Standardize Data Center Development to Benefit Colorado Communities
Data center development is accelerating around the world, presenting both challenges and opportunities to communities everywhere. States that develop detailed policies to ensure sustainable development of data centers may maximize the potential to deliver benefits for their communities, including enhanced economic competitiveness, reduced electricity rates, improved flexibility and grid resilience, and more. Given the speed of data center development, there is particular urgency to address the issue now, as states that fail to develop comprehensive policies will either miss the opportunity by banning data centers or experience development that does not appropriately benefit communities. As moratoriums on data center development continue across the state, there is a growing need for Colorado legislators to craft a new bill for data centers that addresses both economic development and environmental sustainability. By mandating data centers that are clean, flexible, efficient, and beneficial, the state can bring opportunities to communities across Colorado and enhance our overall infrastructure.
Challenge and Opportunity
The main challenge with data center development is the speed at which this development is occurring, with power demand for data centers expected to double by 2027 in the U.S. alone. The pace of development is putting pressure on policymakers, utilities, regulators, grid operators, and communities to quickly develop useful policies for responsible infrastructure development. This challenge is exacerbated by other factors, including a currently strained grid, existing regulatory frameworks, potentially speculative overbuild, and interconnection queue backlogs (i.e., severe delays in permissions for grid connection) causing over twice as much power potentially available to connect as is currently on the grid. Connecting more power to the grid is important, but it is also essential to avoid speculative overbuild that can increase costs for ratepayers.
Some Colorado communities are moving towards local moratoriums on data center development (e.g., Boulder, Denver, etc). This is a temporary approach that risks missing the opportunity to maximize the benefits of the digital infrastructure buildout for Colorado’s future. For example, rural communities facing economic challenges due to retiring coal plants or other declines in local job opportunities could benefit significantly from transforming into digital development hubs and energy investment zones, which makes this opportunity ripe for the state, as the Office for Economic Development & International Trade’s (OEDIT) and the Office of Just Transition (OJT) is already investing in supporting communities that have formally relied on coal mines and coal-fired power plants to find new jobs and sources of property tax revenues.
Charting a path for sustainable data center development now is critical, as the number of planned projects continues to increase in Colorado, with 10 new data centers planned. When designed sustainably and with meaningful community participation, data centers could provide substantial benefits to communities across the state, such as enhanced economic competitiveness, additional tax revenue, reduced electricity rates, and improved grid resilience. This is especially urgent in the wake of the 2026 Colorado legislative session, after two bills (i.e., HB 26-1030 and SB26-102) attempting to address data centers did not advance. These proposed bills framed the policy challenge as a binary choice between environmental sustainability and economic development. Yet, this is a false dichotomy, as policies can be established to develop data centers that are both sustainable and economically beneficial.
Learning from data center policies in other states, we are poised to craft a new bill that comprehensively addresses the needs of communities across Colorado. The new Michigan Affordability and Responsible Growth Pledge provides a model for garnering commitments from companies for investing in the electric grid, using clean energy, hiring local talent, protecting natural resources, and fronting the cost for construction and operation. The New Jersey Data Center Fair Share Act serves as a model to ensure data centers pay their fair share for energy, rather than pushing the costs onto New Jersey residents. As moratoriums on data center development continue across the state, there is a growing need for Colorado legislators to pass legislation on data centers that addresses both economic development and environmental sustainability. Industry partners will be eager for guidance on data center development, ensuring social license to operate. Through a new bill, Colorado could develop regional technology hubs, provide improved infrastructure for the future of clean energy and grid resilience, enable emerging industries based on AI and quantum computing, and bring community benefits across the state.
Plan of Action
This comprehensive set of policies ensures that data center development in Colorado is sustainable, timely, and beneficial to communities across the state. To achieve these benefits, data center design standards should be mandated through legislation to include three requirements:
Recommendation 1. A Requirement to “Bring Your Own New Clean Energy”
Increasingly known in the energy industry by the acronym BYONCE, this policy requires new data centers to build clean energy solutions to support their data center load at a minimum, or additional load beyond their data center needs to benefit the entire grid. Fossil energy solutions, including coal and gas, are increasingly less cost-effective and slower to build (e.g., gas turbine supply chain delays are up to seven years). This policy has been proposed in New York by EarthJustice, Illinois by Union of Concerned Scientists, and Georgia by the Clean Energy Buyers Association.
