A collaborative approach for meeting data center power needs and protecting ratepayers

Compass Datacenters CEO Chris Crosby critiques a recent Harvard Law study on data center power demands, arguing it unfairly lumps all developers together, failing to distinguish between speculative developers and those committed to equitable solutions. Crosby asserts that speculative developers exploit the 'will-serve' utility model, creating false demand and potentially burdening ratepayers with infrastructure costs for projects that may never materialize. He advocates for a 'co-serve' model, exemplified by Compass Datacenters' approach of partnering with utilities and investing in infrastructure to avoid passing costs onto consumers, while also supporting grid reliability and community service.

Analysis

Chris Crosby, CEO of Compass Datacenters, articulates a critical distinction within the data center development industry, challenging the notion that all developers contribute equally to rising energy costs borne by consumers, as suggested by a recent Harvard Law study. Crosby posits that speculative developers, driven by a 'gold rush' mentality, exploit the traditional 'will-serve' utility model by queuing up substantial, yet potentially unrealizable, power requests, thereby creating 'false demand' and pressuring utility resource planning. This can lead to utilities investing in infrastructure for projects that may not materialize, with costs potentially socialized among all ratepayers. In contrast, Crosby advocates for a 'co-serve' model, which his company, Compass Datacenters, employs. This model emphasizes active partnership with utility providers, shared risk, and direct private capital investment in necessary infrastructure—Compass, for example, invested nearly $20 million in right-of-way for transmission lines and $52.5 million in substation development in North Texas to avoid passing these costs to ratepayers. Crosby argues that established developers often negotiate individualized rates and bear the costs of infrastructure upgrades, and that 'creative tariffs' can further ensure commercial and industrial users pay their share. He underscores that while the growth in data center demand, fueled by AI and cloud computing, is essential for economic progress, cybersecurity, and global competitiveness, it must be managed responsibly, with large users bearing the associated infrastructure burdens to prevent unfairly impacting consumers and to facilitate grid modernization through private investment.

Key Decisions for Investors

• Investors should differentiate between data center developers, scrutinizing their utility engagement models and capital investment strategies to identify those, like Compass Datacenters with its 'co-serve' approach, that proactively mitigate risks of stranded utility assets and ratepayer burden.
• Monitor regulatory discussions around utility service models, as shifts away from the traditional 'will-serve' framework towards partnership-based approaches could alter the risk profile and cost structures for data center projects, favoring developers with established utility collaborations.
• When evaluating investments in the data center sector, which benefits from strong secular growth drivers like AI and cloud computing, consider the sustainability of power sourcing strategies and the developer's commitment to community partnerships and equitable cost distribution for infrastructure, as these factors may influence long-term operational viability and social license to operate.