By Erica E. Phillips for The CT Mirror
As more and more businesses have shifted IT operations to the cloud, state leaders around the country turned to data centers — the giant server warehouses that power the internet — as one way to rejuvenate their economies coming out of the Great Recession.
Over the past decade-plus, more than 30 states have created tax breaks or other incentives for data center construction, and the technology sector’s biggest players, from Facebook to Google and Amazon, have taken full advantage.
This year, Connecticut joined the race.
In late February, state lawmakers passed emergency legislation allowing the Connecticut Department of Economic and Community Development, for the first time, to offer tax incentives to certain data center developments.
Specifically, the state will waive sales and property tax obligations for 20 years for data centers that invest at least $200 million in Connecticut — or just $50 million if the facility is located within a state-designated enterprise zone. The tax exemptions could be extended to 30 years if a $400 million investment is made, or a $200 million investment in an enterprise zone.
But with so many other states offering incentives, and Connecticut arriving relatively late to the game, the legislation’s expedited passage through the Assembly struck some observers as odd. The bill obtained emergency certification — sending it immediately to the floor for a vote, with no committee referrals or public hearings.
DECD Commissioner David Lehman said that was all because of one particular detail: Connecticut agreed to waive its right to impose a financial transactions tax on any qualifying data centers. At the time, New Jersey lawmakers were considering passing a $0.0025 tax on every financial transaction processed electronically in the state. Given how much of Wall Street’s exchange server infrastructure is located in New Jersey, the proposed tax had massive implications for the finance industry.
“We were moving very quickly,” Lehman recalled. “The governor, myself and others were having conversations with these companies around potentially relocating their exchanges to Connecticut … This legislation was really important if they were going to make the move.”
Connecticut lawmakers had the data centers bill on Gov. Ned Lamont’s desk within a week. Lamont signed it on March 4.
Lehman estimates Connecticut could have seen as much as $750 billion in data center investment if New Jersey had passed the financial transactions tax. But New Jersey’s bill has stalled in committee, and it looks like the data centers powering Wall Street are staying put for now. “There’s no imminent move from the financial exchanges at this time,” Lehman said.
Fast legislation, then a slow start
The prospects have dimmed for Connecticut to wrest Wall Street’s back-office data infrastructure from New Jersey. But in several communities, particularly in the eastern part of the state, other kinds of data center developments — aimed at a broader clientele — are beginning to take shape.
Depending on the agreement they work out with the local municipality, new data centers will typically make an annual flat-fee payment in lieu of paying local taxes on the property value of their real estate and equipment. It’s a significant discount, but supporters say it could be worth the trade-off.
“This gives more opportunities to some of our rural towns that may have farmland being taxed at the [lower] farmland tax rate,” said Republican Sen. Heather Somers of Groton. “Some towns are looking at generating millions of dollars off this.”
Somers also said that, compared to other industrial sites, data centers are “low impact.” Once construction is completed, there are no trucks or heavy-duty machinery on site, and the small number of employees means there’s essentially no impact on traffic in the surrounding area, she said.
“Usually on property tax exemptions, we get very hesitant,” said Randy Collins of the Connecticut Conference of Municipalities. His group worked with legislators to include language in the bill that would protect towns in cases where the developer doesn’t hold up their end of the deal. “We wanted to make sure a municipality wouldn’t be taken advantage of,” Collins said.
At the same time, CCM didn’t want to cut off an economic opportunity for distressed communities. “When you take a town with no economic prospects for this parcel — sure, in a perfect world, I’d get $5 million on this parcel but I take $1 million. Maybe the economic development around it will build off what they’re doing,” Collins said.
For developers, the upfront investment and lead time for data center projects is substantial. In some cases, the towns they’re targeting will have to draft new zoning rules, since many laws on the books hadn’t contemplated this particular type of development. Data center developers can apply for the state incentive program only once they’ve worked out a fee agreement with the local town. From there, they negotiate a power purchase agreement with the local utility and begin construction.
The Office of Data Infrastructure Administration and Security, within the DECD, launched July 1. Lehman said so far the office has fielded a handful of requests for applications from developers. Within three years, he said, he expects the number of approved new data center projects to be in the “mid- to high-single digits.”
An old story: Connecticut’s high electricity costs
Connecticut’s current data center tally stands at 14, and their overall data capacity is small compared to that of other states. The main reason for that is the relatively high cost of power in the state.
These facilities use a massive amount of power, which means most development to date has happened in parts of the country where electricity prices are low. The average price per kWh for industrial customers in Northern Virginia, for example, is 5.5 cents. In New Jersey it’s 8 to 9 cents, and in Connecticut it’s 12 to 13 cents. So a user who might pay $750,000 a year for power in Northern Virginia would be paying more than $1 million in New Jersey and more than $1.5 million in Connecticut, according to CBRE calculations.
David Silverstone, who represents customers of the public electric utilities known as Connecticut Municipal Electric Energy Cooperative, said there’s plenty of power available to add data centers to the grid. “However, you’ve got to get the power to the customer,” and that involves building a bigger power line out to the location in order to accommodate the additional capacity. “If you’re a data center, there’s no pole in the street. There has to be a whole system to bring the power to you.” That would be another part of the power-purchase negotiation between the developer and the electric company — as well as additional cost, he said.
The fastest-growing data center markets today — Northern Virginia, Portland, Ore., and Phoenix — have found the sweet spot. In Connecticut, one developer is finding his.
A few years ago, Tom Quinn, chief executive of developer Gotspace Data Partners, started making inroads in parts of the state where electricity costs are lowest — namely, towns that have public electric utilities and can potentially negotiate lower rates. Many of those are in eastern Connecticut, where there are currently no data centers.
Quinn declined to be interviewed for this story, but a paid advertorial this July in the trade publication Data Center Knowledge said Gotspace has “developed exclusively entitled campuses, covering more than 1,700 acres, all located within these low-cost-of-utility areas.” (The piece also credits Gotspace with “creating the big data draft incentives, working with the State of Connecticut and the DECD Commissioner, and lobbying the bill to supermajority approval.”)
Before the legislation went into effect July 1, Gotspace had already inked host fee agreements with Griswold, Groton, Bozrah and Wallingford — all towns with public electric utilities. On the company’s website, a drop down menu lists eight Connecticut locations under “Our Data Centers.”
DECD’s Lehman said, “the initial interest is in areas where there are local utilities that have the ability to provide more competitive rates,” but Gotspace isn’t the only company expressing that interest. He added that DECD expects to see “joint ventures and other forms of partnership as these data centers start to get built.”