Hot Take: A 66% surge in natural gas plant costs paired with a 23% build delay is not inflation, it is structural EBITDA erosion for data center operators.
The market is pricing data center expansion as a high margin secular growth story, but the input economics are collapsing. If a combined cycle gas plant previously cost $1,000 per kW, a 66% increase pushes that to $1,660 per kW. For a 500 MW facility, capex rises from $500 million to $830 million, an incremental $330 million hit. At a standard 8% allowed return, that translates into $26.4 million in additional annual cost just to break even. Now layer in a 23% construction delay, stretching a 36 month timeline to roughly 44 months, which defers revenue while interest capitalization continues. Assuming a 6% cost of debt on 60% leverage, that delay alone adds roughly $40 million in interest carry. The result is a step change in levelized cost of electricity that hyperscalers cannot fully pass through.
This dynamic compresses margins across the stack. Data centers historically target EBITDA margins above 45%, driven by fixed cost leverage and predictable energy pricing. That premise breaks when power costs inflate faster than contracted revenue escalators, which typically sit near 2% to 3% annually. If power costs account for 30% of operating expenses and rise 20%, total opex increases by 6 percentage points. On a 45% margin base, that implies a drop to roughly 39%, a 600 basis point compression with zero pricing relief. Meanwhile, utilities and independent power producers gain pricing power because supply chains constrain turbine availability and interconnection timelines. The bargaining leverage shifts upstream, stripping data center operators of their historical cost certainty.
Valuation models have not caught up. Data center REITs and infrastructure plays trade at 18x to 25x forward EBITDA under the assumption of stable margins and rapid capacity scaling. That assumption fails when capex per MW jumps by more than 60% and asset ramp times extend by nearly a year. Return on invested capital, often modeled at 10% to 12%, drifts toward 7% once higher capital intensity and delayed cash flows are incorporated. That spread versus weighted average cost of capital, typically around 6% to 8%, collapses to near zero, turning expansion into a capital sink rather than a value driver. This is the definition of a valuation trap disguised as growth.
Investor Implication
Expect downward revisions to long term margin assumptions and capex guidance across the data center ecosystem. Equity valuations that bake in linear scaling will reprice once delayed capacity and inflated power costs surface in reported returns.
Final Take: The real bottleneck is not compute demand, it is energy cost inflation that turns hyperscale growth into a capital inefficient grind.