Utilities Shift Financing Strategies Amid Rising Interest Rates

Rising interest rates are prompting utilities to reconsider their financing strategies, according to Tim Keller, managing director of U.S. Bank’s power and utilities group. In an interview with Utility Dive, Keller noted that sustained high rates could lead utilities to rely more on convertible debt, which investors can later exchange for stock. He also highlighted that utilities must balance growth expectations from shareholders with the need for affordable services for ratepayers and consumers.

A 2025 analysis by investment firm Redwheel underscored the sector’s sensitivity to interest rate movements, particularly for capital-intensive utilities with long-term, regulated cash flows. Higher rates increase borrowing costs and reduce the value of future earnings. Despite these challenges, utilities are continuing to invest heavily in capital projects, driven in part by the growth of AI-driven data centers.

Keller pointed out that the Federal Reserve’s recent rate hike, from 3.75% to 4% on September 16, along with soaring bond yields, including a 10-year yield above 5.6%, are making financing more difficult. Additionally, geopolitical risks, particularly the war in Iran, have kept fuel prices elevated, complicating financial planning for utilities. The U.S. Department of Energy’s reduced loan support for certain projects has also pushed utilities to seek backup financing from banks.

Despite these challenges, Keller expressed optimism about the resilience of the power and utility sector. U.S. Bank’s Fall 2026 survey of CFOs showed growing confidence, with 68% rating their three-year outlook as positive. However, geopolitical risks remain a top concern, alongside high borrowing costs and inflation. Keller also noted a temporary pause in some jurisdictions regarding data center growth, though he believes the opportunity remains strong in the long term.