Behind-the-Meter Power Solutions for Data Centers: Legal and Practical Considerations
Introduction
As data center power demands reach hundreds of megawatts or even gigawatts, particularly driven by AI applications, traditional power delivery models are facing significant constraints. Behind-the-meter (BTM) or bring-your-own-power (BYOP) strategies are increasingly attractive solutions for data center developers facing power availability challenges. This article examines the key considerations when implementing these alternative power approaches.
Power Source Options
Data center operators must balance commitments to clean energy with the practical need for 99.995% uptime and 100% availability. Several options present different advantages and challenges:
Renewable Energy
While many data center developers have made commitments to renewable energy sources, practical limitations exist:
- Large-scale projects require substantial acreage for solar or wind installations
- Significant battery storage needs to maintain 24/7/365 operations
- Intermittent nature of solar and wind creates reliability challenges
Nuclear Power
Nuclear power offers several advantages for data centers:
- Low carbon emissions
- Capacity to meet gigawatt-level power demands
- Smaller physical footprint compared to renewables
- Emerging Small Modular Reactor (SMR) technology shows promise
However, nuclear power introduces:
- Complex federal regulatory requirements
- Higher construction and operating costs
- Longer development timelines
Natural Gas
Currently the predominant choice for BTM power projects:
- Familiar technology with established infrastructure
- Lower carbon emissions than coal or oil
- Balance of reliability and environmental impact
- Sufficient power generation capacity without extensive land requirements
- Fewer regulatory hurdles than nuclear power
Regulatory Framework
BTM power solutions face varying regulatory landscapes:
Federal Regulation
- Nuclear power: Subject to Nuclear Regulatory Commission and Federal Energy Regulatory Commission (FERC) oversight
- Natural gas transmission: FERC regulation applies, though existing transmission infrastructure may mitigate some concerns
Case Study: The ongoing Talen Energy and AWS dispute illustrates regulatory challenges. In November, FERC denied plans for AWS to utilize on-site power from Talen's Susquehanna nuclear plant. Despite an appeal, FERC issued another rejection on April 10, 2025, creating uncertainty for the project.
State Regulation
Regulatory environments vary significantly by state:
- Some jurisdictions are creating favorable frameworks for BTM solutions
- Recent example: On May 15, 2025, Ohio's Substitute House Bill 15 expanded opportunities for large customers to self-generate or partner for BTM power without violating exclusive utility territory provisions
Each state has unique approval processes that can extend from several months to over a year, requiring careful planning and engagement with regulatory authorities.
Development Considerations
BTM facilities create additional complexities in the development process:
- Environmental permitting: Projects may require "major source" (Title V) air permits
- Timeline misalignment: Regulatory approvals for power generation typically take longer than data center building permits
- Construction sequencing challenges: Developers may need to begin data center construction before securing BTM power permits
These factors necessitate careful project planning and risk management strategies.
Tax Implications
The ownership structure of BTM power facilities can significantly impact tax treatment:
- Utility personal property taxes may apply differently depending on ownership structure
- Data center ownership of BTM facilities may receive different tax treatment than third-party ownership
- Lease structure matters: Capital leases (implying ownership) versus operating leases may affect tax exemption eligibility
- Local incentives may provide partial or complete exemptions in some jurisdictions
Conclusion
As power constraints intensify and data center demands grow, BTM/BYOP solutions offer viable alternatives to traditional utility service. However, successful implementation requires comprehensive understanding of the regulatory, development, and tax considerations.
These projects are best approached as two distinct but interconnected initiatives rather than a single project. This perspective allows for appropriate attention to the unique challenges of power generation alongside data center development, particularly when considering different ownership structures and varying state regulations.
The Real Property Puzzle: How Data Centers Are Often Over-Assessed
Data centers are critical infrastructure in today’s world, but they present unique and significant challenges for property tax valuation. Many jurisdictions have provided property tax incentives or abatements for newly built facilities, but will this trend continue? What happens after the property tax incentive ends? Demand for data centers is anticipated to grow rapidly—driven by cloud computing, AI, and digital services. However, many tax assessors lack the expertise to value data centers correctly, potentially leading to inaccurate assessments or over-assessments, causing owners and tenants to pay too much in real property tax.
