The global megatrends of rising artificial intelligence and the energy transition have intersected in the digital infrastructure space as data centre capacity moves to double within the next five years.

While already benefitting from the growth in digitisation and cloud migration over the past decade, today’s step-change in AI adoption, signalled through mainstream use of headline applications like ChatGPT and Microsoft Copilot, is driving the current wave of data centre investment globally as well as for the projects to power them.

Gavin Hutchison is NAB Global Head of Leveraged Finance and Core Plus Infrastructure and says this expansion is happening in multiple markets, where the bank has significant experience structuring and arranging data centre financings.

“NAB currently banks nine industry players operating in Australia, Europe, the US and Asia, and we are actively targeting continued expansion of our relationships and loan book,” Hutchison says.

“We expect to see significant growth as the capital requirements for data centres continue to expand, driven by continued outsourcing, data growth and the latest developments in AI.”

Estimates already put about 46% of enterprise workload in the public cloud, with the recent surge in AI adoption expected to accelerate data centre market growth to 19% compound annual growth rate over the next three years[i].

Combined, this is tipped to double capacity before the end of the decade[ii]. The capital expenditure needed to fund this growth globally is estimated at more than $US600 billion[iii],  with about $US450 billion debt funding required[iv].

“NAB’s experience and involvement in the market so far ranges from single asset greenfield financing through to large scale portfolio financings,” Hutchison says. “We also expect ongoing M&A financing opportunities as the sector continues to evolve. There are a number of live opportunities across Australia, Europe and the US that we are tracking which have drawn interest from infrastructure investors and other specialist investors.”

Powering the cloud

At a basic infrastructure level, data centres lease space to tenants to provide secure power, connectivity and storage in climate-controlled environments. The need for reliability is vital, with redundancy built into the systems to keep servers up-and-running and the storage cabinets and racks cool.

The main types of centre operators range from providing for the largest hyperscalers – like Amazon, Google or Microsoft with vast public cloud storage and applications – to more broad-based colocation operators servicing data needs for a diverse mix of tenants, mostly enterprise and government, using private or hybrid cloud models.

To make this happen, in Australia data centres are already using an estimated 5% of national electricity generation through the grid today and the demand-driven growth fuelled by power-hungry AI technologies is expected to hit 8% by 2030[v].

Tenants are responsible for the cost of electricity on a pass-through basis, subject to agreed efficiency measures, while overall demand on the grid needs to be managed by utilities and electricity regulators like the Australian Energy Market Operator (AEMO) to ensure data centre baseload demand does not adversely affect other users.

AEMO’s latest roadmap[vi] for the transition of Australia’s National Electricity Market (NEM) notes renewables accounted for almost 40% of the total electricity delivered in 2023. But the scale of the task means the NEM, which operates in Australia’s east and southeast, will need to almost triple its capacity to supply energy by 2050 to replace retiring coal capacity and increased electricity consumption as other sectors decarbonise in line with national transition targets.

“NEM regions are forecast to need over 60,000 people in jobs to build and maintain energy infrastructure over the next 20 years,” AEMO’s 2024 Integrated System Plan (ISP) says[vii].

Infrastructure capital

Hutchison says the fundamental power requirement of energy-intensive data centres, coupled with imminent 2030 targets of 82% of electricity supplied by renewables, means the data centre growth will need to be accompanied by renewable energy projects, which will also need funding through equity and debt.

“Large data centre operators have been moving towards sourcing renewable and clean electricity under PPAs [power purchase agreements] in Australia and internationally,” he says. “In Europe, newer data centres tend to be located in regions where electricity is from clean sources and available at an efficient cost.”

To date, NAB has financed more than 200 renewable energy transactions globally, committed over $A16.8 billion to renewable project funding and is recognised as Australia’s leading bank for project finance to the global renewable energy sector[viii].

Hutchison says given the scale of capital needed for both data centre growth and energy projects, some bank debt markets like Australia, while remaining supportive of the sector, may not be sufficient to meet demand.

“As such, NAB has been working with clients to help provide further access to alternate debt markets as a way to unlock market depth for both data centre and renewables financing,” he says.

Securitisation pathway

Tim Glick is a NAB Executive Director in the Specialised Finance team and says this sort of market depth has been achieved in the US through more than $US16 billion of securitisation of data centre assets since 2021[ix].

“What you see is that single asset data centre financings tend to be done through project finance construction facilities, with the ultimate expectation that this then gets termed out to the capital markets through either a securitisation, a USPP [US Private Placement] or refinanced with bank debt,” Glick says.

A trend more recently in the US, he says, is having borrowing base or warehouse securitisation facilities to fund early development and construction which are structured to be taken to market when the built assets have stabilised. Platform financings have also been used for M&A, which may be structured as a bridge to a securitisation takeout as well.

“We have also started to see certain asset-backed securitisation happening in Europe recently,” Glick says.

“NAB is well-placed to provide a holistic service offering for this sector. We have our balance sheet funding but we can also provide access to other capital markets to take advantage of these opportunities we see ahead.”

Endnotes:

[i] Compound annual growth rate 2024 to 2027. Source: 451 Research Datacentre Knowledge Base, S&P Global Market Intelligence (Mar 2024)

[ii] 2024 Global Data Center Market Comparison (cld.bz) and Electricity 2024 – Analysis and forecast to 2026 (iea.blob.core.windows.net)

[iii] Internal NAB analysis

[iv] Ibid

[v] Morgan Stanley research note May 5, 2024

[vi] 2024-integrated-system-plan-isp.pdf (aemo.com.au)

[vii] Ibid

[viii] Rankings based on IJGlobal League Table MLA, Renewables, both cumulative data from 1 January 2010 to 30 September 2023 and for the 12 months ending 30 September 2023.

[ix] KBRA Releases Research – Data Centers: Intersection With Project Finance