When Power Becomes Part of the Capital Stack: Intercreditor Issues in Bring-Your-Own-Power Data Center Financings

Executive Summary

The rise of "bring-your-own-power" data centers and ongoing regulatory changes is creating novel intercreditor issues that may warrant a bespoke approach to data center financing documents.

Introduction

The modern data center is no longer a warehouse with a fan and a creditworthy tenant. It is increasingly an energy-intensive industrial enterprise whose commercial destiny may turn on whether power can be secured, delivered, financed, and protected in adversity. Load density is increasing, while grid interconnection timelines, utility constraints, and local community opposition are making power availability a gating development issue in many markets. The PJM 2027/28 base residual auction in December 2025 cleared at the FERC-approved cap of $333.44/MW-day and still fell roughly 6,600 MW short of the reserve margin, with data centers driving most of the load growth in the forecast. Capacity is no longer a quiet line item in the financial model; in constrained markets, it is becoming a decisive one. Sponsors are therefore looking beyond traditional utility service to “bring-your-own-power” structures involving captive generation, behind-the-meter assets, microgrids, storage, clean energy procurement, and Energy-as-a-Service (EaaS) arrangements.

That shift can open development pathways and create financeable energy infrastructure, but it can also convert a familiar real estate and tenant-credit financing into a more intricate capital structure. The facility, power assets, interconnection rights, fuel arrangements, tax credit economics, and tenant uptime obligations may sit in different hands, answer to different creditors, and be governed by remedies that were not designed to operate in isolation. Recent regulatory developments — including FERC’s December 18, 2025 order directing PJM to establish new rules for co-located load and to revise its behind-the-meter generation (or BTMG) tariff — have only sharpened the point: the legal architecture for BYOP is being rewritten in real time, and financings closed against the old assumptions may not work well with the new ones.

Power as a Financeable Layer

The traditional data center financing model rested on a quiet but consequential assumption: power would be available from the grid. The lender’s collateral would focus on the real estate, leasehold interests, tenant rents, facility equipment, and related project assets. Power procurement mattered, but it ordinarily remained outside the architecture of the credit.

That assumption is now less dependable. In constrained markets, dedicated power may become indispensable not only to the economics of the data center, but to its ability to operate at all. Generation equipment, batteries, substations, interconnection rights, PPAs, EaaS contracts, fuel supply arrangements, tax credit rights, and availability commitments may cease to be collateral scenery and become part of what is actually being financed.

The label “bring-your-own-power” is useful but conceals many differences: a sponsor-owned behind-the-meter generator is not the same financing proposition as a third-party-owned microgrid. A clean energy PPA may serve sustainability or hedging objectives without physically delivering power to the site, while an on-site gas-fired project may be central to uptime and resiliency.

These distinctions drive the legal analysis. Physically integrated power assets raise mortgage, fixture, UCC, easement, access, removal, and casualty issues. Contractual energy solutions raise assignment, termination, step-in, cure, consent, and bankruptcy issues. Fuel-dependent structures require the credit analysis to follow the power arrangement back to the fuel chain that makes it possible. And in PJM—and likely soon in other regional transmission organizations—the regulatory characterization of co-located arrangements and behind-the-meter generation netting is itself in flux.

Where the Intercreditor Issues Arise

Once power becomes part of the capital stack, the cast of creditors enlarges. The facility lender may look to real property, rents, building systems, and tenant credit. The power asset lender may look to generation equipment, batteries, substations, interconnection rights, PPAs, EaaS receivables, and availability payments. Fuel suppliers, tax equity investors, and hyperscale tenants may each hold rights that influence enforcement and exit.

These parties may be underwriting the same operating enterprise, but not the same risk. The facility financing may depend on the power assets; the power financing may depend on the facility as anchor load, offtaker, site host, or payment source. Commercial integration combined with legal fragmentation invites friction unless the documents supply a common vocabulary of remedies.

The first fault line is collateral characterization. Behind-the-meter power assets may be located on, under, or adjacent to the site; attached to real property; or integrated into the electrical architecture. Whether those assets are real property, fixtures, personal property, or severable equipment affects not only perfection and priority, but enforcement. The documents should specify where the mortgage collateral ends and the power collateral begins, who may access or remove power assets after default, and how enforcement can proceed without disabling the facility. FERC’s co-location order adds a regulatory overlay: the boundary between “behind-the-meter” and “co-located” service, and the transmission service options applicable to each, may now influence not just operations but the practical exercise of creditor remedies.

The second fault line is the revenue waterfall. Tenant payments or project cash flow may need to support both facility-level debt and power asset financing. Formal seniority remains important, but the project may lose value quickly if power operating expenses, fuel costs, or maintenance obligations go unpaid. Lockbox mechanics, reserves, cash sweeps, default waterfalls, and permitted operating expenses should be drafted to avoid the elegant but ruinous outcome in which one creditor improves its position by starving the infrastructure that keeps the facility running. Capacity charges and transmission service costs should be expressly accommodated in these mechanics rather than left to the residual category of “operating expenses.”

