Soaring data center costs – Oracle faces another crisis?

Author: Li Jia, Wall Street Insights

The hidden costs of AI infrastructure construction are surfacing.

On July 18, according to The Information, Oracle's $16.5 billion AI super-campus project in New Mexico encountered environmental approval obstacles, forcing it to change its power supply solution, resulting in a surge in costs of billions of dollars. At the same time, the company's data center project in Wisconsin also faces additional regulatory compliance expenses of over $100 million. Last week, S&P Global downgraded Oracle's long-term issuer credit rating to just one notch above investment grade, citing "continued underestimation" of its capital expenditures.

This series of events reflects the common dilemma faced by the entire technology industry in the construction of large-scale AI data centers: environmental resistance, water resource disputes, tightening regulations, and community permit costs are repeatedly disrupting original financial forecasts.

Oracle's power supply plan was forced to change, increasing costs by billions. Oracle originally planned to build its own natural gas power plant for its data center campus, codenamed "Project Jupiter." Located near El Paso, Texas, in New Mexico, the 1,400-acre project was designed to have a capacity of over 2 gigawatts, primarily serving OpenAI's computing needs. However, the state environmental permit application for the natural gas power plant stalled due to air pollution and greenhouse gas emissions concerns. In April of this year, Oracle switched to using Bloom Energy's natural gas fuel cells to power the entire campus. Fuel cells emit fewer pollutants, have slightly lower carbon emissions, and consume almost no water, theoretically giving them an advantage in environmental approvals. But this shift comes at a high cost. Analysts estimate that the cost of the fuel cell microgrid, adjusted to 2.45 gigawatts, would be approximately $8 billion, billions of dollars more expensive than the original natural gas turbine plan. Furthermore, fuel cells age more rapidly if not continuously operated, limiting Oracle's flexibility to switch to inexpensive solar power during periods of abundant sunshine. Environmental resistance has not dissipated. New Mexico issued its second rejection of the proposed fuel pipeline route last week, and the state's Department of Environment announced a public hearing on air quality permits on October 19, citing "significant objections." The New Mexico Attorney General is investigating resident complaints that their names were used without their consent in letters of support submitted to regulators. Local media outlet Source NM points out that the greenhouse gas emissions from the facility's fuel cells alone exceed the combined declared emissions of the state's two largest cities. An Oracle spokesperson stated that the company is "moving rapidly" on its AI site construction and is "confident in the return on its deployed capital." Julia Robin, Oracle's head of infrastructure planning and procurement, published an open letter in a local newspaper, stating that the adjustments the company made demonstrate "we are listening and continuously improving our projects." A Wisconsin regulatory ruling adds over $100 million to the burden. In Wisconsin, Oracle also faces unexpected compliance costs. Although Oracle, OpenAI, and Microsoft had previously pledged to "self-finance" all electricity-related costs for their respective AI projects, a recent ruling by the state's electricity regulator may still cost these companies more. The regulatory ruling on transmission cost sharing reportedly means that Oracle, OpenAI, and their development partner Vantage Data Centers may have to bear the entire cost of building the transmission lines for their Port Washington data center campus, whereas these companies had previously expected the public to share some of the costs. In addition, Oracle has filed a lawsuit regarding another regulatory ruling. The ruling requires Oracle to provide financial guarantees in the form of cash or a line of credit, citing its relatively low credit rating compared to other tech giants. Oracle stated that the ruling will incur an additional cost of approximately $100 million annually.