California is known for being the center of the tech industry, including artificial intelligence. Yet when it comes to tech companies deciding where to locate the data centers that are powering the AI boom, California isn’t the top choice. More data centers are located in states including Texas and Virginia than in the Golden State. And even that may be too much for California lawmakers, who have introduced legislation to restrict the growth of data centers in the state.
There are a lot of reasons why a tech company might choose to locate their data center somewhere other than California. Taxes are high and the state’s social policies are not to everyone’s taste. But I suspect a major reason has to do with state policies that make it harder to build and permit energy resources. Data centers are energy hungry; a large data center can consume more electricity than a small city. California has made it difficult to build enough generation to meet that supply, which has resulted in high electricity prices and an unwelcoming environment for new businesses.
Take nuclear power, for example. Data center companies tend to love nuclear power because it provides 24/7 reliable power with a clean emissions profile. Demand from tech companies is leading to a mini-renaissance in nuclear generation. Microsoft recently inked a deal to reopen the shuttered Three Mile Island nuclear reactor to provide power for its data centers. California, however, is one of 12 states that maintains a moratorium on nuclear power, so companies interested in investing in that sector must look elsewhere.
Those looking for other options, however, will find little love elsewhere. It goes without saying that California’s government is anti-oil. Permitting for new oil wells in California has gone from 2664 in 2019 to only 73 last year. Oil isn’t typically used to make electricity, but natural gas is, and there has been a parallel reluctance of the state to permit new oil and gas pipelines. California’s grid operators have publicly acknowledged that not enough natural gas pipelines are available in the state, yet building continues to stall.
Newer energy technologies, such as geothermal, also face obstacles in California. Geothermal energy pulls heat from the Earth’s core and uses it to produce power. Geothermal potential in the United States is concentrated in the West, including California. But getting the necessary permits for such projects can be a headache. Geothermal projects in California can require separate permits from as many as 11 different state and local agencies in addition to whatever federal or other processes that are required.
And while an exemption in state law allows bigger projects to take advantage of a streamlined process, the little guy cannot. All this rigmarole increases costs to consumers, with one analysis finding that electricity prices were 4% to 11% higher for projects with lengthy permitting timelines than for projects where permitting was completed quicker.
Even energy sources that the state tries to promote, like wind and solar, can face challenges. California policy puts the thumb on the scale heavily for wind and solar, with a variety of subsidies and mandates. Despite this, California trails Texas in installed capacity for wind and for utility scale solar power. This isn’t because Texas has even more lavish renewable subsidies than California (it definitely does not). Rather, Texas is a state where it’s easy to build power and connect it to the grid, so all sorts of fuel types can compete and thrive.
Add all this up, and you can start to see why tech companies might look to greener pastures.
These days it seems like everyone has an opinion on which types of energy they like and which types they hate. But when every form of energy has its own dedicated group of haters, it becomes hard to build anything. And that’s bad news for the state long term. Tech companies want to build great things. If California wants to continue to thrive economically and as a tech center, it needs to let people build the energy projects to power it.
Josiah Neeley is resident senior fellow in energy for the R Street Institute.