REPORT TO COUNCIL
SUBJECT
Title
Staff Presentation and Solicitation of Input on a Comprehensive Approach to Updating City Policies Addressing New Data Center Development [Staff’s Response to Councilmember Jain’s 030 Request, Approved by Council, Regarding New Policy Development on Data Center Water Usage and Demand Side Grid Support Participation]
Report
BACKGROUND
030 Request and Comprehensive Approach
At the August 18, 2026 City Council meeting, Councilmember Jain introduced a Council Policy 030 request to create a policy that limits the type and quantity of water used by data centers and new data centers in Santa Clara (Attachment 1). He also indicated interest in information on Demand Side Grid Management participation by the CAISO or the State of California. City Council approved a motion to agendize this 030 request for discussion at a future meeting.
As discussed later in this report, Silicon Valley Power (SVP) has not accepted applications for new data centers since 2023. During this time, when no new data center load applications have been accepted, the City has been working to improve the policies and approval processes for any future planning applications or electrical load requests from data centers. Beginning August 12, 2026, staff convened an interdepartmental working group to analyze all aspects of existing City standards and practices regarding data center development and operations. The ultimate goal of this effort is to develop a clear understanding of existing data center policies and procedures, identify areas for improvement, and develop a process for implementing such improvements. In addition to enhancing the City’s regulations, the policy improvements would also include ways to increase community benefits from data center projects. This work is anticipated to be completed towards the end of 2027.
This report and the staff presentation at the October 6 City Council meeting will articulate how staff plans to address Councilmember Jain’s 030 request, which primarily focused on data center water usage, as part of the ongoing comprehensive initiative to assess and enhance data center regulations.
Data Center Development History
Large industrial businesses, many of which are large electric customers, have been part of Santa Clara’s business makeup since the 1970s. Industrial businesses have been drawn to Santa Clara due to having a municipal electric utility, Silicon Valley Power (SVP), with reliability and competitive rates. The world’s first modern data center was built in Santa Clara in 1996, and data center growth was steady through the 2000s, as internet and cloud-computing use expanded. Today the City has 56 stand-alone data centers active or under construction and two approved but not yet built. An additional 8 pipeline data center projects have completed System Impact Studies and are part of SVP’s system planning process.
Much of the conversation across the country regarding data centers relates to large data center proposals, where individual data center campuses are requiring anywhere from 500MW to 4 gigawatts (4,000MW) of electricity and constrain local water resources. It is important distinction that Santa Clara has no data centers with an electric load of 100MW or greater. Consequently, the electrical demand of our data centers is substantially smaller than the large campuses proposed or under development elsewhere in the United States. Additionally, Santa Clara has an extensive recycled water system that limits the need for potable/drinking water in the cooling systems of modern data centers.
Based on SVP research and analysis, approximately 71% of the citywide data-center electric load is tied to broader digital economy uses, such as colocation, cloud infrastructure, enterprise IT, software-as-a-service, telecommunications, semiconductor research and development, high-performance computing, and disaster recovery, with the balance of the 29% of citywide data-center electric load tied to AI training and inference, which includes the operation of trained AI models to generate responses and other outputs. Of the 29% that are focused on AI, 13% relate to AI inference, which has been the subject of recent concerns related to autonomous AI agents that involve advanced artificial intelligence systems designed to execute multi-step workflows, make decisions, and use tools independently to achieve a specific goal without constant human intervention.
Attachment 2 provides a graphical illustration of the estimated primary purposes of computing workload in Santa Clara data centers.
Status of New Data Center Electric Service Requests
The City has historically planned for and reliably served electric load growth. With the rapid growth in large electric load requests, beginning around 2020, SVP recognized that electrical requests from data centers exceeded the capacity available from then-existing infrastructure and planned upgrades. To accommodate additional load requests, SVP intensified its coordination with the California Independent System Operator (CAISO) on transmission expansion into Santa Clara.
Key projects are currently anticipated to be completed between 2028 and 2030, subject to permitting, procurement, construction, and CAISO scheduling requirements. SVP has approximately $450+ million in electric infrastructure projects underway and is coordinating with CAISO on related infrastructure projects to meet the increased demands on the SVP system. The infrastructure projects will meet existing customer commitments, support reliable service, and position the Santa Clara electric system to serve increased electrical demand from industrial, as well as residential sectors, as home electrification and electric vehicle ownership have also increased. These major system improvements are on track to be completed by 2030, with specific projects coming on-line beginning in 2028. SVP has not accepted applications for new data centers since 2023. Communications were sent to existing and prospective customers informing them of this decision due to power constraints, see the attached letter (Attachment 3).
