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HomeMy WebLinkAboutStaff Report 2512-56002.Background and Discussion on Data Centers in Palo Alto (DISCUSSION 6:50PM – 7:50PM) Staff: Kathryn Fortenberry, Management Fellow Presentation Item No. 2. Page 1 of 5 8 7 5 6 Utilities Advisory Commission Staff Report From: Alan Kurotori, Director Utilities Lead Department: Utilities Meeting Date: February 4, 2026 Report #: 2512-5600 TITLE Background and Discussion on Data Centers in Palo Alto RECOMMENDATION Staff recommends that the Utilities Advisory Commission (UAC) discuss general guiding principles for the integration of new data centers and give input on community preferences on the possibility of relatively large new data centers being built in City of Palo Alto Utilities’ (CPAU) service territory. EXECUTIVE SUMMARY Artificial Intelligence (AI) computing requirements are driving a generational increase in electricity demand nationwide. News articles highlight new “hyperscalers” of 100 MW to 500 MW or greater throughout the nation on an almost daily basis. While the City of Palo Alto Utilities (CPAU) is aware of increased interest in local data center development as a municipal electric utility with an average electric load of about 110 MW1, existing infrastructure imposes natural size limitations at least in the short to medium term. Limited commercial and industrial sites as well as community preferences may naturally steer CPAU to focus on a smaller scale of data centers (< 25 MW) over the long term as well. The purpose of this report is to: 1. Provide an overview of the in-City data center impacts on electricity rates and infrastructure in Palo Alto to-date; 2. Provide context on the size of data centers that is best-suited for the City of Palo Alto’s existing electric distribution system; 1 While the average CPAU load is about 100 MW, the CPAU recent peak power was 178 MW in 2023. https://www.paloalto.gov/files/assets/public/v/5/utilities/utilities-at-a-glance-fy-2023_final.pdf Item No. 2. Page 2 of 5 8 7 5 6 3. Provide best practices for managing financial risk from data centers and offering customer protections; 4. Solicit feedback from the UAC on community preferences and considerations when it comes to attracting and integrating data centers. CPAU has integrated a few 5-10 MW data centers recently. Carefully structured contracts have thus far helped to stabilize or lower systemwide rates by spreading fixed costs over a greater volume and helping to fund needed infrastructure replacements. Additional 5-25 MW data centers could lower electric rates if locations are coordinated and risks are contractually managed. For data centers with loads above 25 or so MW, the land required for a dedicated customer substation and distribution system impacts will be much larger. CPAU is seeking feedback on guiding principles when attracting smaller data centers and when considering larger projects to align with the community’s preferences. DISCUSSION Overview Of Data Center Load, Rate, and Environmental Impacts To-Date Located in the heart of Silicon Valley and with a municipal dark fiber loop,3 Palo Alto has had data centers for decades. Over the last three to five years, neighboring electric utilities have seen requests for larger data centers, including clusters up to 2 GW in San Jose,4 which is roughly 200 times the size of the largest data centers in Palo Alto. Companies and developers continue to make relatively large data center inquiries throughout the Bay Area and the state as they investigate the Bay Area and shop around between utilities and cities, and states. CPAU has successfully integrated a few 5-10 MW data centers in the last few years, but anticipates requests for larger data center interconnections. 1. Load impacts to-date Palo Alto’s electric load peaked in 1998 around 1,170 GWh, declined roughly 30% to a low of 822 GWh in 2021 and has been growing steadily to roughly 945 GWh in 2025. Staff forecasts that load will rise steadily through 2045 largely due to data center load growth, but also as building and transportation electrification accelerate. Data centers represent roughly 15% of CPAU‘s electric load today. Data center customers may provide system benefits particularly when loads are relatively steady, do not trigger large capital capacity expansion, and persist for several years or decades. Currently CPAU’s largest data centers are running at a high load 3 City of Palo Alto Utilities Commercial Fiber Information. https://www.paloalto.gov/files/assets/public/v/1/utilities/business/25042-commercial-fiber.pdf 4 “Data centers for AI could nearly triple San Jose's energy use. Who foots the bill?” NBC Bay Area. https://www.nbcbayarea.com/news/local/data-centers-for-ai-san-jose/3994182/ Item No. 2. Page 3 of 5 8 7 5 6 factor7, driven in part by the commercial demand rates which incentivize steadier loads throughout the year. 