Texas utilities need to manage massive data center demand

Bloomberg News

Texas is poised to displace Virginia as home to the most data centers in the U.S. within the next five years, raising questions about how the state will manage the growth and how utilities will pay for the power. 

Keeping power affordable and reliable will be critical for utilities managing potential credit risks, panelists said Monday at The Bond Buyer's Texas Public Finance conference in Austin. Municipally owned utilities facing massive power requests should first try to figure out whether the projects will even materialize to avoid being on the hook for stranded assets or excess power, panelists said.

With the country in the midst of a major data center boom, Texas is set to become the world's largest data center market by 2030, according to  JLL's North America Data Center Report — Year-End 2025.

That growth means that within the next five years, Texas will add the power equivalent of a Houston-sized city to the Electric Reliability Council of Texas, or ERCOT, system, which mandates the state's power supply, according to Arthur Kimball-Stanley, senior counsel at Norton Rose Fulbright. 

"This kind of growth has never happened before in the U.S.," Kimball-Stanley said. "These projections raise some key big picture questions — can ERCOT support such growth and how will utilities pay for it?" 

Many of the data centers and other so-called large load customers asking for interconnection "are just trying to hold their place in line" and are "shopping around with everyone," Taylor Kilroy, executive director of the Texas Public Power Association, said.

"We have this enormous interest [but] most of that isn't real," he said. "That's the struggle – trying to figure out who's real."

But the power demand that is real raises questions about the length of time it takes to build new power generation, Kilroy said. In the short term, the timing mismatch between demand and supply could lead to some "spooky days," Kilroy said. "But ultimately we'll get to the point where it's in full balance."

Panelists said Senate Bill 6, which was enacted into law last year, seeks to create interconnection standards for large loads that could help address some reliability and affordability concerns as well as stranded asset risks.

The Legislature is not in session until next year but key committees this year are expected to hold hearings and study data centers, including their ability to use sales tax exemptions, panelists noted. "Senate Bill 6 took a good swing at large load" demand and ERCOT-wide standardization, said Kevin Langlais, managing director at BofA Securities. "But we're still going to be talking about this next session." 

For municipal utilities facing the sudden clamor for power, "it comes down to the management team and how proactively they're addressing it and different ways they're protecting themselves," Langlais said.

The chief challenge is protecting the retail customer, he said. "It might be really nice to bring on the large load and the revenue that comes with it, but at the end of the day you have to protect your core customer," Langlais said. "From the underwriting side , we just want to see the issuers are being thoughtful about this."

Current IRS private use rules for tax-exempt bonds restrict public power utilities to three-year contracts with non-government customers, Langlais noted. 

"That's a very big risk imbalance," he said. "Investors want to see that it's well thought out and that the risks have been contained." 

On the credit side, the biggest risk has to do with the cost of power, said Paul Dyson from S&P Global Ratings. ERCOT's market design already "leads to volatility and sustained higher prices," Dyson said. "We've been citing this risk and exposure for several years."