Load development fees and rates are charged to support infrastructure, where all users pay their proportional share. SVP residential rates continue to be among the lowest in the State of California, are slightly lower than the national average, and are significantly lower than PG&E. Attachment 4 is a chart sharing a comparison of residential rates.
Current Regulations
Data centers are regulated by the City’s Climate Action Plan, General Plan, Zoning Ordinance, and other sections of the City Code. Santa Clara has enacted policies requiring data centers to build recycled water infrastructure, locate solely in industrial areas, and address building aesthetics and design.
Climate Action Plan
The City adopted its Climate Action Plan (CAP) in June 2022, setting aggressive emissions reduction targets and strategy to achieve carbon neutrality by 2045. The CAP establishes a near-term target of achieving 40% greenhouse gas (GHG) emission reductions by 2030 and an interim target of 80% GHG reductions by 2035.
As it relates to data centers, the CAP requires all new data centers to operate on 100% carbon-neutral energy, with offsets as needed. This requirement applies to data centers with planning application approvals as of December 2022. To date, there has been one new data center for which the CAP requirement is applicable, and that data center has demonstrated compliance through the obtainment of a Renewable Energy Certificate.
Zoning Code: Current Siting and Aesthetics Standards
The City’s 2010-2035 General Plan provides broad policy direction for the siting of data centers. Policy 5.5.1-P9 under Discretionary Use Goals and Policies, along with Policies 5.3.5-P12 and 5.3.5-P14 under Office and Industrial Land Use Goals and Policies, support the location of data centers within industrial land use districts and establish expectations for compatibility with surrounding uses.
The former zoning code aligned with the General Plan and allowed data centers in industrial zoning districts. In recent years, as applications for new data centers increased and data centers became more land intensive, staff and the Planning Commission evaluated the need for more robust development standards. In 2024, the City adopted a new zoning code that introduced formal definitions for data centers and established updated development standards covering aesthetics, such as addressing primary building façades, shielded exterior lighting, and structural noise-reduction measures for exterior cooling fans and related equipment. Transitional standards also apply to address building scale when buildings abut residential zoning districts, including the use of 45-degree daylight planes.
Also, as indicated in the Zoning Code, data centers are a conditionally permitted use in the following Zoning Districts: Low-Intensity Office/Research and Development (LO-RD), Light Industrial (LI), and Heavy Industrial (HI) zoning districts. These districts typically also allow industrial, warehouse, and office uses. In the High-Intensity Office/Research and Development (HO-RD ) district, only ancillary data centers are allowed. An “ancillary” data center is a facility for private use by an industrial user, and subordinate to the primary use. Ancillary Data Centers are limited to 20% of the building square footage on a site and a maximum power draw of 9MW. As of 2024, the new Zoning Code requires stand-alone data centers to obtain a Conditional Use Permit (CUP) from the Planning Commission and an Architectural Review Permit through a Development Review Hearing.
In 2025, the City created additional regulations to conditionally permit data centers for the Related Santa Clara project’s northeast area (parcels 1 and 2), which is across the street from the project’s city center. The additional regulations for the Related Santa Clara project also increased aesthetic and locational development standards for data centers and electrical substations.
Water Usage
Water use from data centers account for approximately 6% of the City’s total potable water use. More than half of the data centers in the City are connected to and use recycled water. Collectively, data centers account for approximately 26% of the City’s total recycled water use.
City Code §13.15.160 requires development projects, including data centers, to use recycled water for approved uses, where it is available. The ordinance was adopted by the City Council in October 1997 and was more actively implemented during the 2012 drought. The City has continued to implement this requirement since that time.
Implementation of this code included requiring new proposed data centers to extend the City’s recycled water system to serve their site. These extensions to the City’s recycled water system were designed and constructed at the data centers’ sole expense. The City conducted design review and construction inspections as part of the permitting process.
Data center use of recycled water has increased in recent years. Data centers constructed within the past 10 years, use approximately 55% recycled water and 45% potable water, compared with 48% recycled water and 52% potable water use for data centers older than 10 years. More recently constructed data centers commonly incorporate water-efficient cooling technologies, such as closed-loop, turbo air-chilled systems, which can reduce their overall water demand.
Coordinating City Review
As shared in the Zoning Code section above, stand-alone data centers are conditionally permitted in certain Industrial Zoning Districts and reviewed under the City’s discretionary approval through the application for a CUP. The City's internal Project Completeness Committee (PCC) reviews the conditional use permit application and provides interdepartmental review for all development projects. The PCC provides feedback on data center proposals, resolves issues, and provides conditions of approval. CUPs are approved by the Planning Commission with appeals heard by the City Council.
