A Few Details Michigan's Legislators Might Want to Consider

Michigan’s nitwit media have been gushing over the announcement last Thursday that Switch, LLC will purchase the erstwhile Steelcase Pyramid southwest of Grand Rapids and convert the site into one of their state-of-the-art SuperNAP cloud computing data centers. The ‘information economy’ has been touted as Michigan’s future by no less than Michael Dell. He was in Detroit to address the Economic Club after his company purchased EMC Corporation, another major data center operator with three facilities in Michigan, in a blow out $ 67 billion buyout. Switch SuperNAP promoters, notably The Right Place, Incorporated, are touting 1,000 new jobs in Gaines Township, but this should be regarded wth the same skepticism as any other MEDC clone employment prediction. No one has said anything about financing, but there is good reason to believe that Michigan will be asked to ‘participate’ here as well.

Steelcase vacated their distinctive Corporate Development Center in 2012 and sold it to to Norman Properties in May. Norman Properties, in turn, has agreed to sell this property to Switch LLC, pending the approval of State tax breaks. Those tax breaks have been introduced in the Michigan House by Representatives VerHeulin, Yonker, and Schor. Identical tax break legislation has been introduced in the Senate by Senators Hildenbrand, Schuitmaker, and MacGregor. These legislators are targeting quick passage in the legislative session which convenes after their Thanksgiving break. They might want to consider a few details before they lunge further forward.

This being RightMI, you might think this post is about those tax breaks. You would be wrong. There is actually a critical flaw in this project which will injure Consumer’s Energy electricity customers all across West Michigan. A couple of other issues exist as well, but they pale in comparison to the electricity consumption of this project.  Those tax breaks are a lost cause in American politics today – not even worth protesting.

The Critical Flaw

Data centers are major energy users – huge electricity consumers and polluters, in fact. Switch, LLC’s 2.3 million square foot existing SuperNAP data center in Las Vegas was a $ 1 billion investment and has an electrical load of 310 MW today. The SuperNAP Michigan project is quoted as a $ 5 billion investment and is planned to build out to 2 million square feet. No one has released any power consumption figures, but it is reasonable to assume that SuperNAP Michigan will have an electrical load of at least 300 MW. Given the ever increasing electricity consumption of data centers it could be a lot more, but for the purposes of this discussion we will work with a 300 MW number.

300 million watts of electricity (300 MW, which is the same as 300 MVA for our purposes) is a huge amount of electricity, enough to produce 2.5 million tons of finished steel annually by the most electrically intensive processes. Consumer’s Energy, the utility serving Gaines Township, has a peak demonstrated summer generating capacity of 5,913 MW today – which includes their Ludington pumped power storage facility. Exclude the Ludington pumped power storage facility and Consumer’s actual generating capacity is 4,958 MW. So a 300 MW load from SuperNAP Michigan will represent 5 % of Consumer’s peak capacity and 6 % of their actual peak generating capacity.

No problem, you say? Just build another power plant to deliver the required load. Actually, this additional load is a very big problem in the age of President Obama’s Clean Power Plan. Michigan electrical utilities are in a spat with the Midwest Independent Transmission System Operator (MISO) over the future adequacy of Michigan’s electrical grid. MISO projects that the Lower Peninsula will be short 3,000 MW of electricity generation by 2016. Consumer’s is planning to shut down seven coal-fired power plants which now provide 950 MW of electricity rather than retrofit them to comply with Obama’s CPP emissions standards. Consumer’s will bring on line 542 MW of natural gas fired turbines in Jackson to partially offset this loss and hopes that customer efficiency improvements will offset the 408 MW decline in their future generating capacity. All of a sudden, they will now have to provide for an additional 300 MW load.  A relentless, 24 hour a day, 365 day a year, 300 MW load.

It is not clear that there is enough natural gas transmission capacity to install another 300 MW of gas-fired turbines in West Michigan. 300 MW of gas-fired electricity generation requires something more than one million cubic feet of natural gas per hour. Michigan’s Thumb suffered natural gas starvation in November 2014 due to inadequate transmission capacity and installing another 300 MW of gas-fired generation will very likely allow West Michigan to enjoy the same starvation during peak load periods. Since the CPP requires overall reductions in carbon dioxide emissions, adding 300 MW of additional carbon dioxide creating generating capacity will probably require Consumers to shut down more than just the 950 MW of coal-fired electrical generation presently contemplated. This adds secondary costs beyond just the additional generating capacity.  Thank you President Obama.  This won’t end well unless someone’s plans change radically (and expensively).

