Utilities that build more power generation and transmission infrastructure than is needed to accommodate anticipated datacenter demand will face substantial credit risks, according to analysts at Fitch Ratings and Moody's.

While datacenter development could ultimately be "credit positive" for the utility sector, "inconsistent methodologies for forecasting load" threaten to turn potential financial and operational benefits into burdens, a July 23 Fitch report warned.

"There is significant risk that the estimated load does not materialize or shows up in lower amounts than expected, or that the usage is delayed," Fitch analysts said in the report. "Actual loads may turn out to be significantly lower than announced loads because of technological changes and efficiency improvements that lower the power requirement for datacenters."

A traditional integrated resource plan (IRP), which is a regulatory proceeding that guides future investments in power generation and transmission, typically takes about a year for utilities to complete. Subsequent requests for project proposals require another year on average, Teresa Ho Kim, managing director of asset management for JPMorgan Chase & Co., noted during a recent conference.

"The complications of adding new, large-scale datacenters will exacerbate the long-standing challenges that IRPs face in forecasting power supply needs," Moody's agreed in a July 22 report.

"For now, the risk of overbuilding is most acute for utilities that are short on power or at capacity to serve existing demand in their service territory," Moody's added. "Utility companies with excess capacity can absorb new customers with greater ease, while increasing revenue and margins."

Cost allocation

Southern Co. subsidiary Georgia Power Co. was forced to undertake an early update to its 2022 IRP due to a rapid increase in demand forecasts. Microsoft Corp. filed testimony arguing that those estimates could be "leading to over-forecasting near-term load (through 2030) and procuring excessive, carbon-intensive generation," but the utility's 2023 updated proposal was approved in April under a settlement agreement with state regulators. The revised plan calls for more than 1.4 GW of new natural gas- and oil-fired power generation to be built by 2027, which is expected to cost Georgia Power's customers about $3 billion.

Given the infrastructure buildout needed to satisfy hyperscalers' around-the-clock electricity needs, utility companies must work with regulators to implement rates and tariffs that protect other ratepayers, Moody's and Fitch said.

"Otherwise, there is a considerable risk that residential customers may end up paying disproportionately for the significant investments needed to connect the large, new commercial loads," Fitch said.

Providing discounted rates to large industrial customers, however, is not necessarily the answer.

"This arrangement could be viewed by some customers or consumer advocates as saddling commercial and residential customers with proportionately higher costs for the same service," Moody's said. "This rate design could also expose the utility to volumetric demand that can fall short of expectations, which could cause more volatile utility margin and cash flow."

Instead, many utilities have included "safeguards" in long-term contracts with datacenter companies, including "minimum payments for an operational datacenter regardless of the actual power used" and fees for closing datacenters earlier than expected, the analysts continued.

American Electric Power Co. Inc. subsidiary AEP Ohio in May submitted a proposal to state regulators to create a new rate category that would require datacenters to pay for 10 years a minimum of 90% of the energy they say they need each month, even if they consume less.

Google LLC's Clean Transition Tariff, a collaboration with Berkshire Hathaway Energy unit NV Energy Inc., is also pending before the Nevada Public Utilities Commission.

Under the terms of the contract, Google purchases every megawatt-hour of electricity generated by one of Fervo Energy Co.'s next-generation geothermal facilities in Nevada at its retail cost. Google included adders in the tariff to address transmission network upgrades, while NV Energy will assume the risk of any technology failures.

Duke Energy Corp. plans to use a similar tariff to help finance clean energy generation for datacenter customers. The Charlotte, NC-headquartered utility holding company is working with Google, Microsoft and Amazon.com Inc. on new tariff rate structures designed to reduce investment costs and share technology risk for innovations including new nuclear and long-duration energy storage, subject to approvals from regulators in the Carolinas.