"Jet Propelled"

Financing an Alternative Energy Source for Data Centers

Data centers are in the news every day—and not always for good reasons. The growth of artificial intelligence has increased exponentially the demand for computing power to process AI applications. But data centers (DC) are voracious consumers of electricity, both to power the servers and other embedded equipment inside the DC, and to run the water and other cooling equipment needed to prevent overheating which would compromise the always-on reliability demanded by DC users.

It requires relatively little time to construct and equip a DC. It takes much longer for the local power and light company (P&L) to build electricity generation and transmission facilities, and the marginal cost of those additional facilities typically has been spread across all rate payers (residential as well as commercial) within the P&L district. In many instances where DCs are clustered, residential customers have complained about surging electricity bills which have resulted from DC demands for electricity rather than from the homeowners’ usage. 

Governmental Pushback

The Wall Street Journal has reported that ”there is growing public backlash to data centers” and that construction of more than 20 data centers in the United States has been blocked by local opposition during the first quarter of 2026. Aggravating the situation has been that, in some areas, the grid infrastructure has been inadequate to transmit power from remote generating sources to meet the DC requirements.

State governments have taken notice. In July, New York Governor Kathy Hochul signed an executive order pausing state environmental permits for up to one year, during which the State will explore “the potential environmental impacts of the construction and operation of data centers…including their effect on energy demand.” The executive order excludes DCs which consume less than 50 megawatts of energy and any facilities which are primarily used for manufacturing, research, education or provision of medical care.

Ireland has been beset with similar issues. It has been reported that about 21% of that nation’s entire power generation is consumed by DCs. But with U.S. tech companies accounting for approximately 22% of its tax revenues in 2024, Ireland has abandoned its moratorium on new DCs, in favor of a policy under which new DCs, and expansion of an existing DC, either must furnish their own power generation at the DC site or must contract for new sources of energy geographically close to the DC (to avoid stressing the transmission grid).

A Wall Street Journal article last June concluded by reporting that a DC developer had announced plans for a DC in Dublin which would contain such an on-site power source: “locally sourced biomethane to power operations, with on-site energy storage in the form of hydrotreated vegetable oil and batteries.” But that fanciful approach has given way to plans by several American companies to use “aeroderivatives.”

What’s an Aeroderivative?

There is an abundance of CFM56 jet engines—more than 20,000 worldwide, according to estimates—which are used to power business aircraft. These engines are more practical than engines which power widebody commercial passenger aircraft, and can be repurposed for generating on-site power for DCs: as much as 25 megawatts from a single aeroderivative, according to one commentator. The likely plan would be to acquire engines which have exhausted most of their projected useful life and then re-engineer them to provide power without the imperatives surrounding up in the air transportation.

The adaptation involves several steps: using a smaller fan than that used for jet aviation; using natural gas instead of (more expensive) jet fuel; and remanufacturing parts to extend the engine’s useful life. Admittedly, aeroderivative engines are inadequate for hyperscale DC facilities such as those used by Microsoft, Meta Platforms, Amazon, and Alphabet. But they hold great promise for smaller projects which constitute the majority of the new DCs anticipated to spring up nationwide in the next few years.

What’s the Opportunity for the Equipment Finance Industry?

Unlike the DCs themselves—which contain cloud computing servers, AI processing equipment, HVAC and cooling equipment—aeroderivatives can be financed separately and readily can be relocated or otherwise remarketed if a default occurs under the lease or other financing documents for the DC project. Although there is no reason why the aeroderivatives could not be bundled with financing for the DC realty and DC equipment, there is less downside risk for the aeroderivative lessor or lender than for the DC financier which faces issues arising from the fixed building location and the possibility that the DC equipment described above could constitute fixtures and hence be subject to claims of the building landlord or mortgagee.

Market participants are eyeing both lease and loan structures (as well as power purchase agreements, which—along with government regulation of power sources--are beyond the scope of this article). In a typical net, hell or high water lease, the equipment finance investor would purchase the aeroderivative and the seller could be either the OEM or the remanufacturer. The lessor would pass through to the lessee the warranties from both of those entities. Because the aeroderivative can be re-engineered to prolong its useful life, lessee purchase or renewal options would be negotiated depending on the parties’ circumstances.

If the lessee is not the owner of the realty, free of encumbrances, on which the engine is situated, then the lessor customarily needs to obtain waivers from the landlord and any mortgagee of the premises. But for a true lease, UCC 2A-309(4) (a) comes to the rescue, providing that the perfected interest of a lessor of fixtures, under a purchase money lease, has priority over such an existing owner or encumbrancer if x) the lessor’s interest is perfected by a fixture filing before (or within ten days after) the engine becomes a fixture and y) the lessee either is in possession of the land or has a recorded interest therein. Both of these conditions should be readily obtainable in the context of a DC.

If the transaction is structured as a secured loan or a nontrue lease, then the same issues arise if the borrower or lessee does not own the realty, free and clear. Once again, the Uniform Commercial Code provides a path forward. Section 9-334(d) echoes the Article 2A provisions mentioned above and provides that a perfected security interest in fixtures has priority over a conflicting interest of an existing owner or encumbrancer if 1) the debtor either is in possession of the land or has a recorded interest therein, 2) the security interest is a purchase money security interest, and 3) the security interest is perfected by a fixture filing before the engine becomes a fixture or within 20 days thereafter. For leases and loans, the UCC contains other workarounds, but the ones described herein are more easily accomplished.

It is not likely that aeroderivatives would be needed, and hence might become a fixture, before the DC structure has been completed and the DC equipment has been installed. But if a lessor or lender is approached to finance an aeroderivative before project completion, it should consider whether construction-related liens (including mechanics’ or materialmen’s liens arising from site preparation, installation, electrical interconnection or other improvements) could prime or otherwise impair its interest in the aeroderivative. In that case, appropriate diligence may include review of project construction documents and applicable state lien laws, including how to use UCC section 9-334(e) to escape the priority of a construction mortgage—and any takeout lender of such a mortgage—in fixtures under UCC section 9-334(h).