San Jose Races to Become Bay Area’s Data Center Capital
December 21, 2025
San Jose is aggressively positioning itself as the epicenter for data center development in the San Francisco Bay Area, capitalizing on the explosive growth of the artificial intelligence industry. This strategic push, however, raises significant concerns about the strain on the regional power grid and the potential for rising electricity costs for Pacific Gas & Electric (PG&E) customers.
The utility’s internal “data center project pipeline” reveals the scale of the demand. San Jose dominates this pipeline with requests to power 11 proposed projects totaling 1,630 megawatts of capacity—enough electricity for approximately 1.2 million homes. This figure is more than triple the number of housing units in the city itself. Hayward follows distantly in second place with four projects requesting 975 megawatts. This construction frenzy is driven by billions in investments from major tech firms and venture capitalists into AI, which relies on data centers housing thousands of computer chips for processing.
City leadership has actively embraced this trend. Mayor Matt Mahan supports the development, with officials highlighting San Jose’s prime location within 25 miles of dozens of Fortune 500 tech headquarters, a proximity that reduces latency for AI computations. “City Hall’s enabling stance is a major driver,” said San Jose civic-engagement consultant Ellina Yin, who noted that available large development sites, water infrastructure, and a power-supply deal between the city and PG&E add to the appeal. For the municipality, the financial incentive is clear: a city memo from March estimated that a single fully operational 99-megawatt data center could generate $3.5 to $6.4 million annually in new tax revenue with minimal demand for additional city services.
The massive energy requirements of these facilities, however, present a formidable challenge. PG&E reported last year that infrastructure for data centers costs between $500 million and $1.6 billion for every 1,000 megawatts of capacity. With a total Bay Area pipeline of 3,500 megawatts for projects expected in the coming years, the utility’s capital spending could reach $1.75 billion to $5.6 billion. While PG&E argues that revenue from data centers could eventually allow it to cut residential power rates by 10% or more, the California Public Advocates Office has labeled such projections as “optimistic,” warning that if expected revenues fail to materialize, “the significant costs that utilities incurred to serve these data centers will be passed on to existing ratepayers.”
U.S. Senators Elizabeth Warren, Chris Van Hollen, and Richard Blumenthal echoed this concern in a recent letter to tech companies and operators, stating, “Utility companies have spent billions of dollars updating the electrical grid to accommodate the unprecedented energy demands of AI data centers and appear to recoup the costs by raising residential utility bills.”
Local controversies are also mounting. In San Jose’s Santa Teresa neighborhood, an Equinix data center under construction is slated to include 36 diesel backup generators, alarming nearby residents like Lisa Campbell, who worries about air quality and the safety of storing nearly 300,000 gallons of diesel fuel on site. Furthermore, city planning documents have noted negative impacts from several projects, including harm to habitats and wetlands in North San Jose and the loss of important farmland in Gilroy. Despite findings that two proposed downtown data center-and-housing complexes are “not likely to contribute to a more vibrant urban environment,” they are proceeding under a plan to streamline projects deemed of “extraordinary benefit.”
With 17 of the 26 data centers in PG&E’s pipeline expected to come online within five years, California stands at a crossroads. State Senator Josh Becker warned that data centers “could be a boon, or they could be a big new problem,” highlighting the risk of residents and small businesses subsidizing the industry’s surge through higher bills. As the build-out continues at full steam, the balance between economic opportunity and community cost remains intensely debated.
Source: mercurynews
