Solving the data center power puzzle
How owner-operators can manage the risks of powering data centers
KEY TAKEAWAYS
Historically a niche property type, data centers are one of the most important and fastest-growing asset classes in commercial real estate, requiring new approaches to mitigate risks.
The power grid cannot keep up with the growth in data centers, causing owner-operators to pursue their own power generation.
Natural gas, battery storage, and renewable energy sources can power data centers while they wait to hook up to the grid, but each carries potential business risk.
According to the Pew Research Center, more than 1,500 new data centers are under various stages of development — with more than two-thirds planned for rural areas. And demand is projected to double by 2027. Yet as the sector expands, a new reality is emerging: Access to power is becoming just as important as access to land, financing, and tenants.
The U.S. Department of Energy forecasts that by 2028, data centers will account for 6.7% to 12% of total U.S. energy consumption. That number was 4.4% in 2023.
For commercial real estate developers, this is more than a utility issue. It is increasingly a project feasibility issue, as connecting to a nearby utility often takes three to five years — sometimes up to 10 years.
Rather than sit idly without power after construction, data centers are supplying their own power, known as behind-the-meter power generation. While this allows data centers to operate before they connect to the power grid, it also introduces new operational and insurance considerations.
Balancing operational resilience & risk
Natural gas remains the largest source of electricity supporting data centers, accounting for approximately 40% share, according to the International Energy Agency (IEA). Many operators contract directly with natural gas providers and install on-site turbines to generate electricity.
While these systems can provide critical power independence, they also create potential business interruption exposures. A turbine failure or fire can impact uptime commitments, disrupt operations, and create significant financial consequences if adequate backup systems are not in place.
Battery storage systems are also becoming more common, particularly as operators look for redundancy and longer-duration backup power. However, lithium-ion batteries continue to draw scrutiny from insurers because of the hard-to-contain fires and toxic gases they emit, which can extend beyond data center campuses and pose public safety risks.
Renewable energy sources, including solar and wind, account for 24% of data center electricity, according to the IEA. While these sources entail fewer fire-related risks, constraints on renewable energy often mean wind or solar farms must be in proximity to a data center, introducing development, permitting, and operational challenges.
Taken together, these exposures highlight a broader trend affecting commercial real estate: Operational resilience is becoming increasingly important to asset performance and long-term value creation.
When downtime becomes a revenue risk
Unlike traditional commercial real estate assets, data centers frequently operate service level agreements (SLAs) that guarantee uptime, power availability, temperature control, and connectivity. As a result, data center owner-operators secure property and business interruption policies to cover downtime risks from physical damage to a data center or unplanned outages.
Some downtime risks are traditionally hard to insure. Examples include an employee who makes a technical mistake that causes the data center infrastructure to fail, or behind-the-meter power sources that are not restarting after being shut down for planned maintenance.
For these types of gaps, some owner-operators are supplementing their property coverage with service level agreement (SLA) parametric policies.
Under these policies, owner-operators agree to provide free rent to tenants if a certain amount of downtime occurs. For example, a tenant may receive millions of dollars in rent credits for just minutes of downtime. The agreements state that tenants may terminate their leases if sufficient free-rent concessions are provided within a specified timeframe. SLA parametric policies would cover the data center operator’s rent exposure in such circumstances.
Some data centers, particularly those backed by private equity interests, have considered parametric policies to further protect balance sheets.
Parametric policies are an example of how data center operators can work with brokers to realize creative ways to mitigate risks through insurance.
SLA parametric policies are a complement to, not a replacement for, core coverages such as builder's risk, property, delay in startup, business interruption, and cyber insurance. Given the cost and complexity of these programs, working with a broker that understands both digital infrastructure and power generation risks is critical to securing effective coverage, satisfying lender requirements, and optimizing project economics.
Looking ahead
For now, data centers enjoy ample underwriting capacity and fulsome competition for business. No large-scale losses have occurred that have reshaped the market.
However, the broader lesson for commercial real estate stakeholders extends beyond insurance alone. Data centers are becoming one of the clearest examples of how infrastructure availability, operational resilience, and risk management are converging with capital deployment and investment strategy. Power availability is no longer just a utility concern; it’s a key driver of development feasibility, project timelines, asset performance, and long-term value.
As demand for digital infrastructure continues to accelerate, data center owners, developers, and investors that proactively work with brokers to build an effective insurance tower are best positioned to manage shifts in the market.
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