The Colorado Legislature should require all new data centers (i.e., not existing data centers or those in the development pipeline) to develop and be powered by 100% clean energy. The energy produced must provide the full data center load at a minimum before data center construction begins. Clean energy solutions should be defined as zero-emissions energy, including solar, wind, hydropower, geothermal, and nuclear energy. While solar and wind solutions require almost no water to operate and are generally the most cost-effective and fastest option, the right mix of clean energy solutions will depend on siting solutions for the specific location.
The clean energy solutions must have a grid connection to ensure that excess power benefits the broader system, and they must be located within sufficient proximity of the data center to calculate that the energy produced is powering the facility (i.e., serving the data center load). Georgia’s Bring Your Own Clean Resources plan for large loads and Virginia’s clean energy rules for data centers provide models for how Colorado can credit clean energy production. There are examples of data centers fulfilling these BYONCE requirements in Minnesota and Texas. Google’s Pine IslandMinnesota data center can serve as a model for Colorado, as it has a similar market structure and uses the same utility provider, Xcel Energy.
Enforcement of these clean energy requirements should be managed by Colorado utilities and the Colorado Public Utilities Commission (CO PUC). While the CO PUC regulates Xcel and Black Hills, it does not have authority over Colorado’s municipal utilities or the electric cooperatives. Within the current governance structure, these utilities will need to negotiate directly with developers to ensure all new data centers are powered by 100% clean energy before construction begins. In Colorado, Governor Polis’s recent executive order on permitting reform should help to accelerate the development process. Finally, the Large Load Tariff recently proposed by Xcel Energy presents a model for utilities across the state to ensure compliance with clean energy mandates, including defining load requirements and the efficiency and flexibility requirements described next.
Recommendation 2. Mandate Flexibility and Efficiency
Grid Flexibility. New data centers must be required to operate efficiently and provide load flexibility to increase grid resilience through a combination of storage and demand response programs. Storage options should include traditional battery storage, pumped storage hydro, or other emerging technologies (e.g., EnergyDome, Form Energy). Diesel generators should not be permitted due to cost, noise, and air quality concerns. Given that demand response options depend on the workloads running at a specific site, each Colorado utility must negotiate enforceable demand response terms (i.e., timing and amount) directly with data centers. Data centers may also bring their own flexibility solutions to provide more capacity (e.g., Virtual Power Plant (VPP) capabilities).
Energy Efficiency. New data centers should be required to meet energy-efficient design standards defined by the Colorado Energy Office. Two key developments will support more energy-efficient data centers: (1) improved data center designs have significantly lowered energy use per compute across workloads, and (2) inference workloads are now increasing faster than training workloads, as many models have already been trained and updates are less energy intensive. For Colorado, this means that new data center projects should be designed as smaller, modular facilities that do not cause as much disruption to the community and reduce energy use. Colorado should also incentivize new data center designs to include new, efficient technologies as standard design features.
Water Efficiency. To prevent data center growth from undermining resource adequacy and reliability, Colorado should require a Water Capacity Neutral approach that allows local communities to retain limited available water capacity for future development. This should be achieved through the use of newer closed-loop refrigerant systems and Cold Underground Thermal Energy Storage (Cold UTES) being developed at Colorado’s National Laboratory of the Rockies use little to no water, compared with older evaporative cooling techniques.
Waste Heat Reuse. Where practical, Colorado should incentivize data centers to repurpose waste heat for beneficial uses, such as indoor agriculture. For example, several countries in Europe are developing requirements for new data centers to use up to 20% of waste heat for beneficial use, which also helps resolve the issue of data centers as emerging urban thermal hazards.
