What makes a data center solar project financeable?

As the explosive growth of data centers continues to stump U.S. electric utilities, developers are having to get creative in how they power them. One option: adjacent, purpose-built renewables projects.

Most data centers slated to come online in the next few years are coming out of the deep-pocketed tech giants, like Microsoft or Google, looking to fuel their artificial intelligence platforms. But for small- and medium-sized renewables developers, there’s something of a funding gap — even for those with data center offtakers.

Sunrocket Capital, which offers full lifecycle funding for solar projects, has found that the convergence of electrification, grid constraints, and increased demand for computing power has created a “perfect storm” for lenders, said COO Derek Gabriel. In the last year the company has seen an influx of developers seeking funding specifically for projects with data center offtakers.

Those developers are looking more seriously at data center projects, he added, because of the panic signals coming from the electric utility industry. 

“It’s a huge market, and it’s only going to get bigger; we see the opportunity right in front of us,” Gabriel said. Developers are “coupling the opportunity with the incentives,” he added. “They’re connecting the dots.”

Beyond data center offtakers

But the data center boom alone isn’t enough to make a project a good financial bet, said Gabriel. 

The offtaker itself is important — a project for a Google or a Microsoft is of course a more solid bet for the lender — but the “secret sauce” is predictable, contractible revenue in the form of solar renewable energy certificates, state incentives, and utility rebates.

That secret has been “out of the bag” for some time, he added, but the AI era is presenting developers with a new segment on which to apply a strategy that essentially requires a backup offtaker. 

“Solar has always sought…energy hogs,” Gabriel said. “The market today is in data centers.”

But data center energy needs aside, those predictable and contractible forms of revenue are all key elements of a solid project offtake pipeline, he added. Access to interconnection is therefore extremely important to most of these projects, because if the data center market eventually goes south, the project still needs to be able to stand.

The smart developer is going to “hitch their wagon” to states with solar incentive programs, he added, “just like they always have.”

The utility ‘backstop’

That’s the logic behind how Sunrocket financed five projects in central Illinois that will provide 9.24 megawatt-hours to three new data centers in the region, Gabriel said. 

In addition to powering the data centers directly, those solar fields will also be able to provide extra electricity to the local grid, operated by Ameren Illinois. And, importantly, the developer will receive solar renewable energy credits through the state’s incentive program.

Sunrocket provided $23.5 million in construction-to-permanent funding transactions — a setup in which it offers a loan to finance project construction, like materials and labor, and after construction is complete that loan is converted into long-term financing.

That case was slightly unique, because solar developer Donato Solar and data center company Gail Technologies have the same owner, Gabriel said, but ultimately Sunrocket was less interested in the data centers and more interested in state and local programs.

“We didn’t really look at the PPA [with the data center developer]. We strictly viewed the contracted revenue,” Gabriel said. 

In the case of the Donato Solar projects, that revenue was predictable, stable, and backed by Illinois, he said. And the cooperation with Ameren offered an added layer of stability: it was “the check mark that allowed us to feel comfortable to move that from a term sheet to actual closing,” Gabriel added. 

He characterized Ameren as particularly solar-friendly, plus it was looking to add additional generation capacity, which made central Illinois an ideal territory for Sunrocket to shell out millions of dollars for a project.

“When these installations are being planned, the utility policy, the utility growth forecast, is very important,” he said.

Mapping future deals

Outside of Illinois, Sunrocket has a pipeline of data center projects that it’s considering backing, including in New Jersey and Northern Virginia, Gabriel said. The company expects those deals to be finalized this summer. 

But certain regions central to the data center boom, like Georgia, are a worse bet for Sunrocket on account of their relative lack of solar incentives.The company would bring a higher level of scrutiny to a solar project in that region, because the state isn’t there as a backstop. 

There, the utility builds solar installations itself and accommodates larger data center clients like a Google or an Amazon directly, Gabriel explained, leaving the region hard to penetrate for private developers like Donato.

Ultimately, Gabriel said, a lender’s decision at this moment comes down to one question: “ if a data center goes dark, who can we sell power to?”