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Virginia floats a fee on backup gas

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Senate Finance chair L. Louise Lucas proposed a $35-$45 per-kilowatt charge on data-centre diesel generators around 16 June, the first US levy aimed at installed fallback capacity rather than the power a campus draws.

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Key takeaway

Virginia would tax the generators a campus installs, not the power it draws, reaching gas that grid billing misses.

Virginia's Senate Finance Committee proposed a tiered fee of $35 to $45 per kilowatt on the diesel backup generators inside data centres around 16 June, the first US levy designed to tax installed fallback capacity rather than the electricity a campus draws⁠¹. Finance chair L. Louise Lucas floated it as a compromise: operators keep the $1.9bn sales-tax exemption but pay a per-kilowatt charge on backup generation, projected to raise $582m in FY2027 and $1.2bn in FY2028. The committee has not voted the fee through, and the 22 June Senate session could let it lapse.

The charge falls on installed capacity a campus may never run. This is the behind-the-meter (BTM, on-site generation sited next to the load rather than drawn through the public grid) gas fleet the Department of Energy has switched off twice in 2026 under Section 202(c), the Federal Power Act's emergency-curtailment authority. Federal power can cut that gas off in a heat event; it cannot price it. A per-kilowatt fee reaches the part of the build that consumption billing never sees, because a generator sitting idle draws nothing to meter.

The 30 June fiscal deadline is forcing the pace. The House of Delegates cancelled its 18 June budget session, with Speaker Don Scott saying no agreement had been reached, and Governor Abigail Spanberger sided with The House the same day against any early end to the exemption. Virginia has already lost projects to this fight before any fee existed: Compass Datacenters abandoned two site searches over tax uncertainty, and Danville approved the Berry Hill campus only on condition that the exemption survives. The fee is a wager that a new revenue line can hold the budget together where ending the exemption outright cannot.

Deep Analysis

In plain English

Virginia gives data centres a big tax break; they pay no sales tax on equipment worth about $1.9 billion a year to the industry. The state legislature has been arguing about whether to cancel that break since early 2026, and the argument has blocked the whole state budget. The Senate's new idea is a middle path: keep the tax break, but charge data centres a fee on the diesel backup generators they use when the electricity grid fails. The fee would be $35 to $45 for every kilowatt of backup capacity installed. A large data centre might have hundreds of megawatts of backup power, so the annual bill could run into the tens of millions of dollars. The House of Representatives side of the legislature cancelled its budget meeting the same day, and the governor said she is against the idea. If no deal is reached by 30 June, some Virginia government services could be temporarily shut down: a rare event called a partial government shutdown.

Deep Analysis

Root Causes

Virginia's fiscal impasse rests on three structural conditions. First, the original 2000-era tax exemption was written with no sunset clause and no per-site revenue or employment threshold, meaning the state has never had a legal mechanism to recover costs as data-centre power density increased beyond the assumptions of the original legislation.

Second, the separation of powers between the Senate and House is unusually evenly balanced on this issue: the Senate Finance Committee controls revenue instruments while The House of Delegates controls budget appropriations, and neither chamber can move the budget without the other.

The Berry Hill conditional approval and Compass site abandonment show that the external industry response is already embedded in the political calculus, with operators treating the state-level standoff as a site-selection risk.

Third, the DOE's Section 202(c) curtailment orders targeting behind-the-meter backup gas make the generator fleet simultaneously a federal regulatory target and the chosen base for Virginia's new fiscal instrument, creating a structural tension between what the state wants to tax and what the federal government wants to switch off.

What could happen next?

Risk
If enacted, the $35-$45/kW fee creates a template other states can adopt without touching the headline exemption, spreading capacity-fee instruments beyond Virginia.
Short term · Suggested
Risk
The 30 June budget deadline raises the prospect of Virginia's first partial government shutdown, which could accelerate or collapse the generator-fee proposal unpredictably.
Immediate · Assessed
Consequence
Operators sizing new Virginia campuses will need to model the generator-fee liability as a fixed annual cost, shifting break-even assumptions on large campuses by up to $20 million per year per 500 MW of backup capacity.
Short term · Suggested

Source Landscape

This story draws on neutral-leaning sources from United States

United States

Primary parallel: Texas's 2023 Senate Bill 2 restructured the state's franchise tax exemption for data centres by introducing a graduated payroll-contribution test rather than a flat exemption, requiring operators to create minimum numbers of full-time jobs per megawatt of capacity to retain the abatement.

