecticut Green Bank, and they’ve continued to develop since then with Virginia establishing the Virginia Clean Energy Innovation Bank last year,” said McWard.

“Green banks leverage public and private capital to deliver projects that may not be sufficiently met by other financial markets.”  

The banks collaborate with the private sector through direct market-based lending, co-lending, and loan guarantees. 

Limited public funds are leveraged to unlock private investments by reducing the risks for private investors and making energy projects more attractive. 

Earlier this year, Virginia passed legislation to add a 1.1 cent excise tax on kilowatt hours used by data centers. 

California, New Jersey, New York, and Tennessee have all introduced similar legislation with the revenue earmarked for grid improvements.

Demand response programs, which allow power companies to offer incentives for curtailing power consumption during high usage periods and distributed energy resource programs, which includes roof mounted solar are attracting renewed interest. 

The not-for-profit public power sector, which supplies electricity to about 15% of all U.S. customers remains focused on changing Internal Revenue Service “private use” regulations that limit bond financing that could be used for grid upgrades. 

The rules restrict public power utilities who issue tax exempt bonds to three-year contracts with non-government customers, and less than 10% of a bond issue, or a maximum of $15 million in investment for a private business. 

The power companies are concerned about what happens beyond the three years electricity needs are less than anticipated. 

“We need these changes because we need to sign long term contracts with large customers, so as to protect our existing customers from stranded costs,” said John Godfrey, senior government relations director at American Public Power Association. 

“Treasury has the authority to do this now.  I think they’re very concerned about ensuring that average Americans are not paying the price of bringing on new large-load customers.”  

According to NCSL, 14 states are currently offering some type of tax exemption on electricity consumption as a lure for data centers. 

The competition to develop acres of property tax revenue producing data centers is being throttled down by local opposition. 

The electrical infrastructure required to power a data center typically already exists in well populated areas, but most of the planned new sites are moving towards more rural locations. 

According to the Pew Research Center, 67% of new planned data centers are located in rural areas, while 87% of existing data centers are in urban ones. Nearly 40% of the planned data centers are in counties that currently don’t have any.

Many public power companies and rural electric coops are based in smaller rural areas that aren’t served by investor-owned utilities.

“Anecdotally, we are hearing from more members receiving data center inquiries than we did just a few years ago,” said APPA Policy Director Patricia Taylor. 

“Some have served data centers for years, while others are working with these customers for the first time.”

“Whether a data center is a promising opportunity for a rural public power community depends on that community’s priorities and local conditions.”