Where the "staggering" level of data center-driven investment into electric power infrastructure will take the economy and markets remains unclear, but the ride is likely to be wild.
That was the take from a panel on public power Tuesday at The Bond Buyer's Infrastructure conference in Chicago.
Capital expenditure on power has been growing at 40% a year, according to estimates, and then actually growing at 60% a year over the last three years, said panelist Michael Melzer, a partner at Nixon Peabody.
"This year is no different. Current forecasts put it at $1.35 trillion. If the precedent holds, it'll end up close to $1.6 (trillion). That's on book. There are also lease applications that are a little harder to track, but industry puts them… at $3 (trillion) to $4.5 trillion. So you're looking at $6 trillion of additional capital spending," Melzer said.
While many hyperscalers — operators of the largest, most resource-intensive data centers to power artificial intelligence models — are "high cash flow, high revenue," he said, "it is more economically efficient to debt finance." In aggregate, "we're flooding the market with debt. And I don't think it's going to hit the municipal market specifically, but it's hard to imagine that not having a major impact on capacity across all credit types."
There's a limit to how much can be absorbed, "and they're financing sometimes three- to five-year life assets on a 100-year basis. So I can't help but envision that this will cause some strain in the next couple years," Melzer said.
"I think we're going to see either a change to the rules or very creative structures that require more capital from the hyperscalers," he said.
Assured Guaranty Director Chris Jumper noted that the American Public Power Association has been lobbying Congress and is "working its political angles in Washington to open it up and get some concessions for tax-exempt funding of data centers."
But Jumper said "everyone realizes the mood has pretty much changed" on data centers. "Maybe data centers don't make the best neighbors."
He added, "To the extent that the data center isn't funding 100% of its generating assets or transmission assets… everyone's going to be laser focused on it."
Data center customers can be appealing to utilities because they are high revenue, high energy users running 100% of the time, said Jacob Bissell, senior director of integrated system planning at CPS Energy, San Antonio's municipal electric utility.
"So there's a tax base benefit, there's a revenue benefit, and for CPS Energy, our ownership model is we return 14% of our revenue back to the city, and that funds 30% to 40% of San Antonio's operating budget," he said. "The water, the impact to neighborhoods, that needs to be addressed. I think slowly but surely it will."
But Jumper said in some regions, especially the Northeast and Midwest, 25- to 50-year-old transmission and distribution assets are not uncommon. They were never designed to be operated 24/7, 365 days a year, he said, and "in addition to running around the clock, you know, these large users require huge amounts of water for cooling."
That raises questions about who pays for the buildout that is largely designed to benefit new data center customers.
Jumper said Assured Guaranty is seeing states and local power utilities take important steps to address the asymmetrical risk of building costly, long-lived assets to serve data center loads. "These steps have to start with having an extensive and robust vetting process to ensure that the existing customers won't be subsidizing and backstopping this speculative tech infrastructure," he said.
Melzer teased a novel legal structure that his firm is developing.
"We've been working on at least a concept of a non-recourse limited obligation structure for a public power entity in terms of moving quickly and being off book," he said. "I think that they're probably the best fit, more so than (investor-owned utilities) or co-ops or anybody else."
In terms of risks to the public utility, he said, "it is actually quite novel in terms of having to have effectively a collateral structure that provides for long-term coordination." That includes helping them resell unused power that's generated, and provide sufficient protections around demand.
Looking ahead, Jumper said the greatest threat facing utilities is shifting politics, and with that, changing regulation.
The panel was moderated by Bond Buyer market intelligence analyst Jeff Lipton,
