The Data Center Boom & Its Challenges
1. Surging Demand Will Benefit & Test The U.S. Power Sector
Aneesh Prabhu, Power & LNG Infrastructure Managing Director, S&P Global Ratings, says:
“Significant incremental demand for power from data centers will affect power market dynamics.
Why It Matters: The combination of AI and cloud services with fast-increasing data collection is resulting in a rapid and significant need for new data centers. These are energy intensive and demand significant additional power generation capacity and infrastructure. We view access to power as the most important variable on whether–and how–this growth in data centers will be shaped.
What We Think and Why: In an already tight power market, additional demand will result in tighter supply and higher power prices through the end of the decade. While green energy is favored, we believe this trend will support earnings growth and visibility for all power generators as more long-term contracts are signed. We view this as credit positive for the competitive power markets.”
2. U.S. Real Estate: Computing Risks & Opportunities
Ana Lai, Real Estate Managing Director, S&P Global Ratings, says:
“Surging demand for space to house AI and cloud computing hardware is an opportunity for U.S. data center owners and developers. Risks relating to power and water requirements and financing will have to be managed.
Why it matters: The surge in data center demand will create significant growth opportunities for data center entities. As projects multiply and average project sizes increase, power and water requirements, financing, tenant concentration, and cost inflation emerge as constraints. Navigating these risks are key considerations when assessing data center owners’ and developers’ credit quality.
What we think and why: Not all data center owners are the same. Credit risks differ between hyperscalers and retail/colocation leasing models. Access to energy is an increasingly important consideration. Obsolescence risk is less of a credit issue for the near and intermediate term. Increasing risk appetite to accompany growth could affect credit performance.”
3. More Gas Will Be Needed to Feed U.S. Growth
Michael Grande, Midstream & Refining Managing Director, S&P Global Ratings, says:
“Data centers’ growing demand for electricity will require additional natural gas to support generation, necessitating a response from the North American midstream energy sector.
Why it matters: Data center expansion is central to cloud computing and AI. Sustained growth in data center capacity will require significant amounts of new energy that alone cannot be met by renewable sources.
What we think: North American midstream energy suppliers are already benefitting from increased revenues due to geopolitical energy security concerns. Additional demand from data centers should contribute to at least a decade of supply growth that should be supportive of midstream sector credit quality, though the benefits will accrue most to operators in gas fields near data center hotspots.”
4. Welcome Electricity Growth Will Fall Short of U.S. Data Center Demand
Gabe Grosberg, Infrastructure Managing Director, S&P Global Ratings, says:
“Data center electricity demand should spark sales growth in the long-stagnant North American investor-owned regulated utilities sector.
Why it matters: Regulated utilities will be called on to meet the fast-growing electricity demands of data centers. The significant time required to expand generation capacity is likely to prove a limiting factor in data center growth.
What we think and why: Increased electricity demand from data centers should prove generally supportive of regulated utilities’ credit quality. It will also introduce new risks, notably related to funding and pressures on billing, which will have to be structured to protect existing clients from cost increases related to data center driven growth.”
