Data Center Development in South Dakota Faces Regulatory Hurdles

South Dakota’s attempt to attract large-scale data center investment has hit a snag, as Applied Digital has paused plans for a facility in Toronto, SD, citing a lack of a “competitive policy environment.” This development follows the South Dakota Legislature’s decision to implement mild regulations regarding electricity and water usage for data centers, and to allow the Public Utilities Commission to charge review fees—measures Applied Digital appears to have opposed.

Applied Digital Pauses South Dakota Project

Applied Digital, a data center company too operating in North Dakota, announced its Toronto, SD project is “unlikely to travel forward” after failing to secure the financial incentives it sought from the state legislature. The company stated it seeks locations with a “competitive policy environment that enables our customers to operate effectively.”

According to a statement reported by KELO-TV, Applied Digital is prioritizing locations where it can “bring…the same long-term economic investment and community partnership” seen in its North Dakota projects in Ellendale, and Harwood.

Legislative Response and Regulatory Changes

The South Dakota Legislature opted against providing financial incentives to data centers, instead approving regulations concerning their resource consumption. These regulations include stipulations on electricity and water usage, and a bill permitting the Public Utilities Commission to charge data centers for contract reviews. This approach contrasts with some other states actively courting data center developers with tax breaks and other incentives.

Broader Trends in Data Center Regulation

The situation in South Dakota reflects a growing national conversation about the appropriate regulatory treatment for data centers. The demand for data centers is increasing due to the growth of generative AI and quantum computing, leading to increased demand for electricity. States are grappling with how to balance attracting this investment with concerns about resource strain and the potential need for infrastructure upgrades.

While some states offer tax incentives, others are imposing regulations typically reserved for public utilities. The Gibson Dunn Data Centers and Digital Infrastructure Practice Group is actively monitoring these legislative and regulatory developments.

Applied Digital’s Expansion in North Dakota

Despite the setback in South Dakota, Applied Digital continues to expand its presence in North Dakota. The North Dakota Public Service Commission recently approved an amendment to Montana Dakota Utilities Company’s electric service agreement with Applied Digital, increasing the permitted electrical load from 225 megawatts to 350 megawatts and extending the agreement through August 31, 2030.

Looking Ahead

The South Dakota situation highlights the importance of a favorable regulatory environment for attracting data center investment. As demand for data centers continues to grow, states will need to carefully consider how to balance economic development with responsible resource management.