Virginia's generator fee follows the same design logic: redirect fiscal recovery onto a metric (backup kilowatts) that is harder to argue zero than a direct tax on exempted sales, while leaving the headline exemption intact to avoid operator flight.

Counter-parallel: New York's 2019 attempt to impose a large-load surcharge on colocation customers in New York City collapsed within 18 months after Equinix and Digital Realty filed tariff objections with the Public Service Commission, arguing the surcharge violated a 2010 large-load incentive agreement.

The fee was withdrawn before any litigation; Virginia's generator fee faces no equivalent contractual constraint, but the same political dynamics visible through Compass Datacenters' site abandonment apply: operators threaten relocation and local economic-development officials lobby against the measure.

The fee's revenue geometry differs from a straightforward per-kWh tax. A $40/kW midpoint on 500 MW of installed backup capacity yields $20 million annually per large campus. PJM's Northern Virginia footprint carries an estimated 20-25 GW of data-centre load per Uptime Institute, implying a theoretical state-wide revenue ceiling of $800 million to $1 billion per year from the generator fleet alone, consistent with the Senate's FY2028 projection of $1.2 billion.

For each operator, the fee attaches a fixed annual charge to every kilowatt of installed backup, independent of utilisation. A site running its generators in cold-standby indefinitely pays the same annual levy as one that runs them weekly.

GE Vernova's H1 2026 turbine orders are priced 10-20 percentage points per kilowatt above Q4 2025 levels; the Virginia capacity fee adds a further annual operating charge on top of already-inflated acquisition costs, raising the total lifecycle cost of owning backup capacity in Virginia above that of states with no equivalent charge.

Consensus view: Data Center Watch and BCG's 'Mind the Queue' analysis identify capacity-fee instruments as an emerging alternative to outright exemption removal, because they tax physical footprint rather than revenue and are harder to challenge as discriminatory under interstate-commerce doctrine.

The Virginia proposal is the first US example to levy on installed backup capacity rather than throughput, which Data Center Watch notes creates a recurring annual obligation tied to the kilowatt installed, not kilowatt-hours consumed.

Counter-view: Good Jobs First argues the fee structure transfers the fiscal debate from the right question (whether hyperscalers should receive the underlying exemption at all) to a measurement dispute about backup-generator capacity ratings, giving operators an incentive to under-specify installed capacity on permit documents and creating a compliance-monitoring problem the state has no apparatus to enforce.

Key tension: Whether a capacity fee on backup generation is a durable revenue instrument or a structurally evasible charge that shifts the exemption fight downstream to generator-specification audits.

First Reported In

Update #7 · Virginia taxes the backup, not the draw

Bloomberg Tax· 17 Jun 2026

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Causes and effects

Caused by

Tax fight kills Virginia projects early

Compass abandoned Virginia site searches over tax uncertainty; the generator fee is the Senate's attempt to break the same deadlock.

Occurred 22 May 2026

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Berry Hill approval hinges on tax deal

Berry Hill's conditional approval pending tax outcome is part of the same Virginia budget standoff the generator fee attempts to resolve.

Occurred 26 May 2026

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DOE lets PJM switch off data centres

DOE's 202(c) curtailment order on BTM gas is the federal instrument the Virginia capacity fee would price at state level.

Occurred 18 May 2026

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This Event

Virginia floats a fee on backup gas

Virginia would price the behind-the-meter gas fleet that federal regulators can switch off but cannot charge for.

Led to

Virginia taxes power behind the meter

Virginia dropped the $35-$45/kW Lucas backup-generator fee and replaced it with the $0.011/kWh consumption model

Occurred 22 Jun 2026

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Virginia signs first per-kWh power tax

The Senate's backup-generator fee proposal was dropped in favour of the signed consumption tax.

Occurred 29 Jun 2026

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Different Perspectives

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An Coimisiun Pleanala

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Aragon regional government (Eva Valle)

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Texas Governor Greg Abbott

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