AINEWS
Data Centers Are Reshaping Who Pays for the Next Power Plant
Public water and power utilities are issuing more bonds to serve data centers, and major institutional buyers want safeguards for ordinary ratepayers.
Public water and power utilities are issuing more bonds to serve data centers, and major institutional buyers want safeguards for ordinary ratepayers.
Public power and water utilities sold a record amount of debt last year to keep up with the data-center buildout, and the institutional investors who buy those bonds now want to know who absorbs the cost if AI demand cools.
Municipal bond issuance for public power utilities rose roughly 23% in 2025 to $34.8 billion, with water and sewer issuance reaching $45.8 billion, up a modest 2.6% year-over-year, according to LSEG data cited by American Banker. Year-to-date figures point in different directions: public-power issuance is running about a third below last year's pace, while water and sewer supply is up roughly 16%. The buyer side of that market is starting to read those deals more carefully.
"What we're concerned about is making sure that financing is thoughtful and responsible," said Nate Harris, director of municipal research at Appleton Partners, in comments reported by American Banker. The risk, he said, is that legacy utility customers, the households and small businesses that have paid into the system for decades, end up subsidizing infrastructure built to serve hyperscalers, the handful of companies (Amazon, Google, Microsoft, Meta) operating the largest data-center fleets. J.P. Morgan strategists noted that public utilities carry a legal obligation to serve any customer in their territory, which means the cost of capacity built for one large user is shared across the rest of the rate base.
That concern is structural. J.P. Morgan strategists led by Peter DeGroot noted in a Feb. 27 report that IRS rules on tax-exempt debt prevent public power utilities from signing the long-term, fixed-price power-purchase agreements that for-profit generators routinely use with hyperscalers. The result, the strategists wrote, is that the secondary infrastructure needed to serve data-center load, including transmission upgrades, water capacity for cooling, and redundant supply, lands on municipal balance sheets rather than on the data-center operators themselves, and gets financed through bond issuance. Once the bonds are sold, those costs are recovered through rates charged to all utility customers.
The demand backdrop makes the stakes bigger, not smaller. McKinsey estimated in an August report that data-center power demand could grow 20% to 25% a year through 2030, with most of that growth concentrated among hyperscalers. Morgan Stanley has projected that AI-driven energy-cost increases could translate into roughly $100 billion of additional municipal issuance in coming years. The geographic concentration is already visible: J.P. Morgan flagged notable public-power issuance growth in Arizona, Texas, and California, and water and sewer supply increases in Virginia, Texas, California, Georgia, Illinois, and Ohio, all states with active data-center corridors.
The caution among buyers has not turned into a pullback. Chad Farrington, co-head of municipal bond investment strategy at DWS, told American Banker that public-power and water-sector bonds remain "some of the strongest credits out there" and that DWS is "fairly agnostic" on the sector. DWS did not respond to a follow-up request, so the full scope of its posture on data-center-adjacent deals is not on the record. With only two named buyside voices publicly weighing in, and DWS's response limited to on-the-record remarks, the institutional caution is best read as a posture, not a consensus.
The next test will be whether deals start to carry more structural protections for legacy ratepayers: separate rate classes for large data-center loads, ringfenced project financing, or covenants that adjust repayment if projected demand fails to materialize. With McKinsey's 20-25% growth forecast and Morgan Stanley's $100 billion issuance projection both pointing upward, the question for bondholders is no longer whether the buildout will be financed, but who is on the hook when it is.