Recommendation 3. Require the Negotiation of Legally Enforceable Community Benefits Agreements
All new data centers should be required to provide direct community benefits. This could include upgrading existing structures in the community with resources, such as batteries, solar panels, heat pumps, EV charging, or new green spaces like public parks. There are examples in other states that Colorado can learn from in defining community benefit agreements. For example, Google announced a $30m Community Impact Fund in Texas and a $25m fund in Arkansas. Meta has established a watershed restoration program in New Mexico. Microsoft has created a Datacenter Academy, focused on workforce development to support communities in developing careers in digital infrastructure. Amazon is funding $300m in grid improvements.
While these community benefits funds and programs provide ideas for what could be developed in Colorado, the commitments are voluntary. Community benefit agreements should be mandatory conditions of data center approval, determined by the local community, and must be defined in measurable terms (e.g., minimum investment thresholds as a percentage of capital investment). These agreements can be structured to provide long-term, local prosperity.
In addition to the community-determined benefits, the Colorado Energy Office, Colorado utilities, and the Colorado Public Utilities Commission should require data centers and other large loads to pay for any system upgrades they require, such as grid-enhancing technologies to improve utilization of existing infrastructure. The Colorado Energy Office, Colorado utilities, and the Colorado Public Utilities Commission will need to determine the appropriate level of data center responsibility for system upgrades given that rates are driven by a complicated variety of factors.
Combining these community benefits with the overall economic development opportunities, data centers can lead to concentrations of technological innovation and future growth. Colorado residents stand to benefit from the buildout of this digital infrastructure with legally enforceable protections in place before construction is allowed to begin.
Data centers fulfilling all of these requirements should be approved for development, while those that fail to meet these requirements should be denied approval by local zoning authorities or local governments. Setting and enforcing each of these requirements involves new capacities that the CO PUC may not have available. State policymakers should ensure that the CO PUC is well-resourced and empowered to conduct this work.
Conclusion
As data center development is accelerating around the world, states that seize the opportunity and ensure sustainable development will maximize economic benefits for their communities. Colorado is uniquely positioned at this time with the upcoming 2026 midterm elections to create the leading sustainable data center development policy across the country and serve as a model for other states and communities. When done correctly, sustainable data center development can help support and accelerate the transition to a newer, cleaner, more reliable, resilient, and affordable energy system. If this solution is not pursued, we will either miss the opportunity entirely, or development will occur in a way that does not benefit our Colorado communities.
The primary source of water consumption for data centers is generating power with thermal plants, another reason why wind and solar are preferable. For cooling on site, modern systems use up to 90% less water than they did two decades ago. Newer closed-loop refrigerant systems and Cold Underground Thermal Energy Storage (Cold UTES) use significantly less water compared with older evaporative cooling techniques. Under this policy, data centers will be mandated to use cooling systems involving minimal water use and required to provide the clean energy needed to power these systems.
Data centers should only be built on land that the community approves, which may be land unsuitable for other uses. For example, retiring coal plants could serve as excellent locations for data centers, especially as they include an existing connection to the grid. In some cases, depending on the workload being supported, the data centers may be built in smaller, more modular facilities that can be installed within existing industrial infrastructure.
One of the primary threats that data center developers now face is a reduced social license to operate, providing strong motivation to build projects in a way that communities will accept. Hyperscalers are already converging on these types of requirements for data center systems and joining consensus-based coalitions to do so.
There are many resources for Colorado communities to learn more about data center design and flexibility, notably this research from Tyler Norris at Google/Duke University, from Kyri Baker at Google/CU Boulder, and Data Center Flexibility: Coordinating America’s Digital and Energy Infrastructure: A Framework for Delivering the Data Center Flexibility Ecosystem by Peter Hans Hirschboeck, Lisa Nguyen, and Alex Hall can serve as a comprehensive guide for how to design data centers that benefit communities and the grid. Resources like this are being incorporated by OEDIT and other state agencies working to develop further guidance for communities in Colorado.
By mandating data centers that are clean, flexible, efficient, and beneficial, Colorado can bring opportunities to communities and enhance its overall infrastructure.
This report serves as a landscape assessment and toolbox from which local governments can negotiate an informed position when it comes to the levers available to them and includes a first-of-its kind analysis of eight executed community benefits agreements.
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