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US public power sector evaluates data center customer risks and rewards

Data centers are a major source of electricity for U.S. power utilities. Some requests exceed the energy consumption by their entire customer base, according to CEOs and investors from the non-profit sector.

The data center power demands of Big Tech have created an opportunity for the long-stagnant US power industry to grow revenue and investment. But the record-breaking build-outs of energy-intensive servers warehouses come with new risks, according to market participants at the Large Public Power Council Financial Conference held in New York.

Dan Sullivan, CEO of the Grand River Dam Authority in Oklahoma, said that "we're experiencing exponential growth." He said that there were about 2,000 Megawatts in demand, mainly from data centers. They wanted to connect to the roughly 2,000 Megawatt system of his utility. "They will scale as fast as they are allowed to or as quickly as their capabilities allow them."

Kirk Hudson, the general manager of Chelan PUD in Washington, said that there is a demand for about 1,400 Megawatts, mostly from data centers, to be connected to their system. The utility averages around 200 Megawatts.

Hudson, the Chelan PUD's spokesperson, said that there is significant hydropower surplus, but they are figuring out how to support data centres while maintaining low rates, assuring system reliability and preserving local authority.

The data center market is a fast-moving one, and public power utilities that have contracts for 40 years with their municipal customers face a unique challenge in adapting.

Data centers are becoming more and more prevalent. Some of them consume as much electricity as an average-sized U.S. town. This has raised concerns over power shortages or excessive construction.

Public utilities can issue municipal bonds that are tax-exempt to finance infrastructure. They also explore how to structure data center agreements to avoid stranded cost - the risk associated with building capacity to serve customers who then leave.

John Murphy, Director at PFM Financial Advisors, said that the demand from hyperscalers is unlike anything seen before in public power or utility markets. How these projects are funded will be the key to managing risks.

OLD RULES, NEW ISSUES

In general, public power groups cannot enter into long-term power contracts for data centers, which are commonly used in the power sector that is profit-driven, without compromising the tax status of the entire portfolio. This has led to public utilities issuing short-term contracts that can complicate infrastructure planning in the long term, according to industry executives. They are also seeking clarification from the U.S. Treasury on rules that govern private use contracts.

Javier Fernandez is the CEO of Omaha Public Power District. He said, "These rules need to be updated." In order to protect my residential customers from price shock, I must have a contract that is long-term with these data centres.

Jason Pollack is the executive director for government and institutional banks at Wells Fargo. He said that utilities also face uncertainty about costs and waiting times of equipment needed to build infrastructure. Reporting by Laila K. Kearney, New York. Editing by Ni. Williams

(source: Reuters)