2. Electricity rate impacts to-date Due to careful coordination on distribution system upgrades, existing CPAU rules and regulations, contract structures, and effective commercial demand charges, CPAU’s data center customers currently have relatively steady usage, lowering (or lowering the rate of increase) rates for all customers. To ensure that data center projects continue to benefit all customers, some principles for long-term risk mitigation from new large data centers include up-front funding from developers, rate structures that return that investment over time to ensure durability of electricity demand, and clear communication of where there is existing available system capacity. These are discussed more in the following section. 3. Environmental impacts to-date CPAU has maintained a commitment to a 100% carbon-neutral electricity supply since 2013, meaning Palo Alto is probably one of the greenest places to site a data center in the United States. Palo Alto’s carbon-neutral electricity has been tracked at hourly resolution since 2020, and CPAU is committed to only carbon-free electricity long-term contracts in its electricity portfolio going forward. The same data center load may greatly differ in its climate implications depending on its location. From an environmental perspective, siting data centers in Palo Alto can be preferable to siting them in less-decarbonized utilities. Available Capacity on the Distribution System for Data Centers Based on the current distribution system, the most practical size for additional data center load is in the range of approximately 5–25 MW. The most straightforward inquiries fall within 2–5 MW or 5–10 MW in particular locations. Loads beyond 10 MW are feasible in specific circumstances with contributions of customer funding and structural rate protections. One location with some available capacity for data centers or other new loads is in the commercial areas of Stanford Research Park. CPAU is working with several companies interested in smaller integrating data centers in the 5-10 MW range within existing office space to communicate existing potential sites. For data centers beyond about 25 MW, the land 7 Load factor in electrical engineering is a ratio measuring the utilization of a system, defined as the average load divided by peak load. Essentially, it quantifies how fully a resource (like an electrical system's capacity) is being used relative to its maximum potential. Definition: The ratio of the average load over a period to the peak load during that same period. Example: A high load factor means consistent energy use, reducing costs. Formula: Load Factor = Average Load / Peak Load (for a given time). https://electrical-engineering-portal.com/demand-factor- diversity-factor-utilization-factor-load-factor Item No. 2. Page 4 of 5 8 7 5 6 required for new substations, and distribution system impacts will be much larger. CPAU is seeking input from the UAC on guiding principles when considering these projects and how they align with the community’s vision for the future and ensuring projects are beneficial to existing ratepayers. Best Practices for Ensuring Data Centers Benefit All Customers 9 There are risks that larger or speculative loads that accelerate major upgrades without secured cost recovery can increase exposure and lead to higher rates if the loads do not come online. 9 Wiser, R., O’Shaughnessy, E., Barbose, G., Cappers, P., & Gorman, W. (2025). Factors influencing recent trends in retail electricity prices in the United States. The Electricity Journal, 38(4), 107516. Item No. 2. Page 5 of 5 8 7 5 6 Feedback Solicited From the UAC: Staff is seeking input from the UAC and the community on general guiding principles for attracting and integrating data centers in order to respect community preferences regarding land required for new electric infrastructure, sustainability, and electricity rates. 1. For integrating data centers on the larger side of what is currently feasible within CPAU’s existing electric system, what concerns does the UAC feel should be addressed proactively with the community? 2. How much does the UAC feel the City of Palo Alto should be prioritizing recruiting right- sized data center customers? 