Key Takeaways
- The surge in U.S. data center numbers and capacity should support credit quality for sectors exposed to the trend, including power generators, data center owners and developers, electricity utilities, and midstream gas companies.
- S&P Global Ratings expects U.S. data centers will require 150 to 250 terawatt hours (TWh) of incremental power per year to 2030, with grid infrastructure likely the biggest hurdle to meeting that demand.
- We expect that demand will result in sustained higher prices for power generators, increasing electricity demand after two decades of stagnation, and a reinforcement of the role of gas, with additional demand of between 3 billion cubic feet per day (bcf/d) and 6 bcf/d by 2030.
- Risks relating to this rapid data center growth include financial pressures from increased capital expenditure, a potential for a backlash against power price increases, and environmental impacts including rising carbon emissions due to renewables' limited near-term ability to meet data centers' power needs.
For most casual users, AI and cloud computing services can seem detached from the physical world. But every online save, search, and AI query requires a server and, typically, data storage. As those services expand, demand for the hardware that enables them is surging, leading to commensurate growth in data centers--the power-hungry facilities which house the infrastructure.
The speed and extent of that growth promise to be remarkable and have taken a significant portion of the market by surprise, meaning there are few plans in place to accommodate this growth. For example, S&P Global Ratings expects incremental U.S. power demand from data centers will be between 150-250 terawatt hours (TWh) between 2024 and 2030--a rate of increase that will equate to the addition of the power demands of New York City in just six years. Unsurprisingly, that will have implications for industries exposed to data centers, including power generation, electricity utilities, gas companies, and the real estate sector.
We expect data centers growth will be generally credit quality positive for those sectors:
- Tighter U.S. power markets should support higher prices and enable generators to negotiate long-term contracts and improve earnings visibility.
- We expect data center demand for electricity to boost revenues at North America's investor-owned regulated utilities, underpinned by an annual about 1% increase in electricity sales that should last decades.
- Data center developers and operators should benefit from demand for new facilities and support for rental prices.
- U.S. midstream gas suppliers should benefit from data centers' need for the rapid expansion of cost-effective and reliable power for generation--not least because it will be beyond the near-term capability of other low-carbon options (renewables or nuclear).
New risks, both for those sectors and the wider environment, will also emerge and will have to be managed. Not the least of those will be the considerable sustainability challenges, particularly relating to greenhouse gas emissions, which notably threaten the tech sectors' generally ambitious decarbonization plans.
A series of reports produced by our sector experts look at the implications of data center growth on key related industries in the U.S., its potential to influence credit quality, and the limitations and risks that could shape the future of the tech sector's AI and cloud ambitions.
Computing The Risks And Opportunities For U.S. Real Estate
Sustained demand for data center capacity should support the new projects for developers and rents for the facilities' owners and operators. Increasingly large and numerous projects will demand significant investment and project management talent, both of which are likely to be key constraints on the pace of growth. A willingness (and pressure) to take on greater financial and operational risk could weigh on credit quality, while rollover risk and obsolescence due to evolving tenant needs could also eventually prove an issue.
For our in-depth review see "Data Centers: Computing Risks And Opportunities For U.S. Real Estate," published Oct. 22, 2024.
Surging Demand Will Benefit And Test The U.S. Power Sector
Significant incremental demand for power from data centers will require about 50 gigawatts of new generation capacity through 2030. That will change power market dynamics and should have positive credit quality implications for companies in the merchant power sector. The tech-sector notably favors lower-carbon emitting energy, including renewables, but new demand will support earnings growth and visibility for all power generators as more long-term contracts are signed. At the same time, we view access to power as the most important variable in determining the speed and extent of data center growth.
For our in-depth review see "Data Centers: Surging Demand Will Benefit And Test the U.S. Power Sector," published Oct. 22, 2024.
