The long queues for connecting projects to the power grid are misleadingly large. They are often inflated by multiple speculative applications for the same project. The real, viable projects are backed by investment-grade tenants, while many others are merely "PowerPoints" that will never actually be built.
The most critical component of a data center site is its connection to the power grid. A specialized real estate strategy is emerging where developers focus solely on acquiring land and navigating the multi-year process of securing a power interconnection, then leasing this valuable "powered land" to operators.
Cash-rich tech companies avoid owning data center infrastructure not due to a lack of funds, but because their capital yields far higher returns in core technology. They strategically outsource the lower-margin, stable infrastructure assets to specialized investors, optimizing their return on invested capital.
Today's complex data center financing structures (ABS/CMBS) are not new inventions. They directly apply the same securitization technology and principles previously used for financing cell towers and residential solar projects, adapting them for data center leases and long-term cash flows.
Landowners who have spent years navigating the grid interconnection process for projects like solar or wind are now pivoting. As they near approval, they repurpose their valuable grid connection rights for data centers, which can generate significantly higher financial returns than the originally planned energy projects.
Different financing vehicles focus on different layers of data center risk. Securitization primarily underwrites the long-term value of the physical building and tenant lease. The risk of rapid GPU obsolescence is largely ignored by these structures and is instead borne by private credit and equity investors who finance the hardware itself.
The seemingly obvious solution of building a dedicated, off-grid power plant for a data center is highly risky. If the data center's technology becomes obsolete, the power plant, lacking a connection to the main grid, becomes a worthless "stranded asset" with no other customer to sell its energy to.