Making data centers sustainable

Data centers are attracting both infrastructure and real estate investors. As Morgan Laughlin, global head of data center investments at PGIM Real Estate, the investment management arm of US insurer Prudential, says “the classification of data centers as real estate or infrastructure is really in the eye of the beholder.”

But wherever they sit, there is no question data centers are at a major crossroads. “There remain strong tailwinds for the sector,” says Minesh Mashru, global head of infrastructure at Boston-based investment firm Cambridge Associates. “The hyperscaler phenomenon, and the growth in AI, to name but two. Yet concerns persist regarding valuations and energy usage.”

Power-hungry sector

“There is no getting away from the fact that data centers are power hungry,” says Stephen Beard, head of data centers at UK-based real estate firm Knight Frank. They require substantial amounts of power for cooling and running facilities.

This is getting worse, says Dominic Ward, CEO of data center experts Verne Global, part of Digital 9 Infrastructure. “It used to be that a full rack consumed 5kW of power, whereas now it is 25kW or even 50kW.”

Climate change creates more problems. “The increased frequency of temperatures above 30 degrees is requiring massive additional infrastructure to ensure the cooling of racks is possible on those days,” Ward adds.

Overall, says Mashru, the sector takes up around 1-1.5 percent of total electricity consumption. Beard puts the high end of that spectrum even higher, at “some 3 percent of total global power consumption,” but he says that “this has remained static for the last four years, at a time when we are seeing explosive growth in data center demand.”

Certainly, many of the major efficiency shifts in technology in recent years have actually had overall energy benefits. Laughlin says: “The transition from proprietary corporate computer networks to centrally managed cloud infrastructure is inherently beneficial due to the dramatic increase in comparable workload efficiency. This can be seen in both the amount of power and water utilized relative to the data processed and managed.”

He also believes the new large-scale data centers are relatively beneficial due to their greater efficiency in handling equivalent digital workloads compared to older, smaller data centers.

Great (green?) growth

That was recent history. But is future demand growth actually a J-curve that is only just beginning?

Laughlin says: “While the industry continues to make significant incremental improvements in reducing the ratio of carbon release to data management workloads, these improvements are being overwhelmed by the increase in digital processing demands leading to a continual net growth in the power needs of the industry.” These demands “should be the focus of debate around the use of energy in the data center sector as that is really the heart of the issue.”

Demand for data centers is going to expand exponentially as digitalization rolls out across the globe. Beard says: “The energy implications are enormous. Take Pakistan, a country with a population of some 240 million people and currently only 15MW of power available. That figure should be more like 2,000MW. Because of the surging power demand, it is likely that that 3 percent of global power consumption number will rise significantly.”

It is not just developing markets, though. This is a major problem across Europe, for example. Ward says: “In a country like Ireland, thanks to the large number of global companies now based there, over 20 percent of the total power consumption of Dublin is
already being consumed by data centers, and this figure is set to rise significantly.”

Meanwhile, in London “it is simply not possible to locate data centers of the size and power required within the metropolis itself, leading to increasing developments in the periphery around the city,” he says. This means fringe locations such as Slough have significant power problems.

All of this is happening at precisely the same moment investors are laser-focused on sustainability. The ESG pressures are significant, according to Mashru, “and have given rise to some controversy as our need for data increases, which does not always go hand-in-hand with our decarbonization objectives. Typically, investors are considering power usage and ESG alignment with all investments.”

Data center operators have to react to the carbon emission targets of their customers. Five years ago, when RFI’s were sent out, sustainability would be just one of many factors, whereas Beard says it is now the number-one requirement.

He adds: “ESG ambitions are increasingly being driven by end users’ carbon emission targets, which are much more important than government policy [in] enforcing data center operators to be more efficient.”

“Many large data center companies are publishing ESG reports,” says Christoph Manser, head of infrastructure at Swiss Life Asset Managers, the asset management arm of Switzerland-based insurance company Swiss Life. “They have an active ESG strategy, and participate in external assessments and ratings groups such as EcoVadis or GRESB.”

Net-zero commitments are top of every corporate agenda. As Laughlin says: “The data center industry – hyperscale tenants, data center operators and investors – have made strong commitments toward achieving a net-zero carbon footprint.”

There is an underlying implication in all this. Some assets may become obsolete, with consequent valuation risks, just at the time when data center energy consumption is set to explode.

Originally, the industry sought to mitigate the impact of its energy consumption through offsetting. However, the use of green credits is increasingly frowned upon, according to Beard.

Instead, “manufacturers have been able to utilize technology to make their operations more efficient,” he says. The key technologies here are related to more efficient types of cooling. For example, cooling directly to the rack: instead of flooding the room with cool air, targeting just the area where the temperature needs to fall. Other ways of cooling are also being explored, such as using a natural wind corridor that doesn’t require power at all.

Otherwise, Laughlin says: “The industry has moved increasingly to be a proactive participant in the creation of new renewable energy generation to offset their energy needs. This is taking the form of either investing directly in renewable energy developments or supporting new renewable developments through committing to long-term financial take-or-pay offtake contracts with renewable energy developers.”

At Swiss Life’s Frankfurt Westside site, the entire 7.5 million-square-foot district will be supplied with a nearby data center’s waste heat. The facilities will be powered solely by green energy. Mathias Strauch, senior project manager, says: “We believe 100 percent renewable power-run data centers across the portfolio and industry are possible.”

Not everyone is so optimistic. As Mashru notes: “The key challenge is that demand for data centers is growing at a pace that outstrips the development of renewables. Renewables cannot be developed at the same rate given the need to connect to the grid and other factors.”

Look north

Data centers need to be on 24/7, so a sole reliance on renewables is not possible without a fossil fuel backup, unless a renewable power source is used that is constant, such as hydro and geothermal generation.

For Ward, there is therefore only one solution: “To optimize your compute location.” Historically, data centers were built around copper exchanges and were therefore inevitably in major metropolitan locations. But most data does not have to sit in these carbon-intensive locations.

Ward says: “Maybe only 10 percent needs to be in a metro location and the rest can be moved to locations where the natural resources are more substantial.”

In North America, this might mean relocating to Canada, or in Europe, to the Nordics where “there are thousands of megawatts of power available thanks to hydro and geothermal sources, and low air temperatures mean you can take advantage of natural air cooling.”

Ward now has a major data center in Iceland and three in Finland.

This offshoring of data centers has been made possible by significant improvements in latency performance. The connection between Iceland and London is down to only 19 milliseconds, whereas in 2010 it might have been 40 or even 60 milliseconds.