Electric utilities may increasingly rely on convertible debt — bonds that investors can later swap for stock — to finance their growing capital plans as interest rates continue climbing, according to Tim Keller, managing director of U.S. Bank's power and utilities group, in an interview published by Utility Dive. The shift comes as the sector grapples with higher borrowing costs and expanding infrastructure needs driven by AI-related data center demand.

The Federal Reserve raised its benchmark interest rate from 3.75% to 4% on September 16, marking the central bank's first rate hike since 2023, according to the report. Bond yields have also surged, with the 10-year yield climbing above 5.6% last week for the first time since 2002, according to William B. English, a finance professor at Yale School of Management. Meanwhile, U.S. Bank's fall 2026 survey of chief financial officers showed 68% rated their three-year outlook as positive, up from 58% in the spring survey conducted in March and April. Shorter-term confidence also grew, with 41% rating their 12-month outlook positively — a five-percentage-point jump since spring. Power and utility CFOs appeared "a little bit" more cautious than respondents from other sectors, Keller said. Among all surveyed CFOs, geopolitical risks topped concerns at 38%, followed by high borrowing costs at 35% and inflation at 34%.

Keller said utilities are deploying substantial amounts of capital as they pursue opportunities tied to AI-driven data centers, but balancing this growth with credit metrics will become "a little more challenging with rates going higher as quickly as they have." U.S. utilities "exhibit a pronounced sensitivity to interest rate movements," according to 2025 analysis from investment firm Redwheel, because "higher rates raise the cost of debt and reduce the present value of future earnings" for companies built on long-term, regulated cash flows and capital-intensive infrastructure. Power and utility companies must juggle shareholders seeking growth alongside ratepayers and consumers wanting that expansion to be well-balanced, Keller noted. He added that sentiment around mergers and acquisitions has shifted since spring and summer, with no major consolidation deals announced since NextEra said it would acquire Dominion Energy in May.

The war in Iran has created additional pressure for the sector, particularly around fuel costs that have stayed elevated longer than expected, Keller said. There was widespread discussion over the past year that higher fuel costs would prove temporary and that oil prices would fall back to normal levels once the Strait of Hormuz reopened, which would in turn bring down hot inflation readings — but "this scenario hasn't exactly played out as quickly as expected," he said. This persistent inflation matters as utilities chase financial opportunities from data center expansion. Some jurisdictions that initially would have warmly embraced data center plans have paused, Keller said, though "the growth opportunity still exists" and needs to be managed constructively for all parties. As the U.S. Department of Energy has scaled back loan fulfillment for certain projects, utilities have increasingly approached banks for backup project financing in case DOE funding doesn't materialize, and Keller expects to see more of that. Despite the pause in data center sentiment, he said there's still recognition of "a good growth story, a better growth story than had been the case for the last couple decades," and the pause is hopefully temporary rather than permanent.