Following years of acrimony between San Jose and PG&E over energy reliability, the city and the utility giant Friday announced a new plan for large energy users as part of in an effort to ensure San Jose remains an attractive location for investment while growing the tax base and lowering residents’ bills.
After frustrations escalated to the point that San Jose leaders had explored creating a municipal utility to handle future demand, the two parties hammered out a deal that promised infrastructure and speed improvements, although the city could still pursue that option should PG&E fail to meet its obligations.
The plan sets out objectives and key results for the first 10 priority projects in Edenvale, North San Jose and downtown, including Westbank’s net-zero data center and housing project. Those 10 projects, which the mayor’s office said were confidential, combine to equal 880 MW of new load, or about 80% of the city’s current energy use. Ultimately, the grid upgrades PG&E has committed to will support nearly 2,000 MW of new power demand.
“What I’ve wanted to explore since taking office is a reset of our relationship with PG&E and what it would look like for us to partner more deeply and have real guarantees from PG&E related to performance,” Mayor Matt Mahan said in an interview with The Mercury News. “What this implementation framework — the first of its kind in PG&E territory — does is it creates a binding performance obligation related to speed uncertainty of power for large load customers. Those customers could be R&D facilities, other manufacturing uses, data centers, etc.”
While city officials never intended for a municipal utility to replace PG&E outright, energy reliability had become an increasing concern, especially for providing new service in growth areas like the downtown and North San Jose.
Along with high land and development costs hampering significant investment in San Jose, energization — the certainty of being able to connect to the grid and have reliable power — has become a major barrier, making Friday’s announcement crucial as San Jose looks to become a premier data center hub.
Bob Staedler, a land-use consultant who previously worked at the San Jose Redevelopment Agency, called the announcement a huge milestone, noting from his experience that developers have to invest a sizable upfront cost for significant projects.
“Getting these commitments could speed up San Jose’s economic prosperity tenfold,” Staedler said. “One of the prevailing things you hear is that the biggest obstacle is how long it will take. Large-scale data centers can only happen if they are ready to go.”
Aiding the city’s need for more power, LS Power, a Missouri-based utility development company, is constructing two major high-voltage transmission lines over the next few years to improve electrical reliability in the area. The first transmission line runs through North San Jose, coming down from Fremont on a path near the regional wastewater facility. The second line runs from the Metcalf substation, just north of the Coyote Valley, to downtown San Jose. Mahan said San Jose’s power capacity could grow to 3 GW in the next 20 years.
Over the past several months, PG&E has announced or undertaken several projects to improve reliability and performance, as well as increase capacity, including upgrades at substations downtown near Diridon Station and the intersection of Coleman Avenue and Santa Teresa Street.
Mahan said that the demand for data centers was significant because cutting-edge, low-latency computing capacity could help draw R&D labs that want to be as close to those data centers as possible. He added that they could help the city maintain its competitive edge in the global artificial intelligence race.
For San Jose residents, the deal with PG&E could provide significant benefits, including more jobs and a substantial increase in the city’s tax base at a time when it is facing financial challenges due to stagnating revenue and increased costs. A single 99 MW data center could generate $3.5 million to $6.4 million in annual general fund revenue, which could go toward critical needs such as public safety, road maintenance, or other essential city services.
“We’re an expensive, slow place to build, and I think that unlocking this investment gives us the ability to invest in infrastructure, transit, affordable housing, public amenities, public safety staffing, and upgrade our public infrastructure and services to enable that next phase of growth,” Mahan said. “I think this is a great way to jumpstart a virtuous economic cycle.”
The additional energy consumption could also lower residents’ bills. PG&E officials previously told the City Council that 1 GW could reduce bills by 1-2%.
The agreement with PG&E also requires the utility provider to fund six roles within the city’s public works and economic development departments, which Mahan said would help both parties work more efficiently and effectively together to anticipate projects, remove barriers and meet deadlines.
PG&E has six months to fix any failures to meet its obligations. If that fails, San Jose can terminate the agreement within 30 days and reconsider exploring the establishment of a municipal utility.
“We are focusing first on what we think is the lowest risk approach to delivering these projects, which is partnering more closely with PG&E, but if the utility can’t deliver, we will go back to pursuing a municipal utility,” Mahan said.