The Data Center Sector: An Uncertain Juncture

There’s a remarkable sense of uncertainty in the data center sector right now.

Some of the biggest global markets have seen unprecedented disruption to data center development as regulators and utility companies attempt to work through critical issues surrounding the long-term sustainability of the industry. 

At the same time, the war in Ukraine has fueled tremendous volatility in European wholesale power prices, bringing further stress to an industry that’s fundamentally dependent on vast amounts of power. Let’s unpack the current situation.

Sustainability in Critical Markets

One big question facing the market is whether demand growth for data center power is accelerating too fast for utility grids to provision electricity.

One big question facing the market is whether demand growth for data center power is accelerating too fast for utility grids to provision electricity.

Regulators are tackling this issue on the policy side, while utility companies are trying to sort out how to keep up with demand. While debates roll on, pipeline development is being stalled.

Here’s a quick recap of what’s happening in some of these markets.

• Singapore: After a three-year moratorium, the Infocomm Media Development Authority started to accept data center development applications in July 2022.
  
  Applicants need to adhere to a new set of sustainability requirements that are being piloted, and total capacity allocated under the program is expected to be capped.

• Amsterdam: In February 2022, the executive cabinet of the Netherlands placed a nationwide nine-month moratorium on new hyperscale sites, defined as data centers exceeding 10 hectares and 70 MW of consumption.
  
  In June, the cabinet approved a policy that would effectively ban all hyperscale data center development in the Netherlands by restricting municipalities from approving hyperscale sites as part of a zoning plan or environmental plan. This measure still needs approval from the legislature to move forward.

• Frankfurt: A magistrate’s office report from May 2021 proposed that data centers be built higher to conserve space and that they share waste heat. The report added a warning that it may be difficult to find customers for waste heat in the market, as it would be costly to convert the heat for consumer use.
  
  The office also mandated that future data centers be restricted to certain neighborhoods. The German Datacenter Association expressed concern that workable site construction in the designated areas would be exhausted in just a couple of years.

• Ireland: Local and national agencies in Ireland are grappling with the impact of restrictions on data center development as they move toward new sustainable energy generation targets.
  
  Offices including the Commission for the Regulations of Utilities and the South Dublin County Council have moved to restrict or ban data center development. Meanwhile, the Office of the Planning Regulator has pushed back, citing the industry’s critical role in bringing in international investment.
  
  Irish national power transmission operator EirGrid perhaps rendered the entire debate irrelevant. In January 2022, it moved to deny grid connections for new data centers in the Dublin metro area until 2028, while pushing new data centers to provide their own power generation.

• Ashburn: As residents and various interest groups wrestle with the impact of continuous growth in Loudoun County, VA—the world’s largest data center market—a surprise factor was thrown into the debate in mid-2022. Power transmission capacity to new facilities in the county may be significantly delayed.
  
  The availability of transmission capacity for new data centers could potentially run out by early 2023 or sooner.
  
  Dominion Virginia—the locally regulated power transmission and distribution operator—plans to install more transmission lines, but it’s unclear if those efforts will be able to keep supply at pace with new data center demand. ­­­­

War and Energy Cost Volatility

While multiple jurisdictions wrestle with the data centers’ environmental impact, there’s another interrelated challenge facing the market right now: how to cope with rapidly rising electricity costs due to the war in Ukraine.

Loss of access to Russian gas has exacerbated scarcity in European and global wholesale power markets leading into the winter of 2022–2023.

Loss of access to Russian gas has exacerbated scarcity in European and global wholesale power markets leading into the winter of 2022–2023. This compounds the strain on a sector that’s already wrestling with the impact of its power usage.

A few recent reports highlight the current situation in prime global power markets:

• The International Energy Agency depicted a dramatic shift in wholesale electricity pricing in its July 2022 Electricity Market Report. Major European markets, in particular, are seeing wholesale rates double, triple, or more, based on four-quarter rolling average weighted rates in 2022, with massive increases set to continue into 2023.
  
  
• A Goldman Sachs report in mid-2022 indicated that U.K. inflation levels in 2023 could nearly reach the 22% post-WWII record set in 1975 if wholesale electricity rates aren’t reigned in.
  
  
• In the U.S., the Energy Information Administration stated in September 2022 that wholesale electricity prices would continue to surge due to rising natural gas prices globally. New York’s wholesale rates could rise more than 120% year-over-year in 2022.

Where Does This Leave Us?

In the short term, both existing and planned data center supply will be under a lot of pressure in key interconnection markets. New supply will be scarce or simply unavailable as regulators pursue fundamental changes and utility operators scramble to provision electricity.

At the same time, existing data centers will have to cope with soaring electricity rates leading into the winter. While some operators have paid higher utility rates to hedge their power allocation against inflation, most will have allocated more of a just-in-time inventory with pass-through clauses to customers.

In the short term, this means that many customers will have to absorb the brunt of the rapidly rising power prices.

Data center operators will take the pressure of this moment to spur continued adaptation in the sector.

But data center operators will take the pressure of this moment to spur continued adaptation in the sector. The adoption of sustainable practices will accelerate: capturing waste heat to reuse, building higher to reduce footprints, using on-site energy generation, and committing to carbon-neutral energy goals.

Data center development will also continue to move into new locations with abundant power and land resources, disseminating increasingly intermeshed and distributed interconnection infrastructure across the globe.

For more information on global data center market trends, take a look at our Data Center Research Service.