The power bottleneck is changing how data centers secure financing.
Until recently, data center developers largely took access to power for granted. Securing interconnection reliably took about a year and a half in most parts of the U.S., so it wasn’t a significant variable in a developer’s conversations with financiers. But now that’s changed; demonstrating a project has access to power is increasingly the lynchpin for getting it funded.
Gordon Bell leads digital infrastructure engagements within EY-Parthenon, EY’s strategy consulting arm. As he explained in an interview, in most cases, customer contracts are what unlock financing options for data center developers. And as things stand, power is the priority for customers.
“Speed to power helps you win the customer and get the customer contract in hand,” Bell said. And with that contract, “a whole universe of different financing options becomes available to you.”
Because of the current supply and demand imbalance in the market, some customers are willing to commit to even contracts that won’t deliver them power for years to come, “simply because that’s the best available option that they have in front of them,” Bell added. In these cases where the timeline is longer, however, lenders are likely to be more focused on the delivery risks, ensuring they’re doing their due diligence not only on the developer, but also on the utility that’s eventually bound to deliver the power.
And power access is also starting to change how some lenders think about the structure of financing data centers.
On-site generation is becoming increasingly popular among developers as a strategy to accelerate access to power — and occasionally a way to bypass the grid entirely. Co-locating data centers and new power sources has the enthusiastic backing of President Donald Trump, who incorrectly claimed it “was largely [his] idea” when he took office in January, and encouraged the use of coal generation specifically. This week at a summit on energy and innovation at Carnegie Mellon University, he reiterated his enthusiasm for the idea as a way to speed data center development. CEOs of companies including Blackstone, Bridgewater, SoftBank, AWS, and BlackRock were in attendance.
For lenders, the trend toward on-site generation introduces both risks and opportunities.
“From a lender perspective, having an on-site generation supply may be something they get comfortable with, because more of the process is in the developer’s control, as opposed to in the hands of the local utility,” Bell said.
But, he added, in most cases a grid connection is still fundamental to the success of a project. “So if anything, what we’re seeing is that [on-site generation is] adding complexity to the overall delivery of a particular project, [like] managing the supply chain for gas turbines and the associated equipment.”
The space is not mature enough yet to know how lenders will approach the new challenge.
Structurally, the growing importance of power generation to data centers could mean that lenders might consider financing a data center project and its on-site generation project — such as a solar microgrid, for example — within the same loan. “It’s a structural question that’s still being contemplated in the market,” Bell said.
But that option introduces concentration risks, he added, because the customer for both projects would be the same.
“You need to be confident that that customer is going to have sustaining demand for that project over the very long term,” he said. “One of the potential benefits is that you’re going to have an investment-grade offtaker, and you may not be as exposed to the fluctuations of power pricing and tech changes, as you would otherwise be.”
A version of this story was published in the AI-Energy Nexus newsletter on July 16. Subscribe to get pieces like this — plus expert analysis, original reporting, and curated resources — in your inbox every Wednesday.
