By Mark Jaffe, EUCI energy writer
Spurred by the growth in data centers, the electricity utility sector is preparing for a “super cycle” of capital expenditures with a projected $1.4 trillion in investments over the next five years, according to financial analyst Morningstar DBRS.
“In response to increased demand, the utility sector in North America has started and is planning a surge in capital investment,” Morningstar said. The $1.4 trillion is double the amount spent in the last 10 years.
Numerous regions across the country may face load growth of as much as 11.6% over the next 10 years, up from the previous estimate of 6.1%, according to the North American Electric Reliability Corp (NERC).
Consumption by data centers could reach between 325 terawatt-hours and 580 terawatt-hours by 2028, according to U.S Department of Energy data, and consume between 6% and 12% of total U.S. energy demand.
More than half of North America is at risk of energy shortfalls in the next five to 10 years, according to NERC, in large part due to the slow pace of infrastructure investments in the face of higher electricity demand expected from data centers and other electrification programs.
Some states, including California, Texas and Louisiana, have already forecast elevated risks of resource inadequacy in 2026 and could in extreme conditions trigger electricity shortfall, Morningstar said.
Emerging data center hubs such as Virginia, Ohio, Arizona and California are already planning for the additional demand.
And growth in data centers isn’t the only demands the sector faces.
“The challenges posed by the rapid buildout of data centers are overlaid on existing concerns for most utilities, including decarbonization and guaranteeing the reliability of grid infrastructure while increasing the contribution of renewable power,” Morningstar said.
“The projected surge in demand provides opportunities for utilities that must be counterbalanced with structural changes and regulatory support for utilities and rate payers,” the financial analyst said.
There are, however, a set of potential risks in the surge to build out electric infrastructure.
Among these are the uncertainty around the forecast for the capacity needed for data centers, increasing rates for other customers and whether traditional funding sources will be adequate.
There remains uncertainty around how much capacity will be required, how many data centers will be needed before market saturation, and how much electricity will be used by data centers.
“Should data center usage fail to materialize in the scale and magnitude planned, investment recovery could be delayed, leaving utilities without adequate demand to recoup investments efficiently,” Morningstar said.
Nevertheless, the sector is poised to raise record amounts of capital for projects.
“Utilities are increasingly looking to private capital to fill funding gaps,” Morningstar said. “Funding sources, including infrastructure funds, private debt, and private equity, have benefited in recent years with annual average investments increasing by 113% to $37.4 billion in 2024 compared with $17.6 billion in 2016.”
As for the risk of increased rates for other customers as a result of a utility bolstering its capacity to serve data centers, Morningstar said “this will be exacerbated as more data centers become operational.”
There are also regulatory challenges for utilities. Increased capital spending will be subject to “regulatory lag” as approval of investment recovery in rates often takes time.
In addition, in the face of concerns over the impact of data centers on residential and small commercial customers, some utility commissions are developing targeted large load tariffs.
For example, the Public Utilities Commission of Ohio approved the increase of upfront electricity payments to 85% from 60% for data center customers, and the Indiana Utility Regulatory Commission approved a similar payment structure earlier this year.
“Such payment structures include long-term contracts with a minimum monthly charge and larger collateral requirements,” Morningstar said. “The agreements also typically include an exit fee equal to five years of the minimum charge applicable if the data center elects to cancel its services from the utility before expiration of its contract.”
From a credit rating perspective, Morningstar said, the greatest risks are the potential for cost overruns, project delays and regulatory lag, “all of which could have a negative impact on their financial risk profiles.”
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