Article

The role of surety guarantees in mitigating data center development risks

In today’s rapidly evolving digital landscape, the demand for data centers capable of powering global connectivity, complex processing, and storage tasks is surging.

In today’s rapidly evolving digital landscape, the demand for data centers capable of powering 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 can support data center developers in navigating the complexities of data center projects while offering a cost-effective alternative to 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 (the developer, operator, contractor, supplier, or power offtaker) in favor of a beneficiary of those goods or services (project owner, grid operator, or power purchaser). If there is a failure to provide the promised good or service, the surety will respond to support completion of the project.

For data center developers, surety guarantees can serve as key tools to secure grid interconnection, ensure reliable power supply through renewable energy agreements, and support optimizing capital management. Surety can help developers by reducing upfront costs, improving project credibility, and accelerating the deployment of sustainable data center solutions.

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. Utility companies and other stakeholders often require financial security for interconnection agreements and other obligations. Surety can meet these requirements without requiring large cash deposits or the use of bank credit facilities. This financial flexibility allows developers to allocate capital more efficiently across other project needs, such as equipment procurement and construction.

Enhanced credibility and project protection

Surety can enhance a developer’s credibility with project owners, contractors, and investors. It can play a role in demonstrating that contractors and subcontractors have undergone a third-party qualification process, showing that contractors are capable of fulfilling their contractual obligations. In the event of contractor default, performance bonds support the project’s completion, mitigating financial loss and delay. This can be especially important for data centers, which are capital-intensive and time-sensitive projects where delays can have significant operational and financial impacts.

Mitigation of interconnection and utility risks

Securing power interconnection with local utilities is a critical and often challenging phase in data center development. Long-wait times and backlogs can delay projects significantly. Surety guarantees provide an efficient way to secure these interconnection agreements, paving the way for providing reliable energy supply for data center operations. Some surety providers also offer surety-backed letters of credit for utilities that do not accept traditional surety guarantees, providing an often cost-effective alternative to traditional letters of credit.

Risk management and default prevention

Surety guarantees help manage construction-related risks by, in essence, prequalifying subcontractors and providing a mechanism to address defaults. The surety has a role in investigating and responding to defaults, often facilitating project transitions to minimize disruption. Bonded projects typically have a lower cost of completion if a contractor defaults, as sureties often bring expertise and resources to resolve issues quickly. This risk management aspect helps prevent more costly delays, disputes, and financial losses, which can otherwise be damaging in the fast-paced data center industry.

Support for various financial obligations

Surety guarantees can potentially address a wide range of financial requirements for data center developers, including:

Utility interconnection agreements
Long-lead equipment purchases
Substation construction
Municipal site improvements
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 draw down on 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.

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