Data center moratoriums raising credit risk

Data centers are a hot button political issue, and the ensuing moratoriums are now attracting attention from credit ratings agencies.  

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“To the extent that moratoriums, permitting slowdowns or potential reversals meaningfully delay projects, financial penalties in the form of rent credits and even tenant termination rights pose credit risk,” said S&P Global Ratings. 

Communities that host data centers usually benefit from the property tax revenue they generate, a limited amount of job creation, and economic development tied to support industries that may spring up around them. 

Property tax revenue is often used to service general obligation bond debt and support school budgets. 

Local opposition to the centers has resulted in 21 states and the District of Columbia enacting moratoriums with six other states considering similar legislation. 

“In addition to statewide moratoriums, local governments in 40 states have active data center bans,” said S&P. 

Local governments adopted 294 moratoriums from January through July. 

Voters will consider 34 data center-related measures next week. Ohio accounts for 20 ballot initiatives across 17 jurisdictions. 

Some of the states instituting development pauses are seeing an opportunity to tie permitting requests to new investments in green energy which have been drastically reduced under the Trump administration. 

“Pennsylvania is using permitting speed as leverage for compliance,” said S&P. “Developers that abide by financial, environmental, and community obligations get a more predictable regulatory path.”

“New York and Illinois are already moving toward similar comprehensive policies that would include a requirement for projects to fund new clean energy generation dedicated to their operations, repealing sales-tax exemptions, and making data center loads interruptible.” 

Texas is a hotbed of data center development but has paused new connections with the Electric Reliability Council of Texas, which runs most of the state’s grid pending a comprehensive audit by the public utility. 

ERCOT was embroiled in lawsuits following power outages caused by winter storms in 2021.   

Nearly 150 data center projects have already been delayed or cancelled in the country with about 75% of delays and cancellations explicitly tied to local opposition. 

“The biggest risk to ratings on data centers would be material construction delays,” said S&P.  

“Most projects have financial penalties including rent credits and tenant termination rights for milestone delays, which could substantially deteriorate credit if exercised.” 

Moratoriums can also raise borrowing costs for municipalities bonding for the infrastructure improvements needed to host a data center due to increased uncertainty around the regulatory environment.  

Many states are considering repealing the sales and/or property taxes that helped lure the data centers in. 

S&P notes that, “if these taxes increase significantly, profit margins and debt service coverage ratios would be impaired, especially given the fixed nature of revenues.” 

Data Center proponents point to an insatiable need for computing power due to the increasing use of cloud storage and the rise of artificial intelligence. 

Cancelled or stalled projects can result in stranded costs for utility companies who may have already started adding substations and transmission lines for a new heavy load customer. 

According to utility industry reports nearly one in five data center interconnection requests never pan out putting rate payers at risk for footing the bill. 

Congress has addressed concerns over data centers as the House passed the bipartisan Ratepayer Protection Act in September with a 417-3 vote.

The bill would require states to consider adopting a federal standard directing data centers to pay the full cost of the electricity upgrades needed to serve them. It has a companion bill in the Senate but as of now, has not moved forward.