Overview
As of March 2025, the United States leads the world in the number of data centers, with approximately 5,426 operational facilities. As demand continues to increase, there has been a shift from large markets due to factors such as energy capacity, availability of real estate, favorable zoning regulations, and costs. The availability of affordable energy and tax incentives has made new markets attractive for hyperscale and colocation facilities.
The Valuation Paradox
When it comes to real property tax assessments, data centers are often misunderstood and often overtaxed. What drives these assessments? Large data center developments often involve significant investment, resulting in complex financing deals and announcements of substantial capital investment. However, tax assessors struggle to value data centers accurately. While there is often significant capital investment, the majority of the investment in a data center is in the business components, which are not real estate and therefore should not be taxed as such.
Property taxes are often the largest single operating expense (assuming the property is not receiving property tax abatements). While there may be up-front incentives abating property taxes for an initial period, what happens after the abatement expires?
The Valuation Challenge
The real estate component of a data center is similar to a warehouse. However, a sophisticated data center will have many specific requirements that far exceed the requirements for a typical warehouse. These requirements include substantial electrical components to operate the servers, with the ability to have an uninterrupted power supply and redundancy to ensure the facility operates 24/7/365. Additionally, the data center must have structural improvements to support the fiber optics and cabling, as well as reinforced or specialized flooring to support the weight of equipment, battery backups, and cooling systems. The facilities also often have redundant electrical systems, extensive water or air handling components, double roofs, and increased security requirements. All of these components are constructed with the facility but, in most cases, may not meet the definition of real estate for taxation purposes in a particular jurisdiction. Real estate taxation should only be based upon the value of the real estate. However, because modern data centers are still relatively new in most jurisdictions, many assessors haven’t determined how to exclusively value only the real estate without incorporating the value of the non-real estate components that are often difficult to separate from the real estate itself. Owners and operators should not lose sight of the fact that even if the property is receiving tax incentives, community development charges could be tied to valuation, or the incentive will end or ratchet down over time, exposing the owner or operator to a tax burden not tied only to the value of the real property.
Valuation Methods Applied to Assess Data Centers
As with any real estate, tax assessors employ three standard methodologies to value the real property: the cost approach, the sales comparison approach, and the income approach to value. Which approach is the best to value only the real estate for a data center?
All three approaches can be useful; however, all have potential issues that must be evaluated to determine the proper assessment of the real property. Let’s first consider some of the flaws with the different approaches to value. Both the sales comparison approach and income approach may not be appropriate for the valuation of a data center.
Starting with the sales comparison approach, a data center is likely to trade in the market as a business operation or going concern. This means that the buyer is purchasing more than just the real estate. The buyer is purchasing the personal property and potentially service contracts or other intangibles. Further, the purchase of a build-to-suit property for a specific user is going to include not only the real estate but also the personal property or business fixtures that should not be considered real property. Any knowledgeable market participant understands that the purchase of a data center is more than just the building and land, making sales of data center facilities suspect to value only the real estate.
Second, the income approach to value suffers from some of the same issues as the sales comparison approach – the inability to isolate only the value of the real estate. There are numerous types of leases and service agreements in the data center industry. The more equipment and services included in the lease agreement, typically leads to a higher lease rate. But again, this is not only for the use of the land and building but often includes components that are considered personal property or business fixtures in certain jurisdictions or services such as security. Leases can vary substantially from one to another. With a NNN lease, the tenant would rent shell space in the data center and be responsible for connecting to power, its equipment, cooling, and security. At the other end of the spectrum would be a lease that could provide full service, including equipment and utilities. These two different lease structures demonstrate the difficulty in evaluating the components included within the lease rate and, in part, account for the differences in the lease rate itself. But they do not effectively account for the rent associated with the real estate alone. Instead, the exercise of trying to isolate the contributory real estate component of the overall lease rate is speculative at best, especially as other factors such as access to energy and the necessary infrastructure (powered shell) may be increasingly driving rental rates for data centers.
