San José and PG&E Strike Deal to Attract Data Centers to South Bay

The cold war between San José and PG&E has officially thawed, as the city and the utility company today announced a partnership aimed at attracting big power users — data centers and others of that ilk — to the South Bay.

Officials say the pact is the first of its kind in PG&E’s service area, with the utility offering assurances to the city and developers that power will be ready for 10 large data center and industrial projects in the city’s north, south and downtown areas in the coming years.

The agreement also means San José will stop pursuing the latest plans to build its own power company — something the city council authorized looking into in 2023. The exploration of the city-owned power company was born in part out of frustrations with PG&E-caused delays, shutoffs and a desire to compete for development of data centers and other advanced industrial facilities in certain portions of the city.

“There’s nothing more devastating than having an investor or an employer say, ‘You know, we really want to build that factory or that data center and bring those jobs to your city, but we’re just not sure we’re going to be able to have the power we need by the time we need it to do it,’” Mayor Matt Mahan said Friday morning at a press conference outside the gates of PG&E’s Los Esteros substation near North San José.

In an interview with KQED, Mahan said the deal will allow the city and PG&E to offer “speed and certainty” to developers to help ensure data centers stay in Silicon Valley, keeping them as paying PG&E customers and contributors to San José’s tax base.

City officials estimate each data center could generate anywhere from $3.4 million to $6.8 million in annual revenue for the city through utility and property taxes.

“What we’re really talking about here is re-engineering our service delivery model to integrate the city and the utility’s teams into one,” Mahan said. “We can actually sign an agreement that says we’ll have 100 megawatts for you at this site by this date, and we will get it done and deliver.”

The agreement hopes to take advantage of and build on 2,000 megawatts of increased power capacity, expected to be provided by two different transmission line projects from developer LS Power Grid.

The lines would run from Newark into North San José energy centers, and from a Coyote Valley terminal in South San José, to the PG&E Metcalf substation and into downtown.

Officials said PG&E will also be investing $2.6 billion into improving and expanding its infrastructure in the South Bay between 2026 and 2035, to enable more reliable delivery of that increased power to customers, large and small.

Patti Poppe, CEO of PG&E, said the historic partnership is about accountability.

“We have agreed to timelines and performance requirements that the city had for us. We’re up for that. PG&E is willing to stand behind our word and do what needs to be done to serve this new growth,” Poppe said in an interview.

“Having expectations and accountability matched with this massive new demand makes it an absolutely unique opportunity to power the prosperity of tech companies, their employees, the citizens of San José and our community right here.”

One of the major projects includes an envisioned large-scale development on roughly 159 acres of public land on the property of the San José-Santa Clara Regional Wastewater Facility, adjacent to Los Esteros. The facility is jointly owned by the two cities.

The utility company has committed to supplying that land with 250 megawatts of power, enough to power multiple data centers, which are often sized to use about 99 megawatts to avoid stricter oversight for projects that use 100 megawatts or more.

Manuel Pineda, a deputy city manager for San José overseeing energy projects, said having an undeveloped piece of land so large, and pairing it with an energy commitment of that magnitude, is “unheard of.”

Pineda recently rejoined San José after running Silicon Valley Power, the city-owned utility in Santa Clara, which has seen massive growth in data centers over the past several years. This demand — Santa Clara’s more than 50 data centers have eaten through about 60% of the city’s power — has forced the city to approve projects to increase capacity. Earlier this year, the city announced a 5% increase in rates for its customers.

San José is home to about 25 data centers at the moment, city officials said.

Some residents of the region have raised concerns about data centers popping up near their neighborhoods with little transparency around the potential impacts, which may include harm to their community’s air quality, due to the massive diesel backup generators that often support data centers during power outages.

Mahan and Pineda emphasized that San José’s large layout means many data centers can be located in highly industrialized areas, like the fields abutting wastewater plants and energy facilities in the city’s Alviso district.

The city’s planning commission in April approved Microsoft’s plans to build two data center buildings across a 64.5-acre site at 1657 Alviso-Milpitas Rd., just east of Los Esteros.

The city has also recently prioritized a developer’s plan for a combined data center and housing project downtown, which Mahan said will be subject to requirements, such as ground-floor retail or community spaces. The project is also “providing carbon-neutral power to all of the surrounding residences,” he said.

While some studies in different parts of the country, such as the Southeast, have shown that data centers are driving increased costs to average customers to help support the extra power infrastructure needed, Poppe said she expects most regular PG&E customers’ power bills to be reduced slightly as a result of this anticipated growth.

“The revenue from that new load is greater than the cost to serve. So customers win,” Poppe added. “To serve the large load, we can put downward pressure on rates. Then we can use that downward pressure on rates to make sure that the grid continues to be resilient and reliable.”

Pineda said PG&E, as part of the deal with the city, has agreed to fund six city staff roles in economic development and public works, to help the city capitalize on the demand and the plans for power upgrades.

“We want to move as fast as we can,” Pineda said.