Renewables vs. Datacenter Financings

With power hungry AI hyperscaler datacenters now being large buyers of power, the debt financing markets for the two sectors are beginning to converge.

Both sectors are characterised by upfront capex, followed by cashflows generated under long-term contracts - PPAs in the case of power, and datacenter leases in the case of hyperscaler datacenters. The counterparties in each case are typically large, creditworthy institutions.

Given the above, hyperscaler datacenters provide similar risk-return charateristics to some renewables projects.

However, hyperscaler datacenter debt financings can be superior in a number of ways:

1. Datacenter lease revenue is highly stable and not reliant on variable weather conditions that drive revenue in renewables
2. Broader financing sources with datacenter debt sitting in real estate, infrastructure or project finance lending books
3. Datacenters as a sector have a much broader range of refinancing options including the ABS and CMBS securitisation markets, private placement and institutional debt investor markets, reducing refinancing risk. This is not the case for even utility scale renewable portfolios
4. Datacenter supply is in a short market with no alternative sources of supply - apart from building more datacenters. This increases the value of the asset from a lien or residual value perspective. This contrasts with renewable assets - where more can be built quickly, and power supply can be backstopped by conventional generation sources
5. Tax equity structures do not exist for datacenter financings, meaning debt is senior as opposed to second lien behind such structures which feature heavily in the renewables world

Lenders to both renewables and datacenter projects will have seen the two sectors converge and credit exposures doubling up, when the underlying credit of a renewable project is a hyperscaler datacenter. When comparing the relative value of renewable vs. datacenter financings, the latter is certainly attractive with a current pricing premium of 100-150bps for essentially taking on the same counterparty risk and superior credit quality characteristics noted above.

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OPINION: "There can be no national security without energy security"

There can be no national security without energy security.

Energy security comes from energy sufficiency - not necessary self sufficiency, but sufficiency through a mix of own production and generation, and supply from trusted partner nations. In an ideal world, energy abundance over energy sufficiency.

The big dilemma plaguing Europe - amidst Russian aggression and malign actors such as China, Iran and North Korea - is how to achieve energy security. Is it by fast-tracking renewables or furthering fossil fuel usage for economic growth, but prolonging the chains fossil fuels and dependency from non-desirable nations.

The answer is all the above, but with the ongoing wind down of fossil fuels.

• Fossil fuels are a cheap source of energy - for both power generation and transportation; affordability remains a must in a world where the high cost of living is causing society to challenge the the foundations of democracy.
• Self generation through renewables must ramp up to allow the West to wean off fossil fuels over time.  Green fuels must also be part of the solution for harder to abate sectors.

But renewables ramp up is not simply installing more wind turbines and solar panels. The entire electricity infrastructure needs to be upgraded including mass roll out of battery storage and grid augmentation to deal with renewable intermittency, and the added challenge of increasing electricity demand from the roll-out of AI and general electrification of the economy.

The simultaneous ramp-down of fossil fuels and ramp-up up renewables is the path forward. The electrification of the economy - particularly the adoption of EVs - is gradual, and the ramp provides the time needed to transition. Renewables build-out, battery storage roll-out and grid augmentation takes time and cannot be delivered over night.

The ramp will also allow the required investment to be phased. The energy transition is expensive and it needs to be paid for. But too much financial pain for the public will not be tolerated.

A clear plan is what is now required, to allow regulation to be designed and finalised, providing investors with certainty on proceeding with the necessary projects to deliver the energy transition. 

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