On Oct. 3, the Minnesota Public Utilities Commission (PUC) approved the acquisition of Duluth-based Allete, whose largest component is electric utility Minnesota Power. The $6.2 billion acquisition, which is expected to be completed later this year, will privatize the long-time publicly traded company (the last one based in the Zenith City). The PUC’s approval was the last one that Allete and the purchasers needed; federal and Wisconsin public utility regulators had previously signed off on the sale.

A couple weeks earlier, the city of Hermantown, just west of Duluth, revealed the purpose of a proposed building project that had been shrouded in secrecy and nondisclosure agreements. According to public records requested by the Minnesota Star Tribune, Golden Valley-based Mortensen is planning to develop a 1.8 million-square-foot data center facility on a 200-acre site. Hermantown officials confirmed the information.

These two recent pieces of news from Northern Minnesota are in many respects intertwined. Large data centers need large amounts of power. Allete, which also develops renewable energy projects, could help power up the boom in large data center construction in Minnesota.

So, does this highly controversial deal make sense for Allete, its new ownership, and the state? The data isn’t yet conclusive, of course. But the deal does put Northern Minnesota at the center of potentially massive economic changes.

Why the acquisition?

The chief reason the Allete sale has garnered so much attention outside of Northern Minnesota (where most of Minnesota Power’s customers are located) is because of the two entities that are making the acquisition. One in particular.

One of them is the Canada Pension Plan Investment Board (CPP Investments), which will own 40% of Allete. The other is an investment company called Global Infrastructure Partners (GIP). In 2024, GIP itself was purchased, becoming a subsidiary of New York-based BlackRock. Since its founding in 1988, BlackRock has become the world’s largest institutional asset manager. It also has been aggressively growing its private equity platform, which ranges from $35 billion to $42 billion. And lately, BlackRock has been setting its sights on the utilities sector.

Historically, power companies have been considered safe but rather sleepy investments. The current bull market has been driven largely by two sectors: technology and the tech-adjacent communication services industry. In 2024, stocks in these sectors—led by the so-called Magnificent Seven big-tech firms—posted returns of more than 35% over 2023. Excluding those sectors, the S&P 500’s gains would have been roughly 11% in 2024, compared to the overall 25% return.

But in 2024, utilities stocks gained nearly 20% after struggling the previous year. And as of early October, the Morningstar U.S. Utilities Index had gained 24% year-to-date. Market analysts cite several reasons for this, including new investments in renewables and infrastructure improvements.

But the biggest factor is rooted in an event that took place on Nov. 30, 2022—the day that saw the public release of ChatGPT. Since then, artificial intelligence has become the latest Next Big Thing. The technology’s ability to “learn” and improve its output has generated both fear and excitement. If evidence for the AI boom is needed, consider California-based Nvidia, whose revenue has grown from $16.68 billion in its fiscal 2021 to $130.5 billion in fiscal 2025. Originally known for its graphics processing units (GPUs) for video gaming, it has become a top supplier of chips for AI applications and large-scale data centers.

The explosive use of generative AI and the emergence of an even more powerful iteration called agentic AI is driving construction of large-scale data centers to accommodate this technology’s huge digital needs. Those facilities also are gluttons for energy. A large data center uses somewhere between 100 and 500 megawatts of electricity per day. Generally speaking, this electricity usage is comparable to that of a mid-sized city. Large data centers also tap vast quantities of water, potentially up to 5 million gallons daily, to keep those hard-working servers from overheating.

All this certainly has grabbed investors’ attention. In an interview on CNBC last July, BlackRock CEO Larry Fink said that “there’s a need for trillions of dollars investing in infrastructure related to our power grids, AI, the whole digitization of the economy.”

The acquisition of Allete could foreshadow more money from private equity firms and other investment entities into power generation. Private equity firm Blackstone (not to be confused with BlackRock, whose origins are rooted in Blackstone) is seeking approval to acquire two utilities, Public Service Company of New Mexico and Texas New Mexico Power. Meanwhile, BlackRock’s GIP subsidiary is seeking to buy AES, a utility and power generation developer based in the state of Virginia. Though a very similar company to Allete, AES is much larger, posting revenue of $12.28 billion in 2024, compared to Allete’s $1.5 billion. (Minneapolis-based Xcel Energy’s 2024 revenue, by the way, was $13.44 billion.)

