Wrapping up 2025: Data Center

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Power & Utilities – Independent Power Producer Consolidation & Incentive Pricing for New Capacity

Key insights 

• Expert expects significant supply-demand imbalances across major power markets over the next 3-4 years, underpinning continued wholesale power and capacity pricing growth
• Behind-the-meter generation opportunities with data centres are limited vs expectations, due to land use constraints, transmission bottlenecks and issues securing siting approvals. Local politics and Nimby-ism have shifted the premium to existing capacity vs greenfield builds.
• "[L]evelised cost of energy for new entrants from 2030 and beyond will be at or above USD 100 a megawatt-hour, and the days of bringing generation online in the USD 40, USD 50, USD 60 a megawatt-hour" are gone. Today "with the tax credits, levelised cost is probably around USD 80 or USD 90 a megawatt-hour"
• Only realistic energy mix options in the medium-term for IPPs are solar, storage and gas. Nuclear and advanced reactor deployments by 2030 and below USD 200 per megawatt-hour levelised cost of electricity are unlikely

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Power & Utilities – Large-load Energy Procurement Criteria & Demand Outlook

Key insights 

• Expert thinks dramatically expediting FERC's interconnection review process will be difficult, given review periods can reach 8-10 years currently. Cutting down to 180-365 days would be "a huge win"
• Large loads now start power procurement 2-3 years in advance of site construction, with some beginning four years early to secure favourable terms through layered strategies. Reliability trumps price for data centre customers, given operating constraints on costly backup generation, largely diesel
• Behind-the-meter data centre arrangements may command 10-15% pricing discounts vs front-of-the-meter retail rates, with 5-10-year minimum contract lengths, though some portion of contract pricing may be variable
• To entice large-volume accounts, IPPs may cut margins from USD 1-2.50 per megawatt-hour to USD 0.25-0.75, per expert's illustrative example
• Expert thinks "it will be almost impossible" for utilities to get back into generation after 25-30 years of efficient deregulated markets

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Power & Utilities – Independent Power Producer M&A Outlook & Valuation Drivers

Key insights 

• Recent M&A comes amid positive demand indicators, with strategic buyers having advantages due to operating synergies, lower cost of capital and ability to leverage bonus depreciation. Baseload gas dominates focus, given the need for uninterruptible power. Expert doesn't see renewables plus storage being able to fill this role, and there's a lack of nuclear assets on market
• Location, technology – ie, lower heat rates– and access to cheap gas are the most important factors driving recent valuations. Assets in states without carbon taxes also carry a premium given higher possible capacity factors
• Buying existing plants at USD 1,000-1,400 per kilowatt offering immediate cash flow is preferred to building new capacity, given new combined-cycle gas is quoted at USD 2,000-2,500 per kilowatt, with development timelines possibly exceeding five years
• Behind-the-meter deals may offer pricing premiums but carry more risk vs front-of-meter arrangements. Expert expects returns will be similar

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