It is possible that someone thinks they can ‘wheel’ power in for SuperNAP Michigan from DTE or out-of-state generators, but there are two problems here. The data center industry is fanatical about power reliability – it is a core element of their sales pitch to clients. Data center power outages knock their clients off the internet. Wheeled power is anything but reliable, requiring careful coordination by utilities using a lot of antiquated manual switches along the wheeled pathway. Wheeling sort of works, but the slow responses of switchgear along the path routinely causes voltage fluctuations which are not kind to the electronics in data centers. Switch, LLC is also acutely aware of the power consumption of their SuperNAP centers and goes to great lengths to assuage their trendy clients’ global warming concerns by touting the use of 100% renewable sourced electricity.  In Michigan, renewable energy is already heavily subsidized by residential and small business ratepayers.  Industrial and government electricity consumers escape these subsidy costs by opting out through electricity choice programs.

About half of Consumer’s current renewable electricity generation is from wind, a source which is not exactly reliable and quite expensive.  The MISO historical record shows that Michigan wind power, by far the most significant renewable component (883 turbines, about 58% of renewable generation), was only available 31.5% of the time (termed ‘capacity factor’) during 2011 and 2012. During two months, July and August of 2011, wind power was available only available 16% of the time.  Not reliable by data center standards, not by a long shot.

Consumer’s Public Act 295 of 2008 ‘leveled’ cost of wind power is $ 90.60 per MWh – and this number is almost certainly a politically contrived myth. While $ 90.60 per MWh is cheap by renewables standards, it is quite expensive when compared to conventional pre CPP coal-fired electricity generation. The U.S. EIA reports that Michigan’s average electricity price for industrial consumers is $ 74.40 per MWh. The comparable price in Nevada where Switch, LLC’s current facilities are located is $ 86.60. Given that they will soon consume about a quarter of the electricty generated in Nevada, you can reasonably presume that they pay substantially less. Utilities really like data centers because their electricity consumption is invariant and this is reflected in the prices they are charged.  A serious question for Consumer’s legacy customers is what is Switch planning to pay for their electricity?  Electricity pricing is indeed a zero sum game in an environment where utilities are the largest political contributors.

The entire issue of our electricity sources, regulation, and prices is before the Michigan Legislature right now. Senator Nofs and Representative Nesbitt are trying to thrash out a replacement for Act 295 of 2008 by the end of this year. SuperNAP Michigan just threw their efforts into total chaos. There are a variety of workable technical solutions to SuperNAP Michigan’s electricity demands, but they are all expensive. The question at this point is whether those costs will be borne by SuperNAP Michigan or Michigan’s other electrical consumers in the form of a hidden subsidy provided through their electrical bills. Those electrical bills are already expected to rise 10 % a year due to President Obama’s CPP, so additional increases will be most unwelcome.

The Minor Issues

Now, about those 1,000 new jobs promised by SuperNAP Michigan promoters. Only 400 of those will be Switch, LLC employees; the rest will be colocated client employees who will spend varying amounts of time on premises. Many will be fly-ins, visiting only when issues arise, and H-1B visa holders to boot.. Switch, LLC is well known for their rigorous security, so a good portion of their 400 employees will be ex military trigger pullers providing that DoD level security. How Switch, LLC can claim a 70% veteran workforce; but also their original Las Vegas data centers directly serve the DoD which does not permit any non NATO foreign national employees.

The actual full-time tech cadre at SuperNAP Michigan is likely to be in the vicinity of 100, not the 1,000 headlines suggest to the gullible. And a lot of that tech cadre are likely to be foreign nationals on H-1B visas since SuperNAP Michigan will be unfettered by DoD security rules. West Michigan already has a critical shortage of tech workers. EDC Corporation, just purchased by the aforementioned Michael Dell, is a major employer of H-1B visa recipients, bringing in over 900 a year for their data center operations. Each H-1B visa is good for six years with extensions, so these annual numbers should be multiplied by six to get a feel for the number of H-1B visa holders at an employer.  A little MEDC style sleight of hand with the employment numbers is being paraded before your very eyes.

Which brings us to the final issue, financing. $ 5 billion is a lot of money and no one has said anything about where it is coming from. Switch, LLC is in the midst of a very expensive expansion in Tahoe/Reno and because they are a private company we have no idea whether they have the debt capacity to finance a further $ 5 billion project. Will they expect Michigan to ‘participate’ in in the financing of SuperNAP Michigan? We are talking about jobs which require $ 5 million in capital each if you buy the 1,000 new employees headlines. $ 12.5 million per employee if you use the more realistic 400 new employee number. By comparison, Michigan auto industry jobs require something around $ 1 million in capital each. And the vast majority of Michigan workers are in lower paying jobs which capitalize at $ 50,000 to $ 150,000 each. Will it be fair to those less well compensated workers to use their taxes to support a bunch of H-1B visa holders? Michigan could get a lot more jobs elsewhere in its economy for the same capital investment.

We are all for development when it is well planned and privately paid for.  Unfortunately Michigan hasn’t been very good at this over the last 50 years.  The SuperNAP Michigan project appears to continue this sad tradition.

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