In today’s rapidly evolving digital landscape, demand for data centers capable of powering and enabling global connectivity, complex processing, and storage tasks is surging. Valued at US$242.7 billion today, the global data center industry is set to more than double, to over US$584 billion by 2032.
However, while the demand for data centers is global and growing, building and operating them at scale is not without potential hurdles. One complex challenge is the capital-intensive nature of these projects. From securing prime land and high-voltage power to installing advanced cooling systems, backup power, sophisticated hardware, and robust security software, the costs can add up.
This is where surety guarantees (also called surety bonds) can be a game-changer. By offering financial protection and risk mitigation, surety guarantees assist data center developers in navigating the complexities of data center projects while offering a cost-effective alternative to bank guarantees and bank letters of credit.
What are surety guarantees and how can they help data center developers?
Surety guarantees are instruments issued by an insurance company (“the surety”) on behalf of those supplying goods or services or who have an obligation to another party. A surety guarantee is issued in favor of a beneficiary — generally a customer, a counterparty, or a government authority. If the underlying obligations are not met, the surety will respond.
For data center developers, surety guarantees can serve as a key tool for grid interconnection obligations and commercial contracts which ensure reliable power supply via power purchase agreements (PPAs). Surety guarantees can be used to cover a data center’s long-term payment obligations under PPAs and/or can cover the power provider’s obligations to supply power to the data center.
Advantages for data center stakeholders
Financial protection and greater flexibility
One of the primary benefits of surety guarantees for data center developers is the financial protection they provide. Stakeholders often require financial security, and sureties help meet these requirements — often without requiring collateral or security.
The use of surety guarantees helps to keep bank lines free for other needs. This financial flexibility allows developers to allocate capital efficiently across other projects, such as equipment procurement and construction costs.
Enhanced credibility, project protection, and risk mitigation
Surety guarantees can demonstrate that prime contractors, subcontractors, and key equipment suppliers have undergone a rigorous third-party qualification process, judging them capable of fulfilling their contractual obligations.
In the event of default, performance guarantees issued by qualified insurers safeguard the project’s completion, minimizing financial losses and preventing costly delays. This assurance can be especially important for data centers — capital-intensive and time-sensitive projects where delays can have significant operational and financial impacts. Lenders and financiers can have confidence knowing that the project and contractors have undergone thorough vetting and are fully bonded.
Support for interconnection and power delivery risks
Energy providers responsible for powering data centers must provide guarantees that cover interconnection obligations and the reliable delivery of power — whether to the grid, a utility, or directly to the data center owner. As the offtaker, the data center may also be required to provide payment security under the long-term PPA. Surety guarantees offer an efficient way to secure these supply and payment obligations, facilitating capital investment and providing a dependable energy supply for data center operations.
Marsh can arrange for surety-backed bank guarantees or letters of credit (“bank fronted-solution” or “BFS”) when beneficiaries do not accept traditional surety guarantees. These alternatives provide a cost-effective option compared to traditional bank guarantees and letters of credit.
Support for various financial obligations
Surety guarantees can potentially address a wide range of financial requirements for data center developers and others in the data-center ecosystem, including:
- Power purchase agreements
- Interconnection agreements
- Long-lead equipment purchases
- Substation construction
- Municipal site improvements
- Lease agreements
- Contractor performance security
- Licenses and permits
This broad applicability makes surety guarantees a versatile tool for managing the complex financial landscape of data center projects.
Alternative to cash deposits and bank letters of credit
Surety guarantees offer an attractive alternative to cash deposits and bank letters of credit, which can reduce liquidity and tie up capital. This liquidity preservation can be key for data center developers who need to maintain financial flexibility to respond to changing project demands and market conditions. Marsh works with highly-rated insurers who are committed to their surety offerings, which provide beneficiaries with greater peace of mind.
Using surety for data centers
Surety guarantees are unlocking new possibilities for data centers to meet the growing demand for sustainable digital infrastructure.
At Marsh, we can customize surety guarantee programs to address the unique needs of data center projects and assist with integrating surety into a suite of risk management and insurance solutions that seeks to optimize financial security and drive project success.
For more information on surety and to understand how it can help your organization, fill out the form and let's connect.
