Morgan Stanley: US gubernatorial elections raise risk of data center delays; assets with secured power may become scarcer

Why does the Texas election affect data center construction?

Morgan Stanley believes Democrat Gina Hinojosa’s election as Texas governor increases the risk that data center projects will be delayed or canceled. She advocates suspending new permits until relevant legislation is passed, excluding projects already under construction.
The policy tightening comes against a backdrop of already congested grid-connection queues. Texas suspended parts of the data center grid-connection process in August; applications at the time totaled about 474 gigawatts, more than 5 times the state grid’s historical peak demand, with data centers accounting for about nine-tenths of new power requests. The review also aims to distinguish credible projects from speculative applications that may overstate demand.
The governor can temporarily suspend new projects through executive orders, appoint members of the electricity regulator and influence permitting policy; lasting changes such as eliminating tax incentives or giving local authorities the power to reject projects require state legislative approval.

Morgan Stanley expects developers of powered data center facilities with significant Texas exposure to face pressure and potentially need to lower the probability assigned to the completion of several prospective projects, especially those still in the batch grid-connection process. The bank believes projects under construction are relatively less affected by policy uncertainty.
Ohio’s newly elected governor has also increased the risk of project delays, including for a 10-gigawatt project involving Nvidia and a major US AI lab. The state had previously suspended consideration of new data center tax exemption applications.
If approvals become slower or stricter, limiting the supply of new facilities, assets with stable operations and secured power could gain greater scarcity value. For example, Digital Realty’s new Texas projects still face approval risks, but its existing assets could benefit from stronger pricing power; Equinix’s Texas operations account for a smaller share of its global facilities, so its overall benefit may also be limited.
Morgan Stanley is therefore more concerned about a US data center capacity shortfall by 2028.

Morgan Stanley expects independent power producers’ shares could initially come under pressure, but believes cash flows associated with existing assets, contracts and forward power prices support valuations. The bank estimates Vistra’s existing assets are worth about 180 dollars per share, above the prior-day share price of about 140 dollars cited in the report; for Constellation Energy, the estimate is 249 dollars, slightly below its share price of about 263 dollars, and excludes potential incremental data center contracts.
The bank expects only a modest near-term decline in Texas forward power prices: forward prices for 2029 are at a low level of just over 50 dollars per megawatt-hour. The bank believes this is insufficient to spur a large number of new fossil-fuel plants and also means the curve had not priced in significant growth in electricity load to begin with.
Power equipment and on-site generation companies could face pressure from slower growth across the data center industry. GE Vernova has a relatively diversified customer base and geographic footprint, and a large number of contracts provide business visibility beyond 2030; engine supplier Innio could face slower orders in 2029 and beyond.

Morgan Stanley believes Bloom Energy’s fuel cells could be an alternative to natural gas turbines in some states: they use no water in operation and produce none of the pollutants listed in the report, such as sulfur dioxide and nitrogen oxides, or noise. However, slower industry growth could still weigh on valuations of power equipment and on-site generation companies.
Williams has geographic flexibility through its natural gas pipeline network and reserved gas turbines. The bank says it can provide on-site gas-fired power to major cloud customers within 18 to 24 months of signing a contract; valuation upside depends on more data center projects coming to fruition.