The third fault line is default contagion. A power default can render the data center non-operational; a facility default can undermine the power asset; a fuel default can impair both. Cross-defaults, cure periods, standstills, and step-in rights must therefore be calibrated to preserve value rather than inaugurate a race to remedies. Direct agreements among the facility lender, power provider, power lender, tenant, and, where relevant, fuel supplier or tax equity investor can establish the notice, cure, access, assignment, and non-disturbance protections that determine whether the project can keep operating during a default.

Bankability Beyond the Loan Documents

For BYOP data centers, bankability cannot be measured solely by the facility, the tenant, and the core loan documents. It also turns on less visible, but often decisive, questions: the legal characterization of the power arrangement, the reliability of the fuel or energy supply chain, transferability of interconnection rights, regulatory status, and tax credit structure.

EaaS models illustrate the point. If a third-party provider owns and operates power infrastructure and sells its output to the data center operator, the facility’s bankability may depend on that agreement as surely as it depends on a lease or interconnection approval. Depending on its terms, the arrangement may be analyzed as a services contract, lease, license, power sale, financing arrangement, or hybrid agreement, with consequences for assignment rights, regulatory status, lien analysis, and bankruptcy remedies. Access rights, easements, non-disturbance provisions, and step-in rights should be drafted for resilience rather than conjured after the fact from commercial necessity.

Regulatory characterization can be just as decisive, and the regulatory ground is moving. FERC’s December 18, 2025 order directing PJM to provide clear interconnection and transmission service rules for generators serving co-located load, to revise the BTMG netting threshold, and to establish a grandfathering regime for existing contracts is a leading example.

A physical on-site generation solution presents different issues from a virtual or financial PPA that supports sustainability goals but does not deliver electricity to the facility, and both will be evaluated against an evolving tariff backdrop.

Fuel supply and interconnection rights also deserve scrutiny. Gas supply, pipeline transportation, storage rights, backup fuel, and replacement supply options can determine whether power assets can support uptime requirements. Queue positions, utility approvals, physical interconnection assets, and contractual interconnection rights may be scarce, conditional, or difficult to transfer. If those rights are essential, the financing documents should address how they are pledged, assigned, controlled, and preserved after default.

Tax equity and tax credit monetization add another layer where the power assets include eligible clean energy property, such as solar, storage, or other qualifying technologies. Not every BYOP asset supports the same tax strategy. Where tax equity is used, flip structures, buyout rights, partnership allocations, transfer restrictions, lender consent rights, and foreclosure mechanics should be integrated with the broader creditor architecture, not left to operate in isolation.

What Sponsors and Lenders Should Do Now

The most effective BYOP structures begin not with a form document, but with a project-level map of assets, contracts, creditors, and operational dependencies. That map should identify the facility assets, power assets, fuel arrangements, interconnection rights, offtake contracts, tenant rights, tax credit interests, permits, insurance, and revenue streams, and connect each to the relevant lien, consent right, default trigger, cure right, assignment restriction, and enforcement remedy. In PJM-footprint deals, the map should also identify which elements of the structure depend on tariff provisions that are themselves under active revision.

From that foundation, the documentation should coordinate the creditor bargain. Master intercreditor agreements can establish waterfalls, standstills, enforcement protocols, collateral allocation rules, and cure sequencing. Collateral boundary protocols can define which assets belong to which collateral pool, supported by fixture analyses, title diligence, UCC filings, easements, and site access arrangements. Direct agreements can preserve critical contracts through notice, cure, assignment, and non-disturbance provisions. Shared collateral agency structures can help administer rights where the assets are too integrated for a purely bilateral arrangement. And regulatory change provisions—covering tariff revisions, grandfathering events, and the loss or modification of behind-the-meter or co-location rights—deserve a dedicated place in the bargain rather than the residual comfort of a generic MAC clause.

BYOP is not merely a power procurement strategy. It is a structural finance development that can alter collateral packages, underwriting assumptions, enforcement rights, bankruptcy analysis, tax credit protections, regulatory diligence, and real estate remedies across the data center market. With FERC and PJM actively redrawing the rules under which co-located and behind-the-meter arrangements operate, the price of relying on legacy templates is rising. Sponsors, lenders, and investors that recognize this shift can open development pathways, support energy resilience, and create investable infrastructure around one of the fastest-growing sources of power demand. Those that do not may discover, perhaps too late, that the decisive question is not only who owns the data center or who supplies the power, but whether the capital structure acknowledges that power has become part of what is being financed.