More Gas Will Be Needed To Feed U.S. Growth
The rapid growth in U.S. data centers' energy demands is likely to be met, in the near term, by low-risk gas projects with manageable capital expenditure, notably in gas fields near data center growth hubs in Texas and the Southeast. We estimate that U.S. data centers' increasing energy demands will lead to additional gas demand of between 3 billion cubic feet per day (bcf/d) and 6 bcf/d by 2030, from a starting point of almost none today. The resulting modest benefits for midstream operators are unlikely to have a significant effect on credit quality, particularly compared to the potential for the sector to be reshaped by consolidation and other demand factors.
For our in-depth review see "Data Centers: More Gas will Be Needed To Feed U.S. Growth," published Oct. 22, 2024.
Welcome Electricity Growth Will Fall Short Of U.S. Data Center Demand
We expect data center electricity demand will boost revenues at North America's investor-owned regulated utilities, providing modest support for the industry's credit quality. Our base case assumes annual electricity sales growth at about 1% for several decades, which will be transformative for an industry used to stagnation but will fall short of meeting the tech industry's needs.
The potential for increased demand from data centers to result in price hikes will have to be managed to shield existing customers and avert the potential for a backlash that give rise to regulatory risks.
For our in-depth review see "Data Centers: Welcome Electricity Growth Will Fall Short Of U.S. Data Center Demand," published Oct. 22, 2024.
Rapid Growth Will Test U.S. Tech Sector's Decarbonization Ambitions
U.S. tech companies' emissions could increase by 40 million to 67 million tons of CO2 equivalent (tCO2e) per year by 2030 if data center's growing energy demand relies on gas-fired generation. That is at odds with major tech players' ambitious decarbonization goals, which are premised on tapping low-carbon energy for power (though also employ carbon offsets). Emission concerns are unlikely to be a major impediment to the sector's growth, but significant long-term increases in energy needs could lead to challenges, including greater environmental scrutiny from regulators, investors, and other stakeholders.
For our in-depth review see "Data Centers: Rapid Growth Will Test U.S. Tech Sector's Decarbonization Ambitions," published Oct. 30, 2024.
What's Next
The independent and interdependent effects of data centers' growth on the key sectors in our reports speak to the complexity of a technology landscape that will be transformed by AI, its rapidly expanding capabilities, demand for related infrastructure, and hunger for energy.
It is a future, for example, that comes with the promise of energy efficiencies delivered by the same technology that threatens increases in carbon emissions linked to greater power consumption. And it is a future that will inevitably require a balancing act that tempers innovation with sustainability, and long-term benefits against short-dated negatives.
The outcomes, for better or worse, will be financially material to large sections of the economy and the creditworthiness of the issuers we rate.
Writer: Paul Whitfield.
Related Research
- Data Centers: Rapid Growth Will Test U.S. Tech Sector's Decarbonization Ambitions, Oct. 30, 2024
- Data Centers: Computing Risks And Opportunities For U.S. Real Estate, Oct. 22, 2024
- Data Centers: Welcome Electricity Growth Will Fall Short Of U.S. Data Center Demand, Oct. 22, 2024
- Data Centers: More Gas will Be Needed To Feed U.S. Growth, Oct. 22, 2024
- Data Centers: Surging Demand Will Benefit And Test the U.S. Power Sector, Oct. 22, 2024
- U.S. Tech's AI-wakening: Enterprises Tread Cautiously, Hyperscalers Charge Ahead, May 9, 2024
- Data Centers In South And Southeast Asia: Balancing Risk And Reward, Sept. 10, 2023
This report does not constitute a rating action.
| Primary Credit Analysts: | Pierre Georges, Paris + 33 14 420 6735; pierre.georges@spglobal.com |
| Sudeep K Kesh, New York + 1 (212) 438 7982; sudeep.kesh@spglobal.com | |
| Secondary Contacts: | Aneesh Prabhu, CFA, FRM, New York + 1 (212) 438 1285; aneesh.prabhu@spglobal.com |
| Michael V Grande, New York + 1 (212) 438 2242; michael.grande@spglobal.com | |
| Gabe Grosberg, New York + 1 (212) 438 6043; gabe.grosberg@spglobal.com | |
| Ana Lai, CFA, New York + 1 (212) 438 6895; ana.lai@spglobal.com | |
| Terry Ellis, London +44 20 7176 0597; terry.ellis@spglobal.com |
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