3. Large data centers in the 50 MW or greater range have the opportunity to lower or stabilize electricity rates for customers in Palo Alto, but depending on site location could require extension of distribution overhead and underground infrastructure and other investments. a. What should staff consider when having those discussions about relatively large (50 MW) data centers? b. Would a relatively large data center or data centers align with community values if they did lower or stabilize rates for all customers and provide an increase in electric revenue? At this time, there is no financial impact associated with these recommendations. Staff is working to streamline processes and contracts for data centers which appear to be good fits for our distribution system and community. Staff anticipate continued engagement with the Utilities Advisory Commission, coordination with additional City departments as needed, economic development study impacts, and outreach to affected stakeholders and interested members of the community. The UAC’s discussion of this item will not cause a direct or indirect physical change in the environment, and is therefore not a project subject to review under the California Environmental Quality Act (Public Resources Code sec. 21065). : Alan Kurotori, Director of Utilities Staff: Kathryn Fortenberry, Management Fellow Staff: Lena Perkins, PhD, Utilities Acting Deputy Director, Resource Management February 4, 2026 Background and Discussion on Data Centers in Palo Alto Kathryn Fortenberry, Management Fellow Lena Perkins, PhD, Utilities Acting Deputy Director Resources Utilities Advisory Commission PaloAlto.gov1 TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 ▪Workplan Goal: Discussion of Data Center Competitiveness ▪Background on U.S. Data Center Market ▪Palo Alto Competitiveness in the Data Center Market ▪Current & Future Data Centers in Palo Alto ▪Considerations & Best Practices for Integrating Data Centers ▪Input Sought From UAC Outline 2PaloAlto.gov TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 UAC Workplan Goal Electric System and Supply: Discuss and advise City Council regarding electric system and supply portfolio, including grid modernization, second transmission corridor, power portfolio, smart home technologies, distributed energy resources, and competitiveness of the city for data centers. 3PaloAlto.gov Background on Data Center Market February 4, 2026 4PaloAlto.gov TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 ▪Physical facilities that house computing machines and IT infrastructure, including servers and network equipment, to store, process, and manage digital data. ▪Data centers are essential infrastructure for cloud computing and increasingly, AI workloads. What is a Data Center? 5PaloAlto.gov February 4, 2026 Relative Sizes of Data Centers 100 MW ~100,000- 300,000 sqft 50 MW ~50,000-150,000 sqft 6PaloAlto.gov 25 MW ~25,000-75,000 sqft TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 1. Self-Perform / Enterprise ▪Organization owns and controls the servers and related infrastructure and may own and operate the facility. 2. Multitenant / Build-to-Suit ▪A facility owner or developer provides the building and leases capacity to one or more tenants, including custom build -to-suit deployments. → Edge Case Applications ▪Low-latency applications from autonomous vehicles to augmented reality and virtual reality require computing resources closer to end users. ▪Palo Alto’s niche could be micro and modular edge facilities for these low-latency applications Two Main Types of Data Centers 7PaloAlto.gov TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 Data Center Trends: growth appears to be a once in a generation shift ▪U.S. data center electricity demand rising quickly & expected to continue ▪By 2030, data centers are projected to account for roughly 7%–14% of total U.S. electricity use. ▪Primary drivers are rapid growth in cloud services and AI computing. 8PaloAlto.gov February 4, 2026 Primary U.S. Data Center Markets 9PaloAlto.gov *H1 represents first half CY 2025 ▪Silicon Valley is a data center hot spot on a national scale. ▪AI tenants are reshaping real estate market via preleasing ▪AI is driving U.S. electricity growth, making up ~10%-20% of data center power ▪AI workloads ~10x more energy-intensive than traditional computing https://www.cbre.ch/insights/reports/north -america-data-center-trends-h1-2025 February 4, 2026 What are U.S. Data Centers Looking for? PaloAlto.gov ▪Access to Fiber/Interconnection ▪Access to Water for Industrial Purposes ▪Access to Clean, Reliable, Affordable Energy ▪Climate and Risk of Natural Disaster ▪Land Availability and Cost ▪Tax and Regulatory Climate ▪Ownership/Occupancy Costs ▪Time to Market ▪Access to Skilled Construction and Technology Workforce Data Center Coalition, "Data Centers: Powering the Internet and Our Modern Economy" 10 TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 Why are Data Centers interested in Palo Alto? ▪Low-cost electricity:CPAU electricity rates 50% lower than PG&E ▪Green electricity: CPAU’s 100% carbon-free electric portfolio ▪Fiber / interconnection :Local dark fiber and Internet Exchange ▪Clients and talent nearby:Core Silicon Valley location; proximity to Stanford/tech workforce ▪Essential for edge -case data centers, which need low-latency & proximity to start-ups, researchers &end users ▪Entitlement certainty :Clear, published development review process &standards ▪Commercial & industrial sites:R&D, light industrial -zoned locations ▪Mild, dry climate & few natural disasters 