Grid constraints and electricity affordability concerns are increasing regulatory scrutiny and could slow the pace of new grid-connected data center development and extend implementation schedules, particularly for projects awaiting power and interconnection approvals, Fitch Ratings said in a recent report.
"Regulatory uncertainty heightens permitting and completion risk for new-build projects, especially if they have not secured required permits by financial close. Limited grid capacity will encourage more data center developers to pursue behind-the-meter (BTM) or co-located arrangements with generation assets," it said.
"Rapid data center growth is increasing electricity affordability concerns as utilities invest heavily to meet rising power demand," it said.
Fitch said that grid infrastructure "is a key restriction amid rising demand, limited transmission capacity and an outdated interconnection process. The U.S. grid was not designed for large data center loads and thousands of new renewable and storage projects."
A data center can be built in 12–24 months, but new generation and transmission projects can take 5-10 years or longer, it noted.
Fitch believes power supply challenges will spur developers to consider incorporating BTM solutions in new data center financings.
"While projects built with BTM systems may secure power, they also expand the construction scope and heighten completion risk by introducing project-on-project risks, which could result in schedule delays and cost overruns. These risks underscore the importance of adequate construction-phase liquidity to absorb delay-related costs."
While typical BTM components, including turbines, reciprocating engines and battery energy storage systems, "have established operating track records, they have limited demonstrated history operating in islanded configurations that serve highly variable high-performance computing and AI workloads," the rating agency said.
"Hence, the interaction between generation, storage and load-management systems could introduce technological and operational risks, given fluctuating AI workloads and data center service-level agreements requiring 99.999% or 99.99% uptime. This is true even if individual components perform as expected."
BTM system redundancy, modularity and maintainability "are critical to support data center credit. Data centers that maintain diesel generation or a grid connection as a backup source of power are better positioned to meet SLA obligations than facilities fully dependent on the BTM plant," Fitch said.
Sufficient pipeline capacity and contracted gas transportation and supply help mitigate fuel supply risks for the BTM system, it noted.
"Gas cost pass-through mechanisms are typically indexed to a contractual heat rate, which leaves the project exposed to residual risk if it operates less efficiently. A tenant’s assumption of some or all of the operational, technological and fuel-related risks associated with the BTM system is a credit positive."
Co-located or BTM supply supported by long-term contracts "with highly creditworthy counterparties, particularly with take-or-pay contract structures, is viewed as a stronger characteristic for merchant generators supplying power to data centers."
