U.S. electric utilities are entering a five-year capital expenditure “super-cycle” as they build out transmission and generation networks to meet new demand from data centers, Morningstar DBRS said in a Monday research note.
“Investment in electricity infrastructure is projected to be $1.4 trillion from 2025 to 2030, double the amount invested in the prior 10 years,” the firm said. And based on data from the North American Electric Reliability Corp., Morningstar said many regions can expect load growth to increase from previously estimated 6.1% to around 11.6% over the next decade.
“The challenges posed by the rapid buildout of data centers are overlaid on existing concerns for most utilities, including decarbonization and guaranteeing the reliability of grid infrastructure while increasing the contribution of renewable power,” Morningstar said. “The projected surge in demand provides opportunities for utilities that must be counterbalanced with structural changes and regulatory support for utilities and rate payers.”
"We anticipate that regulated utilities with supportive regulatory commissions, solid credit ratings, and access to capital markets will deploy the needed capex to take advantage of the data center boom," Bukola Folashakin, Morningstar assistant vice president of corporate ratings, said in a statement. "We expect this capex investment in turn to make such utility locations attractive for more data center construction, potentially creating a cycle of increased revenue for as long as data centers remain economically viable."
Some states — Morningstar named California, Texas, and Louisiana — will see elevated risks of resource inadequacy next year that “in extreme conditions, could trigger electricity shortfalls,” according to the note.
Morningstar’s analysis mirror’s recent capital expenditure estimates from the Edison Electric Institute, which expects U.S electricity generation to grow “for the foreseeable future.” The group, which represents investor-owned utilities, said generation rose 3% in 2024 and generation investments as a share of the industry’s total capital expenditures have risen for four straight years.
The rapid rise in electricity demand, following decades of stagnation, will challenge utilities in a few ways, according to Morningstar.
Uncertainty around needed data center capacity “makes it challenging for utilities to accurately forecast future power demand and the required investment,” according to the report. And those data centers bring demand surges that are driving “higher tolls for other customer segments,” which “will be exacerbated as more data centers become operational.”
Meeting the demand requires massive utility investment but “traditional funding sources are inadequate to meet future investment needs,” Morningstar said. “Utilities are increasingly looking to private capital to fill funding gaps,” while increased ratepayer-funded investments lead to regulatory lag.
