From Barron's, September 16:
President Donald Trump never got Mexico to pay for his border wall, but he’s having a surprising amount of success getting Japan to pay for America’s artificial-intelligence data center buildout.
Japan has already approved government loans for three gargantuan natural-gas plants in Ohio, Texas, and Pennsylvania. If they opened today, they’d be the three largest gas plants in American history, powerful enough to provide all the electricity needed by both New York City and Los Angeles on an average day. All three are expected to power AI data center complexes.
The projects and the financing schemes behind them are unlike anything seen before in the U.S. Japan has agreed to commit as much as $550 billion on American infrastructure by the end of Trump’s term in return for a relatively low base tariff rate of 15%, down from its pre-deal rate of 25%. The outlines of the deal were struck a year ago, but it has largely faded from public view since.
It’s reasonable to be skeptical that Japan will advance the full sum, which equates to some 12% of its annual gross domestic product. Trump’s plans for U.S. investments by other countries have sometimes flamed out, as in the case of a $10 billion factory that Chinese manufacturer Foxconn said it would build in Wisconsin during his first term. But these Japanese investments look to be firmer.
There is now real money involved. U.S. and Japanese officials spent months hashing out concrete investments, including the big gas plants. Japan’s state-run bank has approved billions of dollars worth of loans to a half-dozen projects, and a state-run credit agency agreed to insure loans provided by private banks, which are expected to be counted as part of Japan’s investment.
“We need to take this seriously,” says Jefferies analyst Julien Dumoulin-Smith, who covers electricity markets. Dumoulin-Smith thinks the fact that these plants have the explicit backing of the White House—and are located on federal land, in the case of the Ohio plant—gives them an advantage over many privately funded projects at a time when data centers are facing a wave of political pushback. “It creates a real overlay of credibility.”
The Japan deal upends the traditional ethos of American capitalism—that financing flows to the projects expected to produce the highest returns. Instead, under the terms of the Japan agreement, the U.S. president must personally sign off on each project. That gives him the power to determine which states—and potentially which companies—get to profit off the AI buildout. “Whatever Donald Trump wants to build, the Japanese will finance it for him,” said Commerce Secretary Howard Lutnick in a TV interview.
It’s in line with Trump’s vision of state-directed capitalism that has also resulted in the government taking direct financial stakes in companies. Dumoulin-Smith says the danger is that government-directed investment ends up crowding out private investment in new energy projects. It’s notoriously tough to compete with Uncle Sam, particularly if the government has access to low-interest loans. There’s another twist, too. Once these plants are constructed, the government—not the companies that built them—is expected to own them.
For the companies on the right side of Uncle Sam, however, the Japan-U.S. deal could result in a new source of funding. American, Japanese, and even Canadian firms are in line to profit. Florida-based NextEra Energy will build and operate the plants in Texas and Pennsylvania. Natural-gas producer Comstock Resources has been tapped to provide natural gas to the Texas project. Other producers, like Expand Energy, are well positioned to sell their output to the Ohio plant, through pipelines operated by companies like Enbridge and TC Energy, which are based in Canada but own major pipelines in the area. Certain utilities will profit; Ohio-based utility American Electric Power will be in charge of building out $4.2 billion worth of transmission lines.
Japan expects the agreement to help Japanese companies, too, portraying the investments as a way to expand the reach of its own supply chains. One of the investments it announced is for a set of new, small nuclear reactors built in Tennessee and Alabama by a joint venture owned by GE Vernova and Japanese company Hitachi. The reactors could cost as much as $40 billion, though there’s still little evidence the project has progressed. GE Vernova told Barron’s, “We have continued to work closely with both governments to advance the projects.”
The Ohio natural-gas plant, located on the site of a Cold War–era uranium enrichment plant, is the largest project of all so far, and arguably the most complicated. Spread across three square miles of public and private land, it is expected to eventually host 9.2 gigawatts of electricity capacity, more than twice as much as the biggest existing natural-gas plant in the U.S. The total price tag is estimated at $33 billion. It will power a data center complex stocked with Nvidia chips and potentially costing hundreds of billions of dollars.
The project is backed by a who’s who of international tech giants. The data center site is being developed by SB Energy, a U.S.-based affiliate of Japanese tech company SoftBank Group that recently filed to go public. OpenAI has signed a 20-year lease to use the data center, which itself is backed by a commitment from Nvidia to take over a portion of the lease under certain circumstances, such as an operator default.
The government of Japan is already putting money in. The state-owned Japanese Bank for International Cooperation approved loans for $630 million, and private-sector banks will lend it another $1.26 billion, insured by Japan’s Nippon Export and Investment Insurance. If all goes right, the first data centers could start operating by 2028.....
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