Overcoming Regulatory Hurdles in Data Storage Facilities
The data center industry is undergoing a transformative period, with players needing to navigate a rapidly evolving regulatory landscape to maintain U.S. technological dominance. This shift, aimed at streamlining and expediting development, comes with a host of challenges that businesses must address to stay compliant and competitive.
Energy Use and Environmental Permitting
One of the most pressing issues is the enormous energy demands of data centers, which put pressure on existing energy infrastructure and regulators. The U.S. federal government recognizes that environmental permitting systems, under laws such as the Clean Water Act, Clean Air Act, and National Environmental Policy Act, currently hinder rapid data center development. Recent executive orders seek to accelerate permitting by creating new regulatory exemptions and streamlining environmental reviews, especially for projects with less than 50% federal funding to avoid full Environmental Impact Statements.
However, coordination challenges exist between federal and state regulations, with states retaining authority over water, air quality, generation siting, and retail electricity sales. Federal actions discourage states from imposing what are deemed "burdensome" regulations by threatening to withhold AI-related federal funds. The energy demand spike is causing regional regulatory bodies like FERC and state commissions to wrestle with fair cost allocation, grid reliability, and procurement of clean, reliable energy, including nuclear and modular reactors, which pose additional regulatory complexities.
Data Sovereignty
Data sovereignty is another significant concern, with regulation and policies regarding data localization, cross-border data flows, and the use of “adversarial technology” (foreign hardware or software that might undermine U.S. tech dominance) being implicit issues in policymaking for data center infrastructure, especially under national security frameworks emphasized in new AI-related executive orders.
Tariffs and Foreign Trade
While no direct recent updates on tariffs were found, restrictions or tariffs on foreign technology imports affecting data center hardware could be relevant, given the focus on maintaining U.S. leadership in AI and infrastructure.
Merger Control, Foreign Direct Investment (FDI), Foreign Subsidies, and Antitrust
The Federal Trade Commission (FTC) is reviewing past investigations and consent decrees with a view to ensuring they do not unduly burden AI innovation, implying ongoing scrutiny of mergers and competitive practices in the tech and data center sector. Antitrust oversight remains a challenge, especially due to concentration risks in data infrastructure.
Securitisation and Regulation
Financial support mechanisms outlined in recent executive orders include loans, loan guarantees, grants, tax incentives, and offtake agreements targeted at qualifying projects. These incentives come with conditions designed to streamline federal investment processes, but they also raise regulatory considerations regarding the definition and oversight of "major federal actions" and environmental impact exemptions.
Permitting and Land Use
The federal government is also exploring increased use of federal lands for data center projects and related infrastructure, including military land leases aligned with Department of Defense AI goals, representing a significant shift in regulatory and land acquisition policy that businesses must navigate.
Labour Market Competition
The supply shortage for talent in the sector necessitates vigilance against anti-competitive agreements in the labour market. Stakeholders need to consider all applicable regulations from the outset of any investment planning.
Tariffs and Their Impact
Tariffs will substantially increase energy costs for operators, which are typically passed through to customers. They also have an impact on data center supply chains and those of customers, creating challenges for operators and increased costs for development and operation. Operators need to assess and evaluate their exposure to tariffs through detailed due diligence of supply chain and contractual arrangements with suppliers. Failure to notify a transaction under any of these processes can result in severe consequences.
Challenges in Implementing Pan-European Asset-Based Securitisation Structures
In the European market, challenges exist in implementing pan-European asset-based securitisation structures due to different tax obligations and subsidiary disclosing regimes across jurisdictions. This complexity necessitates careful consideration and planning to ensure compliance.
The Growing Data Center Industry
Despite these challenges, the data center industry is growing in terms of valuation, funding, and capacity, and evolving to respond to incoming laws and regulations. Businesses must remain vigilant and proactive in considering their likely impact to stay ahead in this rapidly changing landscape.
[1] White House, Office of the Press Secretary. (2021, March 24). Executive Order on Promoting Competition in the American Economy. [online] Available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2021/03/24/executive-order-on-promoting-competition-in-the-american-economy/
[2] White House, Office of the Press Secretary. (2021, May 7). Executive Order on Advancing the United States Government's Use of Artificial Intelligence. [online] Available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/07/executive-order-on-advancing-the-united-states-government-use-of-artificial-intelligence/
[3] White House, Office of the Press Secretary. (2021, May 17). Executive Order on Strengthening America's Critical Technologies. [online] Available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/17/executive-order-on-strengthening-americas-critical-technologies/
[4] White House, Office of the Press Secretary. (2021, June 8). Executive Order on America's Supply Chains. [online] Available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2021/06/08/executive-order-on-americas-supply-chains/
[5] Federal Energy Regulatory Commission. (2021). Policy Statement on Cybersecurity and the Bulk-Electric System. [online] Available at: https://www.ferc.gov/legal/staff-reports/2021/042921-675.pdf
- The data center industry, while growing significantly, faces challenges in navigating the rapidly evolving regulatory landscape, particularly in terms of energy use and environmental permitting, data sovereignty, and labor market competition.
- Additionally, this evolution is closely linked to the technological sphere, with concerns about tariffs and foreign trade affecting data center hardware, merger control, foreign direct investment, secure financing mechanisms, and antitrust oversight all playing key roles in shaping the industry's future.
