Colorado’s Data Center Dilemma: Carrot or Stick?

Colorado lawmakers face a polarized choice when it comes to data centers—either incentivize their development or impose regulatory guardrails that could keep the state from becoming an emerging market.

Data centers are attracting national attention because they create jobs and economic growth but also require a significant amount of electricity, pitting economic benefit against environmental concerns.

Industry leaders say the state is missing out on major economic opportunities like construction jobs and infrastructure investments. Of all 50 states, 37 already offer significant incentives while Colorado offers none, despite eight data center developer headquarters calling the state home. Meanwhile, environmental and consumer advocates are warning about grid strain, surrounding community impact and increasing utility costs for ratepayers.

With Colorado’s 2026 legislative session underway and two competing legislative proposals at opposite ends of the regulatory spectrum, will the state bring a carrot or a stick to the data center debate? And what do local communities have to say?

COMPETING LEGISLATIVE APPROACHES

The Carrot of the Pro‑Incentive Approach: This bill—sponsored by state Reps. Alex Valdez and Monica Duran and Sen. Kyle Mullica—aims to make Colorado competitive by offering tax benefits to data center developers, including a 100% rebate on state sales and use taxes for 20 years for data centers with investments exceeding $250 million and incentives for large-scale projects. In exchange, data centers would have to meet the state’s energy standards, use water-free or close-loop cooling mechanisms, and earn approval from a to-be-established state oversight board that will monitor grid capacity.

Specifically, the bill will:

1. Establish a Colorado Data Center Development Authority within the Office of Economic Development, consisting of nine members, including two appointed by the governor and approved by the state Senate; the Colorado Energy Office director or a designee; and a mix of experts in water and clean energy, labor organization representatives and data center developers appointed either by the Senate president or House speaker.

2. Offers a 100% exemption from state sales and use tax on qualified purchases for certified data centers, with exemption available for at least 20 years (with possible extensions).

To qualify, data center operators must:

• commit to at least $250 million in infrastructure investment within five years.
• break ground within two years of certification.
• create new full‑time jobs meeting program requirements.
• meet craft labor, apprenticeship and prevailing wage standards.
• obtain recognized energy‑efficiency certifications.
• implement water‑stewardship strategies.
• consult with the local electric utility on interconnection feasibility and grid capacity.

The bill was assigned to the House Energy and Environment Committee and awaiting its first hearing.

The Stick of the Stricter-Oversight Approach: State Sen. Cathy Kipp, working with state Rep. Kyle Brown, introduced a bill this week that requires “large-load” data centers to procure 100% of their electricity use from renewable sources, meet hourly matching requirements set by the Public Utilities Commission (PUC), implement water-efficient technologies and maximize renewable alternatives for onsite backup power. Notably, operators must either pay all utility costs up front or commit to mandatory 15-year utility contracts before interconnection. The bill also modifies various local zoning processes. This is meant to protect consumers from having to pay the grid expansion costs associated with data centers and to ensure new loads don’t cause a backslide on state climate goals.

Here are the specifics in the bill:

1. The legislation would apply to data centers with a peak load greater than 30 megawatts, or data center campuses with a collective peak load greater than 60 megawatts, or existing centers that add these amounts.

2. By Jan. 1, 2031, operators would be required:

• source 100% of their electricity from renewable resources.
• meet PUC hourly matching requirements.
• use new, incremental renewable resources deliverable to the grid serving the facility.
• comply with utility tariffs, power purchase agreements (PPAs), or self-supply (onsite renewables or storage).

3. Prior to interconnection, the bill would require operators to sign 15-year utility contracts or make up-front payments that cover all generation, transmission and distribution needed to serve the facility, plus a proportional share of system reliability resources and renewable curtailment and reserves costs tied to the project.

4. Local governments would be able to require water-efficient cooling, and the bill adds various annual reporting obligations to the Colorado Department of Public Health and Environment (CDPHE).

5. For backup generation (a data center requirement), centers would have to favor non-combustion or renewable options where feasible. If diesel is used, it is limited to emergencies and less than 50 hours of testing per year and must meet EPA Tier 4 Final with ultra-low sulfur diesel.

6. The bill would require the Department of Local Affairs to:

• publish model local codes for data centers.
• prohibit data centers from being a use by right in any zone district.
• require site assessments with water, emissions and siting details.
• provide a cumulative impacts analysis by a CDPHE-selected third party, mandate at least three public hearings and a community benefit agreement if a site is proposed in a disproportionality impacted community.

7. Kipp’s bill also mandates various labor standards including prevailing wage, apprenticeships and OSHA protections.

The Discourse Around Both Bills: Supporters of incentives argue that Colorado is falling behind other states and losing billions in potential investment and that encouraging data center development will help fund upgrades to the state’s energy grid and support job creation. Environmental and fiscal groups counter that tax breaks could come at the expense of higher utility costs for ratepayers and overtaxed water resources. Some communities have a more nuanced position, welcoming the prospect of injecting jobs into waning markets while worrying about safety and environmental concerns at the local level.

The state also has fairly aggressive energy standards, and some opponents of incentives view data centers as a threat to those goals. Opponents also claim tax breaks might not be the most responsible use of state dollars.

LOCAL COMMUNITIES CONSIDERING MORATORIA

In late January, the Larimer County Board of Commissioners approved a temporary moratorium on new data center permits in unincorporated areas of the county. The pause was enacted so county staff can develop specific land‑use regulations for data centers, which are currently not directly addressed in the county’s existing code.

The initial moratorium lasts 30 days, with the county preparing to consider a longer, six‑month moratorium following a public hearing on Feb. 9. Logan County also passed a six-month moratorium in October 2025. Denver City is also considering a formal policy around data centers and has formed a stakeholder work group to work on the issue—but no clear direction has emerged.

Meanwhile, Weld County began actively drafting data center regulations in late 2025 on the heels of a proposed facility near Windsor. The county is allowing projects to continue while moving forward setting new rules, which will focus on tightening up zoning and infrastructure requirements.

Elsewhere, Saguache County commissioners began discussions last month on how data centers might fit into the county’s rural land use framework, with an awareness of water scarcity and other land use concerns in the San Luis Valley, while other counties in the Denver metro are treating data centers like other industrial land use and zoning projects.

HOW COLORADO STACKS UP TO OTHER STATES

Regardless of stance, the general consensus is that Colorado is late to the data center incentive game. At least 37 states already offer incentive packages, including sales‑ and use‑tax exemptions, property‑tax reductions, and investment tax credits.

Major hyperscale hubs like Virginia, Georgia, Arizona, Texas and Utah provide long‑standing, stable incentive programs that attract massive AI‑related investment to the point where data center companies assume they will be available wherever they plan to build. Lessons learned from those regulatory schemes include tying together incentives with better sustainability requirements and ensuring that development “pays its own way” for electrical infrastructure upgrades and needs. And while environmental concerns are growing, few states with tax incentives have tied them to strict sustainability requirements, unlike Colorado’s current incentive package.

To many, Colorado should be an attractive market for data center development—available land and labor with a mild climate. The state has almost 60 data centers completed or in development along the Front Range, though most are small or mid‑sized. Compared to other states, Colorado will likely remain a secondary market unless and until it hones an incentive program that lures developers to the state, especially with neighboring states like Nevada and Utah growing as Western hubs with established incentives already in place.

And, for some legislators and environmental advocates, that is exactly where they want Colorado to be.

---

This document is intended to provide you with general information regarding local and state policymaking surrounding data centers in Colorado. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.