Dash for data centers creates revenue risks for power developers

Reuters

7 hours ago

July 1 - Surging development of U.S. data centers has hiked power demand forecasts but predictions vary widely, creating risks for developers.
The U.S. is set for "explosive" demand growth over the next five years, Chris McKissack, CEO of battery energy storage systems (BESS) developer Fullmark Energy, told Reuters Events.
The U.S. Department of Energy forecasts 20 GW of new data center load by 2030 and predicts data centers will consume 6.7%-12% of total U.S. power production by 2028, up from 4.4% in 2023. This represents a huge margin of error for just three years in the future.
The U.S. power market is facing 'a moment of peak uncertainty,' Rebecca Carroll, Senior Director of Market Analytics at energy advisors Trio, said.
CHART: Forecast US data center electricity demand
Developers require accurate forecasts to secure long-term power purchase agreements (PPAs) that provide revenue certainty and attract investors.
Prior to the AI boom, U.S. power demand was stable for two decades and demand forecasts were traditionally based on demographic, economic and industrial growth forecasts. Long lead times for new industrial loads aided generation planning but data centers are being developed faster than new power plants as consumers and companies clamber to use chatbots and large language models.
A Reuters survey of 13 U.S. electric utilities in April found that nearly half had received inquiries from data centers for more power than their peak demand or existing generation capacity. Oncor Electric, which serves Dallas, received requests to connect an additional 119 GW, close to four times its existing demand.
Grid operators and large utilities have responded by requiring more information from data centers and some jurisdictions including Texas are increasing upfront fees for grid connection, Carroll told Reuters Events.
Facing uncertain power demand and prices, power plant developers are adapting PPA strategies and using a wide range of hedging instruments to mitigate revenue risk.
Data rush
The pace of demand growth will vary hugely between regions. Data center operators typically favor sites with competitive clean energy supply, transmission availability and low development costs, and development is soaring in Texas and northern Virginia, where end-users can benefit from some of the lowest power prices in the United States.
CHART: Commercial electricity prices in key US states
Texas grid operator ERCOT projects peak demand will soar to 218 GW by 2031, compared with a record 85.5 GW set in 2023. By May 2025, ERCOT had received 136 GW in large power user connection requests, up from 41 GW just 12 months earlier.
Price forecasts on ERCOT have risen accordingly, although they have retreated from highs seen at the start of the year as more realistic completion rates are applied to the large number of new data center projects coming to market, McKissack told Reuters Events.
'Growth projections are currently not quite as aggressive as initially expected, but still remain strong', McKissack said.
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Google signed a PPA for 90 MW from Engie's 350 MW Chillingham solar project in Bell County, Texas in October 2024 under a special program developed with pricing platform LevelTen Energy to streamline PPA sourcing. The process increases transparency and automation and 'enables sellers to create pricing based on the final contractual details, as opposed to speculating on future terms that are likely to change during the negotiations,' according to LevelTen.
A number of factors are pushing up long-term price forecasts across the United States, Carroll said. Prices are increasing due to high demand as well as 'lower installations of renewable energy projects due to [U.S.] policy changes and higher natural gas price expectations due to increasing LNG exports,' she said.
Price increases have been particularly strong for solar projects, according to LevelTen. Solar projects can be developed quickly and prices can therefore closely reflect fluctuations in costs and supply-demand imbalances.
Average North American solar PPA prices in Q1 2025 rose 9.8% on a year ago to $57.04/MWh, LevelTen Energy said.
Download our exclusive report: Soaring US Power Demand Opens New Paths for Developers.
Delays in permitting and approval of grid connections and new power lines are also delaying power project development as grid operators struggle to process high numbers of clean power and data center applications.
Risk management
Fullmark Energy uses a number of power market forecasts and modelling tools to predict local power demand and decide the location and size of its battery storage projects. The developer uses forecasts from the DOE and the International Energy Agency (IEA), plus Goldman Sachs research as well as its own in-house dispatch optimization tool to run various scenarios for project siting, design, financing and operations. Key factors which are taken into account include local market supply-demand balances, grid infrastructure limitations, interconnection queue delays, renewable energy curtailment and regional economic activity.
This process "helps us model revenue projections and structure contracts that hedge against [local] nodal volatility as AI-driven load growth intensifies demand for flexible capacity," McKissack said.
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PPAs and hedging mechanisms can provide price stability, including synthetic (virtual) PPAs that bundle electricity from multiple generation projects to smooth out renewable energy supply.
Battery storage developers increasingly use structured offtake contracts, such as tolling agreements or capacity purchase agreements for reserve power, as well as PPAs based on load shape that can "reduce merchant market exposure while preserving upside through indexed pricing or shared savings," McKissack said.
Under tolling contracts, solar plus storage projects can be leased to a tolling counterparty in return for a fee.
Fullmark also uses synthetic PPAs and revenue swaps, whereby it receives a fixed price while paying back actual market revenue earned.
Power plant developers also face price risks from changes to tariffs and tax credits being imposed by President Trump, Carroll noted.
Project developers 'are looking for clear guidance around the final tax credit rules and timing to be confident in their financing and development plans," she said.