Why Allete?

Allete doesn’t rank in the top 50 among the largest U.S. utility companies by revenue. What’s more, the company’s overall earnings declined from $4.30 per share and $247.1 million in 2023 to $3.10 per share on net income of $179.3 million in 2024. By at least one measure, the company’s stock has underperformed its peer group, at least until 2025.

That noted, the company has a history of innovation. Allete was incorporated in 1906 as Minnesota Power. Over the next couple of decades, it acquired several other utilities in Northern Minnesota, changing its name to Minnesota Power and Light (later shortened to Minnesota Power). In 1950, it listed its stock on the New York Stock Exchange, and over the next 20-plus years it built several new plants.

At the beginning of the new millennium, the company changed its name again, this time to Allete, to reflect its recent diversification away from electric power. At the time, Allete’s other holdings included a wholesale automobile auction network and a provider of auto dealer inventory financing. But Minnesota Power remained its largest component, as it does today.

Over the past two decades, Allete has shed its non-utility businesses and pursued expansion opportunities in the energy field. It established Allete Clean Energy, a developer and operator of renewable energy projects nationwide. Another subsidiary, New Energy Equity, is one of the country’s largest solar power developers. It also has been a bright spot in Allete’s earnings picture.

New Energy Equity’s strong performance, however, didn’t offset Allete’s overall decline in earnings in 2024. This year, the company is seeing lower electricity demand from the region’s volatile taconite industry, which has long been Minnesota Power’s biggest customer. The utility’s electricity sales to taconite facilities fell from 35% of its second-quarter 2024 regulated operating revenue to 28% in this year’s 2Q. (U.S. Steel and Cleveland-Cliffs, which operate the Iron Range’s taconite plants, opposed the Allete deal, fearing that the new ownership would raise their electricity rates.)

Supplying energy for large data centers could be a new revenue powerhouse for Allete and Minnesota Power.

The Big Data Bonanza

When it began taking bids from private buyers, Allete stated that the sale was necessary to access capital required to meet Minnesota’s law mandating 100% carbon-free electricity by 2040. Some critics of the sale have argued that this isn’t necessarily true. But powering up electric generation for large data centers probably wouldn’t have been something Allete could have accomplished on its own.

Data centers aren’t a new phenomenon, of course. Banks, health care facilities, and many other information-intensive businesses own or lease such facilities. In the metro, the most prominent is the Minnesota Technology Center near U.S. Bank Stadium, which houses several data centers. What are called enterprise data centers typically host between 500 and 2,000 servers occupying between 5,000 and 20,000 square feet.

While demand for enterprise data centers remains strong, the big action is in what are called large-scale or hyperscale data centers. These centers are designed to gather, store, and process massive amounts of data required by cloud computing and, more recently, AI. A generally accepted definition of a large data center is a facility containing at least 5,000 servers. Those servers and ancillary equipment cover hundreds of thousands of square feet. Many new and proposed centers measure in the millions. ChatGPT developer OpenAI has plans for a data center covering 8 million square feet.

Large data centers are also proving to be a major economic driver. A report from Dallas-based commercial real estate firm CBRE stated that in 2024, data center construction spending jumped by 29% over 2023, with the supply in primary markets increasing 34% year-over-year. This fall, Harvard University economist Jason Furman presented numbers suggesting that investment in data centers and information-processing technology drove nearly all U.S. GDP growth during the first half of 2025.

On Oct. 15, a consortium of investors, including Microsoft and Nvidia, announced a $40 billion deal to acquire Texas-based Aligned Data Centers, which designs and operates data centers throughout the Americas. A key member of that consortium is BlackRock’s GIP subsidiary.

The Minnesota Opportunity

Currently, large-scale data center construction is focused mostly in the West and on the East Coast. The only Midwestern region experiencing major investment is around Chicago.

