U.S. AI Data Center Regulations: Myth and Reality... 'Not "Don't Build," but "Pay More"'

Democratic Pledges Call on Operators to "Shoulder External Costs"
Construction Delays, Not Cancellations
Big Tech Capital Spending Expected to Proceed Unabated

Concerns about investment in artificial intelligence (AI) are growing amid fears of tighter data center regulations following the U.S. midterm elections and the departure of Nvidia CEO Jensen Huang. Analysts see little chance of AI demand falling sharply. They say the pace of investment could vary among operators depending on how much they have to pay for electricity and water and whether they can secure funding in time.

40 of 41 Local Ballot Measures Restrict Development... Electricity Rates Spark Concerns

According to Daishin Securities on November 16, 49% (92.2 GW) of planned development across 25 major U.S. data center regions is concentrated in Texas, Georgia, Ohio, Nevada, and Iowa. Democrats newly won governorships in these states after the midterm elections on November 3. Of the 41 data center-related ballot measures held in 10 states alongside the midterms, 40 ended with restrictions on development.

Residents are worried that electricity rates will rise further. In August this year, residential electricity rates rose by 11.3% in Virginia and 10.4% in Ohio, far exceeding the national average of 3.4%. A majority of both Democratic and Republican voters opposed data center construction in their areas, at 75% and 63%, respectively.

Democratic campaign pledges called for operators to cover costs arising from data center construction, including grid expansion costs. The pledges also included restrictions on evaporative cooling and requirements to maintain distance from residential areas. Cost-sharing measures are already in place in some regions. Ohio utility AEP Ohio charges a minimum fee based on up to 85% of contracted power, even when a large new data center's actual electricity use falls short of its contracted amount.

"What we need to watch going forward is not how hard-line the Democrats are, but how quickly data center operators incorporate the costs of meeting each state's requirements for community acceptance into their businesses. We expect the pace to affect Korea's AI value chain as well," said Lee Kyungyeon, a researcher at Daishin Securities.

Texas Approvals Face December Turning Point... Federal Government Seeks to Speed Up Permitting

Hanwha Investment & Securities found on November 6 that seven of the 50 U.S. states had suspended data center permits. The key state is Texas, where development plans total 50.2 GW. Since August this year, Texas has put on hold new power connection approvals for facilities of 75 MW or more under the jurisdiction of the Electric Reliability Council of Texas (ERCOT), and in September it also suspended the issuance of environmental permits. The results of an audit in December are expected to provide a basis for deciding whether to resume approvals.

The governor-elect's campaign pledges could also become an additional condition for resuming approvals. The Texas governor-elect said new approvals would be suspended until a law to protect residents is enacted. If implemented, the suspension could last longer depending on the progress of legislation during the state legislature's regular session from January to May next year. The Georgia governor-elect has pledged to temporarily halt new construction and reassess it, while the Ohio governor-elect has pledged to suspend new approvals until conditions such as operators covering all electricity costs are met. The governors-elect' pledges to restrict construction could take effect as early as January next year.

The impact of regulation is expected to vary depending on the stage of each project. Daishin Securities expects most of the 33.8 GW scheduled for completion next year to be largely unaffected, as regulations are focused on projects that have not yet begun construction. Facilities that have already begun construction but are still awaiting power connection approval could face delays in starting operations, while 30% to 45% of capacity scheduled to come online in 2028 is expected to be delayed.

There are also efforts to speed up permitting while requiring operators to shoulder the costs. According to the Associated Press, on November 9, the U.S. Senate approved a procedural vote to consider the "Bringing America's Affordability and Jobs Act" (BAAJA), with 73 votes in favor and 25 against. The bill would speed up infrastructure permitting and increase the share of grid improvement costs borne by large data centers.

Despite regional regulations, forecasts for Big Tech's capital expenditures have actually risen. According to Daishin Securities, consensus estimates for next year's capital expenditures by five major Big Tech companies rose 1.2% after the elections. Some companies are proceeding with investments despite the costs. On November 5, Google announced plans to build a $17 billion data center in Wyoming and said it would directly cover the cost of power infrastructure.

Big Tech's capacity to invest in data centers is expected to depend on future revenue trends. According to KB Securities, combined free cash flow (FCF) for Amazon, Alphabet, Microsoft, Meta, and Oracle is expected to turn negative at about -$26.7 billion this year, with the deficit widening to about -$118.5 billion next year. The number of companies unable to cover capital expenditures with their own operating cash flow has risen to four, and they have entered a period of filling the gap through corporate bonds, paid-in capital increases, and off-balance-sheet leases. Meanwhile, combined backlogs for Amazon, Microsoft, Alphabet, and Oracle totaled about $2.48 trillion as of the end of September, exceeding their estimated revenue for this year of about $2.0078 trillion. "This clearly supports the view that current capital expenditures are not investments being made in the absence of demand," said Kim Se-hwan, a researcher at KB Securities. "The focus has shifted from demand to how quickly backlogs are converted into revenue and cash."

Jensen Huang's Departure... Focus on Supply Contracts and Customer Financing

CEO Jensen Huang's departure is another source of concern for investors. On November 12 (local time), Nvidia's board announced that Huang would resign as president, CEO, and a board member. Chief Financial Officer (CFO) Colette Kress will serve as interim CEO, while the board searches for a permanent successor. U.S. congressional investigations into national security allegations related to former CEO Huang are also ongoing.

For neocloud providers that have received Nvidia's support, whether that financial backing will continue is a key uncertainty. Nvidia has helped them secure funding by agreeing to buy server capacity that neocloud providers, which lease servers for AI computing, have been unable to sell. "If Nvidia's support declines, financing costs could rise first for neocloud providers that cannot raise funds through contracts with investment-grade customers," said Kim Ilhyeok, a researcher at KB Securities. He added that if the AI chip shortage continues, large cloud providers could buy the capacity even if orders from these companies decline.

Jensen Huang (left) and Alice Huang, with whom he had an affair

Nvidia will announce its results and outlook on November 17 (local time). Regarding Huang's resignation, Han Jiyeong, a researcher at Kiwoom Securities, said, "In the short term, it weighs on sentiment toward AI investment, but the likelihood of it leading to a slowdown in demand across the AI industry as a whole is limited." She also said the chances of a short-term disruption to the business were low, as production schedules for next-generation products and supply contracts with major customers had largely been finalized. She cited changes in how supply volumes are allocated among suppliers by the incoming management team and changes to joint development schedules for next-generation products as factors that could affect Korean semiconductor stocks. She also pointed to the possibility of tighter export restrictions to China as a factor that could determine Nvidia's medium- to long-term results.

This content was produced with the assistance of AI translation services.