11PaloAlto.gov Current and Future Data Centers in Palo Alto & Palo Alto Competitiveness February 4, 2026 12PaloAlto.gov February 4, 2026 Data centers in Palo Alto for decades ▪Data centers in Palo Alto since the 1990s ▪Most data centers have very flat loads ▪Expected data center growth is modest, with some highly speculative inquiries Palo Alto electric sales would be ~10% less without recent data centers ▪To-date data centers have stabilized City electric sales Rates would be ~ 5% higher without recently added data centers Current & Forecasted Data Center Impacts in Palo Alto https://efiling.energy.ca.gov/GetDocument.aspx?tn=264915#:~:text=Pag e%203,CEC%202023 Palo Alto Staff July 2025 Presentation to the CEC 13PaloAlto.gov TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 Current & Forecasted Data Center Impacts in Palo Alto https://efiling.energy.ca.gov/GetDocument.aspx?tn=264915#:~:text=Page%203,CEC%202023 July 2025 Presentation to the CEC ▪~ 50% of 2025-2035 of City’s projected load growth is from data centers ▪~ 10% projected increase in Utility peak load due to data center load growth by 2035 ▪~14 MW in data center load growth is anticipated by 2035 ▪~10 MW of this data center load growth already online 14PaloAlto.gov February 4, 2026 To-date data centers have stabilized electric sales ▪Electric sales declined from roughly 1998 to 2021 ▪Rebound since 2021 mostly due to Covid recovery & data center growth ▪About ½ of forecasted growth is from data centers Data centers ~15% of current electric sales ▪Several 1-5 MW new data centers likely ▪Palo Alto might be competitive for 50MW or smaller data centers One “Edge-Case” 25 MW data center represents a large opportunity for Palo Alto ▪Palo Alto has 110 MW average & 170 MW peak ▪One 25 MW data center ≈ 20% higher electric sales Palo Alto Context: Data center growth to-date has been modest Actual Forecast 15PaloAlto.gov February 4, 2026 Santa Clara pursued data centers since the 1990’s- generating revenues for City & Utility ▪Santa Clara’s increase in electricity sales has been especially notable since 2000 & forecasted to continue. ▪In 2025 Santa Clara sold ~5x the volume of electricity of Palo Alto ▪By 2035 Santa Clara electricity sales forecasted to be ~10x greater than Palo Alto’s electricity sales 16PaloAlto.gov Actual Forecast TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 Data centers making major economic contributions to Santa Clara Data centers helping to drive Palo Alto’s economy as well. ▪Additional data centers could make large economic contributions to Palo Alto’s economy. In Santa Clara, Silicon Valley Power (SVP) contributes 13%of total City budget ▪Each additional MW adds roughly $56,000 to the Santa Clara General Fund every year: ▪SVP transfer to the general fund, ▪property taxes, ▪sales & use taxes, and ▪business use taxes. Since 2019 data centers have brought in $6.5M for Affordable Housing in Santa Clara ▪Palo Alto’s Municipal Code (16.65.040) has similar provisions to generate revenues for Affordable Housing. Additionally, SVP requires that data centers pay developer fees ▪For example,$25M for a 50MW data center to expand the electric system to interconnect. 17PaloAlto.gov TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 Supporting innovation ▪Support global technology leaders ▪Enable AI, mobility tech stack, advanced manufacturing, cloud computing, & innovation ecosystems ▪Reinforce California’s leadership in high-value, innovation -driven industries Broader economic competitiveness ▪Major capital investment and support broad ecosystems of suppliers, service providers, and related industries ▪Each data center job supports more than six jobs in local economy Drive economic growth and revenues to the City ▪Higher electric utility sales leading to higher utility users’ tax ▪Developers fee, property taxes, sales & use tax, and business use tax ▪Potentially drive lower electric rates which also stimulates the local economy Future data centers: Why would Palo Alto want more data centers? 18PaloAlto.gov Considerations & Best Practices for Integrating Data Centers February 4, 2026 19PaloAlto.gov February 4, 2026 https://www.paloalto.gov/files/assets/public/v/4/planning -amp-development-services/3.