Key Takeaways
- In our view, prospects for load growth from data centers and beneficial electrification mandates have the potential to expose U.S. not-for-profit electric utilities to negative credit pressures due to the substantial investment requirements to serve load growth.
- For those electric utilities with surplus power generation resources, load growth might strengthen credit metrics as utilities spread fixed costs over more megawatt hours.
- S&P Global Ratings' base case assumes annual electricity sales growth of about 1% for the next several decades, which is a significant rise following nearly flat sales growth in the past two decades.
- Preserving credit quality among not-for-profit electric utilities will require mitigating customer nonpayment, avoiding cost shifting among new and existing customers, and developing rate structures that provide for the timely and sufficient recovery of the costs of adding resources to support new loads.
Utilities Face A Milestone
Following two decades of stagnant national electricity sales, the introduction of new loads from data centers and beneficial electrification is, in our view, a significant development for U.S. not-for-profit electric utilities. (According to the International Energy Agency, beneficial electrification is replacing technologies or processes that use fossil fuels with electrically powered equivalents.) The magnitude of load growth might manifest to differing degrees among public power and electric cooperative utilities and largely reflects expectations of an increasing number of data centers and economic activity.
Why it matters
The prospects for the substantial load growth opportunities that data centers and beneficial electrification directives present will provide opportunities for not-for-profit electric utilities to enhance their revenue streams and possibly spread fixed costs over more megawatt hours. However, S&P Global Ratings anticipates that serving these new loads will likely require significant investments in generation, and in transmission and distribution infrastructure, the costs of which might pressure financial metrics in the absence of effective cost recovery mechanisms that don't exacerbate retail rate affordability issues for existing non-data center customers. Stable credit quality will also hinge on rate design that perpetuates sound alignment among revenue, expenses, and debt service.
In addition, adding data center loads can create exposures to extreme customer concentration and vulnerability to customer departures before the costs of infrastructure investments have been fully recovered. The cost pressures utilities will likely face to provide reliable service to existing and new loads coincide with a need to invest in buttressing utility infrastructure against more frequent and severe climate events. Utilities also face costs from capital spending requirements of energy transition mandates by supplanting legacy thermal generation with cleaner resources.
What we think and why
Right now, capital-intensive not-for-profit electric utilities are facing the financial pressures of elevated costs of materials, labor, and debt associated with maintaining infrastructure, buttressing their systems to withstand climate events, and investing in emissions remediation. And that means the financial burdens of adding generation, transmission, and distribution resources to serve additional load attributable to data centers and customers' compliance with beneficial electrification mandates will likely magnify the cost pressures utilities and their consumers already face. Retail electricity rate inflation has consistently and meaningfully outpaced the broader Consumer Price Index in the past two years. The outsize inflation that retail electricity prices exhibit magnifies the affordability difficulties associated with recovering added capital and operating costs from consumers, which can hurt credit metrics by whittling electricity rate affordability.
We believe that owners of some of the largest data centers have the financial capacity to wholly absorb the costs attributable to developing the infrastructure necessary to serve their loads, thereby shielding other utility customers from the infrastructure costs new loads present. However, when not-for-profit electric utilities provide service to operators of smaller data centers, management needs to focus on reducing exposures to the risk that new customers might default on financial obligations. Management also should develop retail rate frameworks that allocate costs of serving the new load exclusively to the data centers without socializing costs among existing customers. Otherwise, adding the new load might erode rate affordability and the capacity to produce sound financial margins that support ratings.
Related Research
- Data Centers: Rapid Growth Will Test U.S. Tech Sector's Decarbonization Ambitions, Oct. 30, 2024
- Data Centers: Rapid Growth Creates Opportunities And Issues, Oct. 30, 2024
- Data Centers: Surging Demand Will Benefit And Test The U.S. Power Sector, 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: Computing Risks And Opportunities For U.S. Real Estate, Oct. 22, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | David N Bodek, New York + 1 (212) 438 7969; david.bodek@spglobal.com |
| Nicole Shen, New York (1) 332-323-4605; nicole.shen@spglobal.com | |
| Secondary Contacts: | Jeffrey M Panger, New York + 1 (212) 438 2076; jeff.panger@spglobal.com |
| Tiffany Tribbitt, New York + 1 (212) 438 8218; Tiffany.Tribbitt@spglobal.com |
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