A proposed tax break for a new data center in north Denver is facing questions from city leaders concerned about the project’s water and energy needs in a city trying to reduce carbon emissions and conserve water amid a 20-year drought.

Denver-based CoreSite plans to build a new data center in the Elyria-Swansea neighborhood to provide computing services to companies in the metro area and beyond. Company leaders negotiated a tentative multimillion-dollar tax return agreement with the city’s economic development office, but still need the City Council’s approval. The deal would return to CoreSite half of all sales and use taxes associated with the new data center, up to $9 million.

But some council members hesitated to approve the tax break for a center that will use a significant amount of water and power at a time when Colorado’s water resources are shrinking and the city is already behind its goals to eliminate greenhouse gas emissions by 2040.

Designs for the full facility are not yet final, but a company spokeswoman said the data center’s maximum power needs will range between 65 and 75 megawatts. A megawatt of electricity can power approximately 1,100 homes, according to Xcel Energy, so the center when running at max capacity would be drawing the same amount of power as up to 82,500 homes. A company official said a typical CoreSite data center draws less than 50% of full capacity and has never had customers use a facility’s full capacity.

The final construction could also use a maximum of approximately 805,000 gallons of water a day to cool its systems, the same as 16,100 Denverites’ average daily indoor water use. The facility’s average daily use of water, too, would be less than the maximums, company officials said.

The new construction comes at a time when city officials are implementing new regulations mandating owners of large commercial and industrial buildings to install more efficient heat, cooling and water systems. Denver Water, too, is asking individuals to conserve water by limiting when people can water outdoors and working to replace thirsty turf with native plants more adapted to Denver’s arid climate.

“Overall, I am very concerned about a tax incentive for a company that is using some of our most valuable resources,” Councilwoman Flor Alvidrez said during an August council committee meeting. “I am concerned about water usage and the impact on the grid.”

Increasing scrutiny of data centers’ water and power use is not unique to Denver.

Data centers provide the infrastructure needed for cloud storage and streaming, businesses’ computing needs as well as the growing use of artificial intelligence. Across the country, governments and businesses try to balance the infrastructure needs of an increasingly digital society with demands to reduce the emissions fueling globe-altering climate change.

The dialogue is particularly intense in the drought-stricken West, where already-stretched and highly-contentious water supplies are becoming more scarce due to climate change and the large amount of water needed to cool data centers can spark opposition.

“Increasingly, as data centers pop up, the pressure on the water systems can’t be ignored,” said Sudeep Pasricha, a Colorado State University professor who studies data center sustainability.

But the new CoreSite facility will provide companies a more efficient way to access data services that are in high demand, CEO Juan Font said. The new facility will use water and power much more efficiently than the company’s two older facilities and in-house computing solutions companies might otherwise use.

“It is an essential infrastructure,” Font said. “Our lives are completely digital, there’s no way to go around that. But we do everything we can to minimize environmental impact.”

The data center

CoreSite in 2022 bought a former concrete factory at 5050 Race St. for the new data center and plans to develop it over the coming decade into a three-building, 600,000-square-foot data campus. Companies will then pay to use the facility for their computing needs instead of housing servers in their own buildings.

CoreSite owns 28 data centers across the U.S., including two smaller facilities in downtown Denver that total 34,000 square feet. It’s important for the company’s centers to be in the same geographic area as their clients because it reduces lag time and gives companies more convenient access to their equipment, Font said.

“We use a lot of power but the intent is to have people move out of those corporate environments into a much more efficient environment and share resources,” he said.

CoreSite will purchase the power it needs from Xcel Energy and will negotiate a special rate with the utility, company representatives said during the Aug. 28 meeting of the City Council’s Business, Arts, Workforce Climate and Aviation Services Committee. In Colorado last year, 42% of the utility’s power came from carbon-free sources, like wind and solar. Coal and natural gas plants provided the remaining 58%, according to Xcel.

While the new facility’s power needs will max out between 65 and 75 megawatts, the plant will on average be drawing about 35 megawatts, Font said.

About 80% of the water that will go through the system will be lost to evaporation, Font said. What remains can be chemically treated and reused.

The city’s Economic Development and Opportunity office estimated that the new data center could generate more than $200 million in local tax revenue from the project and its customers over 20 years. The project would be an important addition to the city’s tax base and create 175 construction jobs while being built and 75 long-term jobs to operate the facility, chief business development officer Deborah Cameron said.

“We refer to this kind of project as a unicorn project as it ticks multiple boxes in terms of our economic development goals,” Cameron said, noting it will create jobs, establish critical infrastructure and rehabilitate an abandoned industrial site.

The type of tax incentive proposed with CoreSite is rare, Cameron said. The last project the city entered into a similar agreement with was the 2020 development of a retail center anchored by Costco in northeast Denver.

Tax breaks necessary for growing industry?

Data centers have existed for decades but the need for their computing power has increased substantially as Americans increasingly use artificial intelligence, cloud-based services and cryptocurrency, said Pasricha, the CSU professor. Streaming Netflix, monitoring a doorbell camera and hopping on a Zoom call all rely on data centers.

CoreSite avoids dealing with cryptocurrency companies but some of its clients are starting to use artificial intelligence, Font said. The company is building flexibility into its design to handle AI workloads, which require more power because of the large amount of data and computation involved. CoreSite’s facility will not be used to train AI models, an activity that requires a huge amount of data and electricity.

The market for colocation data centers — like CoreSite’s proposed Denver facility — has doubled in the last four years, according to an analysis by global real estate company Jones Lang LaSalle. Construction of new data centers has increased more than sevenfold in the last two years.

The data center market in Denver and Colorado Springs “exhibits significant growth potential” due to the increasing number of tech companies and artificial intelligence users in the area, according to the report.

Colorado is home to 56 data centers, all located along the Front Range. The vast majority of the facilities are in metro Denver, including a massive 177-megawatt hyperscale facility under construction by QTS Realty Trust in Aurora.

Denver council members questioned whether a tax break was necessary for the CoreSite project — a conversation also ongoing at the state level.

Colorado lawmakers have considered multiple incentives to lure data centers to the state, though the most recent attempts failed to become law.

A law passed in 2018 allows electric utilities to sell power to certain commercial and industrial users at a discounted rate in order to entice them to the state — a perk that QTS Realty Trust is leveraging for its Aurora project.

Lawmakers in the 2023 and 2024 legislative sessions considered, but did not pass, bills that would have granted data center companies millions in tax breaks on the purchase of construction materials and equipment. Environmental groups like Conservation Colorado opposed the bills.

Because CoreSite’s building site is already zoned industrial, the company does not need City Council approval to build its data center. It does, however, need the council to sign off on the tax return deal.

The Business, Arts, Workforce, Climate and Aviation Services Committee twice postponed a decision on the tax return deal. It has not yet been scheduled for another hearing before the committee. If passed out of committee, it would then go to a vote from the full council.

Font said he would not speculate whether CoreSite would continue with the new center if the City Council did not approve the tax return deal.

CoreSite wants to expand in Denver because of a growing customer base here and it will allow the company to provide faster connectivity to customers in the metro area, Font said. Data centers provide essential infrastructure for the city and can help attract businesses here, he said.

“Any time you use your smartphone, stream video content or look at pictures — all of that uses data center networks,” Font said. “Without a CoreSite, you couldn’t have video conferencing.”

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