Minnesota could be well-positioned to become a player in large-scale data center development. That’s not only because it offers access to large tracts of land and an adequate water supply. Like many states, Minnesota provides tax breaks for data center development. In June, the Legislature updated its original 2015 tax rules for data centers, adding a category for large-scale data centers, which the legislation defines as facilities 25,000 square feet and over. These centers are eligible for tax breaks on information technology equipment and software.

There doesn’t seem to be an exact count of the number of centers in Minnesota. Sources range 42 to 72, which reflects the different ways the term “data center” is defined. None are large-scale data centers. But developers have discovered Minnesota: There now are about a dozen large-scale data centers being proposed in the state. Facebook parent Meta is building the first one. Located on 280 acres within the University of Minnesota’s UMore Park in Rosemount, it’s set to open next year. An even bigger project is being proposed in Pine Island by Minneapolis-based developer and builder Ryan Companies. If built as currently conceived, it would be more than four times the size of the Meta facility.

Not all Minnesotans are charged up about these projects. Many say that tax breaks are out of proportion to the potential economic impact. During the building phase, a data center will employ more than 1,000 construction personnel. Once the center is up and running, a typical large data center needs only about 50 people to maintain it (though that number can be higher for bigger facilities).

In early October, a meeting of Pine Island-area residents expressed concerns about how the Ryan project could hurt their community’s character and their electric bills. And in Farmington, residents filed suit to stop development of a data center campus proposed for a 343-acre site in their city. Community resistance has derailed big projects elsewhere. Earlier this month, Microsoft pulled the plug on a proposed large data center in Caledonia, a small city south of Milwaukee, in the face of opposition from residents.

State regulations may also influence the pace of development. In May, Amazon decided to not go forward with plans to build a multibillion-dollar data center near Becker on 348 acres of land formerly owned by Xcel Energy. Though Amazon gave no specifics about the pullout, one factor may have been the state’s resistance to Amazon’s request to install 250 backup generators at the site. Three years earlier, Google canceled a $600 million data center project in Becker for reasons it didn’t make clear. But the tech giant hasn’t ruled out a large-scale center in Minnesota in the future.

Can It Work?

All this brings us back to Hermantown, and to Allete. Northern Minnesota seems like fertile ground for large-scale data center development, given the amount of open land (very little of which can be used for farming) and proximity to the world’s largest body of fresh water.

The Allete acquisition is almost certainly a done deal. Still, questions remain. Can a relatively small utility like Minnesota Power generate the amount of megawattage large-scale data centers need? Will its new owners—both of which are heavily involved in private equity—be willing to spend the money (and time) to build new plants? How much return will this allow them to deliver to their investors? (Industry observers also question whether the U.S. power grid can currently accommodate the additional electricity needed by all the large-scale data centers being proposed.)

Last July, in response to a PUC request to evaluate the Allete acquisition, Administrative Law Judge Megan McKenzie recommended that the agency not approve the sale. McKenzie asserted that the deal was likely to cause higher electrical rates for consumers while threatening the company’s transition to carbon-free electricity generation. McKenzie and other opponents of the acquisition also argued that private equity tends to rely heavily on debt, potentially damaging Allete’s long-term financial health.

There also have been concerns about transparency. As a publicly traded company, Allete is required to meet SEC regulations regarding financial performance. At this point, it’s not clear how upfront new ownership will be about its revenues, spending, and debt levels. Allete leaders insist that the company will remain independently operated and locally managed.

How beneficial the acquisition might be for Minnesota could depend largely on state regulators, notably the PUC. The PUC sets electricity rates based on utilities’ operating expenses plus what it considers a fair rate of return on investment. The PUC allows utilities to “upcharge” on capital expenditures, whether that’s new poles or new plants. To approve the deal, the PUC required Allete to not raise rates for a year. Regulators also restricted the new owners’ return on equity to limit rate increases through 2030.

If the PUC can maintain its control over Minnesota Power rate increases and (if necessary) enforce transparency regarding the new owners’ return on equity and capital spending, it could soothe at least some worries about the Allete acquisition. It might even help a growing industry—large data-center construction—flourish in Minnesota. Still, the battle over that industry and its impact has probably just begun.