Finally, the cost approach to value data centers can be a useful method if properly developed and if only items that are real estate are included within the approach to value. If the cost approach is properly developed, it will best reflect the value of the real estate. A cost valuation approach starts with estimating the cost, often through valuation manuals. From there, depreciation is determined, and the value of the land is added to the depreciated improvements. This results in a determination of the fee simple value for the real property. However, there are still challenges with this approach, especially in jurisdictions that do not tax personal property or have business fixture definitions that may exclude certain components from the definition of real property. With these factors in mind, the cost approach is the best method to isolate the value of only the real property.
Final Thoughts
As data centers become more prevalent across the country, the impact of real estate tax assessment will evolve and change. However, until each tax assessor recognizes the flaws with the methods they employ, data center owners and occupants should carefully review their real property tax assessments to determine if the value reflects only the value of the real property. Even if the properties are subject to tax incentives, the review process is still important because there may be other charges such as community development charges tied to value, and because, importantly, the property will become fully taxable in the future.
Wisconsin's Tax Reform: Catalyzing Data Center Investment
Wisconsin has emerged as a hotspot for data center development, with numerous project announcements coinciding with recent legislative tax reforms. Two significant changes—the elimination of most tangible personal property taxes and the creation of a specialized data center sales tax exemption—have positioned Wisconsin among the growing number of states implementing data center-friendly tax policies.
The Data Center Equipment Equation
Data centers represent a substantial capital investment, with personal property comprising a significant portion of development costs. Unlike traditional industrial facilities where buildings constitute the primary expense, data centers require massive investments in specialized equipment:
- Computer servers and networking hardware
- Advanced cooling infrastructure
- Redundant power systems
- Backup generators and uninterruptible power supplies
This equipment often costs millions—if not billions—of dollars for hyperscale facilities. The financial burden is compounded by the industry's rapid equipment refresh cycles, with servers typically requiring replacement every three to five years, unlike traditional industrial equipment that may last a decade or longer.
Dual Tax Implications for Data Centers
Before Wisconsin's reforms, data center operators faced potential taxation in two critical areas:
- Sales/use taxes applied to equipment purchases and replacements
- Annual personal property taxes based on equipment value assessments
These taxes created particular challenges for data centers due to their frequent equipment replacement cycles. While conventional industrial facilities might make major equipment purchases once a decade, data centers replace substantial portions of their technology infrastructure every few years, resulting in more frequent tax events and assessments at minimal depreciation.
Wisconsin's Strategic Tax Reforms
Personal Property Tax Elimination
Prior to comprehensive reform, Wisconsin maintained a complex system of industry-specific exemptions that provided some relief for data centers, particularly for computers and servers. However, not all data center equipment qualified for these targeted exemptions.
The passage of 2023 Act 12 fundamentally transformed this landscape by eliminating most personal property taxes beginning with the January 1, 2024 assessment year. This reform:
- Places Wisconsin among approximately one-third of states with total or near-total personal property tax exemptions
- Eliminates the administrative burden of navigating complex exemption qualifications
- Provides certainty for data center operators in their financial planning
Data Center Sales Tax Exemption Program
Recognizing the outsized impact of sales taxes on data center economics, Wisconsin established a dedicated data center sales and use tax exemption through 2023 Act 19. This program:
- Requires qualifying investment commitments between $50-150 million, depending on county population
- Provides comprehensive sales and use tax relief on equipment purchases
- Creates predictable cost structures for long-term operational planning
Strategic Positioning for Wisconsin's Economy
By implementing these complementary tax reforms, Wisconsin has significantly enhanced its attractiveness for data center investment. The state has effectively aligned itself with leading data center markets while demonstrating how targeted tax incentives can diversify economic development.
These reforms provide both immediate financial benefits and long-term operational certainty—two critical factors that data center developers evaluate when selecting locations for major infrastructure investments.
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