- comprehensive -plan/comprehensive -plan/full-comp-plan-2030_with-dec19_22-amendments.pdf Land Use Regulations & Considerations •Data centers currently allowed in Light Industrial & Research/Office Park •Staff recommend Palo Alto develop Conditional Use Permit rules specific for data centers 20PaloAlto.gov How power flows in existing Palo Alto electric system: ▪1 Receiving transmission substation ▪17 miles of 60kV power lines ▪9 Substations ▪317 miles of distribution lines (64% underground) New large data centers could require and fund: ▪Substation expansions ▪Dedicated substations ▪60kV or 12 kV Line extensions ▪Developer fees for capital projects City of Palo Alto Utilities Electric System https://www.electricaltechnology.org/wp-content/uploads/2021/10/Classification -of-Electric-Power-Distribution- Network-Systems-768x410.png TITLE 40 FONT BOLD Subtitle 32 font Dedicated Substation for 50 MW Data Center 50 MW Data Center February 4, 2026 21PaloAlto.gov TITLE 40 FONT BOLD Subtitle 32 font Most competitive for less than 50 MW data centers: ▪25 MW likely need substation expansion ▪Data centers for researchers & start -ups, requiring low-latency and IP protection ▪Data centers seeking green electricity Considerations 50 MW and larger data centers: ▪Given the scale of the work going on for grid modernization, CPAU less likely to compete favorably for these ▪Dedicated substation for 50MW data centers and larger Most likely development areas: ▪Stanford Research Park within existing spaces ▪Other commercial & industrial locations (e.g. East Meadow Circle area) ▪Adjacent to Palo Alto Utilities’ 60 kV sub -transmission February 4, 2026 Summary of Palo Alto Competitive Niche 22PaloAlto.gov TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 Clarity from City & Utilities on expectations ▪Utilities interconnection timelines, processes and fees ▪Conditional Use Permit rules on setbacks, architectural standards, etc… Developer fees for electric grid expansion ▪For dedicated substations, substation expansions, dedicated new 60kV & 12kV lines Careful power supply contracts and rates ▪Take or pay contracts ▪Capacity reservations ▪Appropriate demand charges to pass on grid impacts Agreements to participate in flexible demand response as a grid asset ▪Although data centers want reliable power, increasing potential with 1 -4 hour “flexible demand response” turning them into “virtual power plants” during times of California grid stress Best practices for Utilities integration 23PaloAlto.gov Input Sought from UAC PaloAlto.govFebruary 4, 2026 24 TITLE 40 FONT BOLD Subtitle 32 font February 4, 2026 Input sought from UAC UAC input on integrating or attracting data centers: ▪Thoughts on pursuing new data centers ▪Possible actions that City and Utilities staff could consider when trying to attract potential data centers ▪Staff’s recommendation City explore Conditional Use Permit rules for future data centers (e.g. required setbacks, architectural standards, etc.…) UAC considerations for staff when integrating: ▪New data centers in 5 -50MW ▪New data centers in the 50 -100MW range 25PaloAlto.gov For further questions, please contact: Alan Kurotori, Utilities Director: alan.kurotori@paloalto.gov Terry Crowley, PE, Utilities Chief Operating Officer: terry.crowley@paloalto.gov Lena Perkins, PhD, Utilities Acting Deputy Director, Resources: lena.perkins@paloalto.gov Catherine Elvert, Utilities Communication Manager: catherine.elvert@paloalto.gov February 4, 2026 References 27PaloAlto.gov ▪City of Palo Alto. “Background and Discussion on Data Centers in Palo Alto” (Staff Report).https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?id=10250&meet ingTemplateType=2&compiledMeetingDocumentId=18399. ▪The Washington Post. “Supersized data centers are coming. See how they will transform America.” (Graphic: “Power use by U.S. data centers is growing exponentially, with large forecast uncertainty”).https://www.washingtonpost.com/climate-environment/interactive/2025/giant- data-centers-energy-pollution/. ▪CBRE. “North America Data Center Trends, H1 2025.”https://www.cbre.ch/insights/reports/north -america-data-center-trends-h1-2025. ▪Lawrence Berkeley National Laboratory (LBNL). “2024 United States Data Center Energy Usage Report.”https://escholarship.org/uc/item/32d6m0d1. ▪Data Center Coalition. “Data Centers: Powering the Internet and Our Modern Economy.”https://santaclara.legistar.com/View.ashx?M=F&ID=14226540&GUID=C3D7AAC0- 3756-44EE-ABC2-EB42359C7B78. ▪California Energy Commission (CEC). “Palo Alto Staff July 2025 Presentation to the CEC.”https://efiling.energy.ca.gov/GetDocument.aspx?tn=264915. February 4, 2026 References 28PaloAlto.gov ▪The Silicon Valley Voice.“Data Centers: Santa Clara’s Third Largest General Fund Revenue Generator.”https://www.svvoice.com/data-centers-santa-claras-third-largest-general-fund- revenue-generator/. ▪Palo Alto Municipal Code § 16.65.040 — “Basic requirement - mixed use, nonresidential and residential rental projects.” https://codelibrary.amlegal.com/codes/paloalto/latest/paloalto_ca/0-0-0-75427?utm. ▪City of Palo Alto.Palo Alto Comprehensive Plan 2030 (with December 19, 2022 amendments).https://www.paloalto.gov/files/assets/public/v/4/planning -amp-development- services/3.-comprehensive-plan/comprehensive-plan/full-comp-plan-2030_with-dec19_22- amendments.pdf. ▪ElectricalTechnology.org. “Classification of Electric Power Distribution Network Systems” (image).https://www.electricaltechnology.org/wp-content/uploads/2021/10/Classification -of- Electric-Power-Distribution-Network-Systems-768x410.png.