Israel to Require $50 Million Deposits for Server Farm Applications

Israel is set to implement new regulations requiring significant financial deposits from companies seeking to establish server farms, a move aimed at curbing speculative applications and ensuring genuine development. Under the proposed rules, developers will need to provide a guarantee of approximately 200 million shekels (around $54 million) before receiving a building permit for a 100-megawatt server farm. This deposit, which will be returned upon permit issuance, could tie up capital for one to two years, incurring substantial financing costs.

The new measures follow a halt in July on the allocation of grid connection permits after a surge in applications from server farm developers. These applications collectively requested about 27 gigawatts of power, vastly exceeding Israel's average electricity consumption of around 9 gigawatts and a peak demand of nearly 17 gigawatts. Industry estimates suggest that actual needs for computing power in Israel are closer to 2 gigawatts, with a projected maximum of 2.5 gigawatts in the coming years, meaning only about one in ten requested megawatts is likely to be approved.

Previously, applying for a grid connection was free, with no financial capacity checks or experience requirements, leading to a rush of applications from entities seeking to capitalize on the potential increase in land value associated with approved connections. Prominent real estate and energy groups, including Dalia Energy, Nofar Energy, Ampa, and Doral, along with major applicants Mega DC (12 gigawatts) and SDS (2 gigawatts), were among those who submitted numerous requests.

The new regulations introduce two main hurdles. The first is the substantial financial guarantee, amounting to several million shekels per megawatt requested, potentially exceeding 2 billion shekels for gigawatt-scale applications. This is expected to deter applicants who were merely seeking to reserve capacity without serious development plans. The second hurdle is a new regulatory review by the Prime Minister's Office's AI Directorate, headed by Erez Eskal. This body will assess applicants' expertise, proven financial capacity, and the existence of actual clients, such as cloud or AI companies, before approving applications.

These changes are expected to benefit experienced developers with strong financial backing and existing clients, creating a more orderly market with less competition from speculative applicants. Energy companies capable of generating their own power will also have an advantage. The limitations on allocation aim to ensure that AI infrastructure development does not compromise electricity supply for the general public. Conversely, developers whose models relied on land speculation rather than actual computing needs, and landowners who saw their property values rise based on speculative applications, may face losses. Large developers will also need to prioritize their projects due to the deposit requirements.

Israel currently operates over 40 data centers with a total capacity of about 400 megawatts. The industry's business model relies on anticipated demand from global cloud companies, AI advancements, and the government's push for sovereign computing capabilities. The final framework is expected to be published by the Electricity Authority for public comment in the coming months, with the redistribution of approvals to commence thereafter.