As data centers continue to pop up across the country, communities are starting to ask questions about their impact. These large facilities may be powerful enough to power the online services people use every day, but they also have brought into question how much water and energy are used and what the impact will be on local communities.

Erik Nordman is an associate professor in the Department of Agricultural, Food and Resource Economics at the College of Agriculture and Natural Resources, and he directs the Institute of Public Utilities at Michigan State University.

Nordman is an expert on environmental policy and economics including applications in energy, nature-based solutions and the management of common-pool resources, which are a type of good that is available to all but limited in supply. Here, Nordman answers questions on how the rapid growth of data centers impacts water, electricity and Michigan’s economy.

Why and how do data centers use water?

Data centers are warehouses full of computers processing information. Some data centers are relatively small, perhaps the size of a small building. But the “hyperscale” data centers being built specifically to support artificial intelligence, or AI, can span multiple warehouses on hundreds of acres. The computer chips, especially those designed for processing AI prompts, generate waste heat. The waste heat can be either dissipated into the atmosphere through a cooling system or it can be captured and turned into a resource for a district hot water and steam service.

Some data centers use large amounts of water for cooling. Many of the modern data centers that are being built today use a closed-loop system. Once the water fills up the pipes, they circulate the same water and it’s about 95% efficient — this means they are reusing about 95% of the water. Some facilities, however, use a once-through system in which water is used to cool the chips one time, then disposed of through a wastewater treatment plant. Closed-loop systems use less water than once-though systems but require more electricity to cool the recycled water.

How do data centers become approved in communities?

Like other industrial developments, data centers must conform to locally determined zoning regulations. The data center would move through the community’s planning and zoning process during which residents may offer their input. Utility regulators, like the Michigan Public Service Commission, will typically need to approve an agreement between the hyperscale data center and the electric utility. The utility may charge the data center with special rates to ensure that all the costs of providing service to it are covered. The public may have an opportunity to formally comment on the public service commission’s actions.

How do data centers get their electricity?

Many data centers get their electricity from grid-connected sources owned by electric utilities. In some cases, there is enough electricity on the grid to serve the data centers. In other cases, especially for the hyperscale data centers, the utilities may need to build additional electric generation capacity to serve them.

The challenge is that it may take several years for a utility to build the natural gas, wind or solar generation and connect it to the grid. The data center owners want their electricity as soon as possible. Therefore, some data centers are generating their own electricity on-site, or “behind the meter.” They typically use generators that run on natural gas to do this. However, so many data centers are buying generators that they are in short supply. It may take months or even years for the natural gas generators to be delivered, and the price is rising. Natural gas can also be used to generate electricity using a fuel cell. A fuel cell uses a chemical process to generate electricity rather than burning the natural gas.

Still other data centers are looking to repower decommissioned nuclear power plants and run on that electricity. Some, but not all, data center owners have voluntary corporate commitments to use clean and/or renewable energy for their data centers.

How are data centers impacting electricity prices?

Researchers at the Lawrence Berkeley National Laboratory in California studied the drivers of electricity rate increases over the past several years. They found that large data centers do not always lead to electricity rate increases. In some cases, they were associated with rate stability or even decreases. That is because the fixed costs of generating and delivering electricity are spread out over more kilowatt-hours — many of which are consumed by the data centers.

But when utilities build new generation infrastructure to serve the large data centers, those data centers must bear the costs. Utility regulators may approve special rate categories for data centers and the data centers pay for those additional resources. The regulators may also require the data center owners to lock into long-term contracts to ensure that other customers do not get stuck with the costs if the data center closes down.

How could data centers affect Michigan’s economy and environment?

There may be economic benefits to the host communities for data centers. Hyperscale data centers are large industrial facilities that would pay property taxes. Those property taxes fund community services like fire departments, police departments, roads and local schools. The data center owners may also contribute to improvements in the electric and water utility systems, which could benefit the rest of the community as well.

The state of Michigan offers an economic incentive to locate data centers here in Michigan. A data center owner can obtain a break from state sales and use taxes on the equipment they buy. However, to quality for the tax incentive, the owners must invest at least $250 million, employ at least 30 workers and obtain 90% of their electricity from clean sources within six years of operation.

The biggest environmental impact of the hyperscale data centers is the pollution from their electricity use. One hyperscale data center could use as much electricity as a city like Detroit. If that electricity is generated from fossil fuels, it would increase both conventional air pollutants and greenhouse gas pollution. The federal government expects 90% of the electricity to power data centers to come from natural gas. That would likely reverse the decline in greenhouse gas emissions that the U.S. has experienced over the last 20 years.

By 2040, Michigan law requires the utilities to generate their electricity from 100% clean sources like nuclear, wind, solar, hydropower and batteries or from fossil fuels with carbon capture and storage. That, combined with Michigan’s data center tax incentive requirements stipulating that data centers obtain 90% of their electricity from clean sources within six years, means that these centers in Michigan — and in many other states — will have to work together with utilities to build out a tremendous amount of renewable energy in a relatively short time to comply with the laws.

Additionally, there could be the potential for what we call e-waste, or electronic waste, which are old computers that may have a useful life in another purpose. These computers could be repurposed or recycled. Additionally, data center operations must conform to the host community’s land use regulations, including those for noise.