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Explosive demand for data center capacity is powering potential possibilities for power generators, electric utilities, midstream gas companies, and other sectors exposed to the trend—while introducing financial pressures from increased capital expenditures; the risk of backlash against power price increases; and negative environmental and sustainability impacts.
What We're Watching
Impressive innovations in the digital economy—most importantly, artificial intelligence (AI) alongside data collection and storage, cloud computing services, and more—are sparking a significant surge in demand for and financing of data centers.
In the U.S., S&P Global Ratings estimates incremental power demand from data centers will reach 150-250 terawatt hours (TWh) between 2024 and 2030, marking an increase commensurate with adding the power demands of New York City in just six years. This would require roughly 50 gigawatts (GW) of new generation capacity, necessitating approximately $60 billion of investment in generation and $15 billion in transmission. Our recent research focuses on the U.S. specifically because data centers' growth is most currently prevalent and relevant in this market, given that most of the technology giants (such as Amazon, Google, Meta, and Microsoft) are major U.S. companies.
The feverish growth of (and expansive expectations for) data centers have taken many participants by surprise, starting with the energy infrastructure players that need to fuel these power-hungry assets—and resulting in a frenzy to accommodate the activity. Established and emerging risks and opportunities are already shaping the future of this booming market and its associated sectors.
We are closely assessing the ongoing implications of data center growth on key related industries, 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.
What We Think And Why
In the U.S., data center growth is likely to be generally credit quality positive for power generation, electric utilities, gas companies, and the real estate sector—all of which are essential to data centers' promise.
Regulated utilities and unregulated power generators are important players in meeting data centers' expansive electricity needs. As a result, we expect data center demand for electricity to catalyze revenues for the country's long-stagnated investor-owned regulated utilities, increasing electricity sales annually by about 1% for several decades. The growing number of data centers will allow the industry to spread its fixed costs over a wider base. Tighter U.S. power markets should support higher prices and enable generators to negotiate long-term contracts and improve earnings visibility. Overall, we believe this will provide modest support for the industry's credit quality.
This increased electricity demand from data centers should also benefit the U.S. midstream gas industry with an additional source of growth capital and contracted cash flow. Because gas can provide substantive, near-term cost-effective and reliable power generation over other low-carbon options (like renewables or nuclear), we expect gas demand to increase by between 3 billion cubic feet per day (bcf/d) and 6 bcf/d by 2030—from a starting point of there being nearly no new gas demand today. This will benefit midstream gas companies in the short- to medium-term. That said, data center-driven demand is unlikely to provide material upside to our credit ratings or outlooks on midstream gas companies (despite our view that this growth is generally low-risk).
Beyond powering these facilities, the surging demand for real estate to house AI and cloud computing hardware is creating an opportunity for U.S. data center owners and developers. In our view, healthy demand will be a key for their credit metrics. We expect these players to benefit from demand growth for new facilities, a positive leasing environment, and support for rental prices—particularly because these increasingly large and numerous projects feature significant investments and project management as key constraining factors. A supply/demand imbalance and high construction costs are likely to support the market value of data centers in the near- to medium-term.
What Could Change
The powerful productivity and innovation that the evolving technological revolution may provide are balanced with meaningful risks to decarbonization efforts, particularly for the U.S. tech industry. At the same time, the sectors benefiting from data sectors' boom could face complex challenges meeting this moment.
In our view, data center emissions could nearly double by 2030 due to the likely reliance on gas-fired power generation to address growing and immediate energy demands. Because new renewables are unlikely to keep up with data centers' demand growth—coupled with the fact that these data centers need reliable and stable energy sources—we view gas as the likely default to address new demand. As a result, data center growth, alongside ongoing security concerns, will support natural gas demand and asset valuations for at least the next decade.
Related increases in power consumption and emissions appear incompatible with many tech companies' carbon-reduction goals. Hyperscalers—the large-scale cloud service providers that are partly responsible for the increased number of data centers—have generally targeted substantive reductions in carbon emissions by 2030 and committed to increasing their use of renewable or carbon neutral energy by 2030. While U.S. technology companies are investing heavily in sourcing low-carbon energy and scaling efficiency projects, significant long-term increases in energy needs could lead to challenges, including greater environmental scrutiny from regulators, investors, and other stakeholders.
Finally, credit quality across power generators, electric utilities, midstream gas companies, real estate, and other sectors exposed to data centers could see challenges rise from increased capital expenditures and a willingness or pressure to take on greater financial and operational risk. For power, in particular, the potential social and regulatory risks that could arise from increased demand leading to price hikes will need to be managed, in order to shield existing customers and avert social backlash.
Holistically, the outcomes of data centers' growth will be financially material to large sections of the economy and broadly positive for the creditworthiness of the issuers we rate.
Writer: Molly Mintz
This report does not constitute a rating action.
| Primary Credit Analyst: | Pierre Georges, Paris + 33 14 420 6735; pierre.georges@spglobal.com |
| Secondary Contact: | Alexandra Dimitrijevic, London + 44 20 7176 3128; alexandra.dimitrijevic@spglobal.com |
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