In recent years, Planning and SVP have coordinated more closely to ensure large electric load customers understand that land use entitlements do not guarantee electric power. As part of the conditional use permit process, SVP now recommends project-specific conditions of approval which include, among other things, the requirement that a project undergo a system impact study if the load requested exceeded 2.5 MW. The system impact studies evaluate whether and when the requested load can be accommodated and identifies any electric-system improvements that may be needed, such as substation or other distribution or transmission upgrades.
Data Center Financial Benefits
Santa Clara also receives significant financial contributions from data centers through the Electric General Fund Transfer, other taxes, and through payment of the City’s affordable housing impact fee.
General Fund Contributions
Data centers provide contributions to the City of Santa Clara’s General Fund, primarily through:
• Electric General Fund Transfer (Electric GFT)
• Property Tax
• Sales and Use Tax
• Business License Tax
Electric GFT (5% of gross receipts) - The Electric GFT has been in place since 1951 and includes a transfer of 5% of SVP utility revenues to the City’s General Fund. The revenues from this transfer are unrestricted and are used to support City services such as police, fire, street repairs, sidewalks, parks, libraries, and senior services. In November 2022, voters approved Measure G, affirming the continued transfer of 5% of utility revenues to the City’s General Fund. The transfer to the General Fund in FY 2025/26 related to data centers is approximately $23.2 million, which is 52% of the total $45 million Electric GFT in FY 2025/26.
Property Tax - Property taxes are based on the assessments of the value of secured and unsecured assets. Secured assets are walls, ceilings, floors, etc. of a building, including installed equipment “fixtures” which could be property. Unsecured assets are typically moveable equipment. Data centers as a property class are unique as they have high-value unsecured assets with the number of expensive servers and infrastructure installed.
While the total assessed value of data centers is significant, unlike the Electric GFT, which is provided solely to the City of Santa Clara, the City receives only a fraction of what is collected in property taxes. The City receives 10.17% of total property tax collected; however, other agencies, notably the County of Santa Clara and School Districts, receive a larger share of property tax. For FY2025/26, data centers in the City are contributing $7.5 million in property tax to the City’s General Fund, while contributing greater amounts to the County of Santa Clara and School Districts based on their higher proportionate share of property tax.
Sales and Use Tax - Sales tax is based on the value of purchases made at data centers, and use tax is based on the value of purchases that are utilized at data centers. Similar to property tax, the City shares sales and use tax revenue. The majority of sales and use tax revenue goes to the State of California. Of the 9.75% sales tax collected, the City of Santa Clara receives 10.26% of the total tax (for example, the City receives approximately $1.00 out of the total $9.75 collected from a $100 sale transaction). In FY 2025/26, sales and use tax revenue to the City of Santa Clara from data center related purchases contributed an estimated $4.5 million to the City’s General Fund. Sales and use tax revenue can vary significantly from year to year depending on economic activity. The above figures do not include sales tax from companies located in Santa Clara that sell products to support data centers within Santa Clara.
Business License Tax - Data centers, as all businesses in Santa Clara, are subject to the City’s Business License Tax, which is at a rate of $47.37 per employee. This total has not yet been compiled for all data centers in the City but will not be significant, given that data centers have a relatively lower on-site employee count than office uses.
Total Contributions to the General Fund - In FY 2025/26, it is estimated that data centers in the City contributed a total of $35.2 million to the City of Santa Clara’s General Fund from the estimated Electric GFT, property tax, and sales and use tax. This accounts for approximately 9% of the City’s FY 2025/26 General Fund resources, which funds core public services. For reference, the $35.2 million that is received from data centers is roughly the same as the combined budget of the City’s Library and Parks & Recreation Department budgets (at $37M for both for FY 2025/26).
Affordable Housing Impact Fee
Since the City’s Affordable Housing Ordinance took effect in 2019, new data centers have paid $3.9 million toward affordable housing. Three data centers in the pipeline are anticipated to provide $1.75 million for affordable housing.
DISCUSSION
While the City has enacted several policies and practices to improve data center development over the past decade, particularly in recent years, policy improvements are still needed to ensure the highest-quality development and benefits to the City. Staff plans to return to Council with a comprehensive approach to updating policies regarding water, as well as siting and aesthetic requirements for new data centers. Also under consideration is the evaluation of a community benefits program, formalization of a coordinated city review process, potential participation in SVP’s on-demand grid support programs, and investigation of emerging sustainable technologies and approaches.
Water Standards
Staff is currently implementing the requirement for recycled water system extensions for new data center projects using qualitative factors, as no quantitative standards are presently included in the City Code. To promote consistent, transparent implementation, staff is evaluating the establishment of quantitative standards for when a project must extend the recycled water system.
Potential standards would consider the project’s proximity to existing recycled water infrastructure, the estimated extension cost relative to total project cost, and the project’s estimated annual water use.
Staff will also evaluate water-use efficiency standards that encourage the use of modern, lower-water-use cooling technologies.
Siting Standards
Based on feedback received during the entitlement review of recent data center proposals, particularly regarding noise and visual impacts, the City will continue to evaluate standards for the design, development, and siting of future facilities. Currently, aside from a 25-foot rear or side yard setback, there are no distance requirements separating data centers from residential uses. Staff’s work program includes evaluating distance separation standards between data centers and residential uses.
Previously, planning application requirements to the City were amended to include a robust data center-specific application checklist to ensure all required information is submitted and thoroughly evaluated by all City departments during the Project Completeness Committee process. The checklist now includes items such as acoustic report, cooling technology description, water demand analysis, community benefits, and substation details. This supplemental information and any additional changes will enable staff to apply a more consistent and comprehensive approach when reviewing projects.
Community Benefits Program
Santa Clara provides a unique physical and business environment, which has benefited data center development. The City-owned electric utility, SVP, has reliable and competitive electrical rates, which are among the lowest in the State and consistently lower than other Bay Area electric utilities. The City of Santa Clara also has extensive fiber infrastructure, proximity to major technology companies, and proximity to other data centers within the City, which reduces latency, maximizing data center responsiveness speed and efficacy.
Recently, data center companies have been supporting Santa Clara events and programs and have built stronger community connections with the City, school districts, and nonprofits. This increased participation has been valuable.
In addition to the current economic benefits data centers provide, staff will evaluate additional ways that data centers can provide benefits to the Santa Clara community.
Formalizing Coordination of City Review Processes
Staff will evaluate strategies to formalize coordination between City planning reviews and SVP power allocation processes. A more coordinated process would ensure that applicants receive early and consistent information regarding land use requirements, anticipated electric load, power availability and timing, infrastructure requirements, water demand, and other City standards based on the information available at each stage of review.
Demand Side Grid Support
Councilmember Jain’s 030 requested information on Demand Side Grid Support (DSGS) Program. DSGS is a State California Energy Commission (CEC) administered program that offers incentives to electric customers providing load reduction and backup generation to support the state’s electrical grid during extreme events. The program’s purpose is to reduce the risk of blackouts. Previously, the CEC did not allow data centers or any large load using backup generators to participate. Under the new DSGS guidelines, data centers were allowed to participate to help the grid by using their backup generators. However, in the most recent legislative session, funding for the program was not approved, so its future is uncertain. Staff will continue to monitor this issue.
Innovations in Sustainability
Santa Clara’s Climate Action Plan includes aggressive targets for GHG reductions, and data center operations are part of the City’s GHG footprint. Staff will investigate emerging technologies and approaches to construct and operate data centers more sustainably. Specifically, it would be helpful to explore technologies that reduce dependence on diesel emergency backup generators, as well as approaches to data center heat capture, whereby excess heat is delivered to nearby buildings for space heating, domestic hot water, or industrial processes. Staff will provide updates on these and possibly other technologies to assess applicability to Santa Clara.
As noted above, the comprehensive work program to analyze all aspects of existing City standards and practices regarding data center development and operations is anticipated to be completed towards the end of 2027, inclusive of community engagement and the final policy determinations by the City Council.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(b)(5) in that it is an administrative activity that will not result in direct or indirect physical changes to the environment.
Subsequent specific ordinances or policies that are brought forward that further regulate data centers may need to be further analyzed for CEQA compliance.
FISCAL IMPACT
There is no fiscal impact associated with considering the request and developing a comprehensive policy approach except for staff time. New regulations proposed on data centers provided through new policies, ordinance changes, or community benefits would be analyzed separately for potential fiscal impact when specific regulations or approaches are brought forward for consideration.
COORDINATION
This report was coordinated with the City Manager’s Office, Water & Sewer Department, Silicon Valley Power, Community Development Department, and City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
Consider staff’s report on current data center policies and procedures, along with any public testimony presented, and provide input on the presented comprehensive approach to update city policies addressing new data center development.
Staff
Reviewed by: Reena Brilliot, Director of Economic Development and Sustainability
John Ramirez, Director of Water and Sewer
Nico Procos, Director of Silicon Valley Power
Afshan Hamid, Director of Community Development
Approved by: Jovan Grogan, City Manager
ATTACHMENTS
1. 030 Request
2. Estimated Makeup of Computing Workload Purposes in Data Centers
3. SVP Limits to Serve New Data Centers, November 7, 2023
4. Residential Electrical Rates Comparison
5. Data Center Location Map