Powering the critical infrastructure behind the digital economy – key issues and opportunities

The UK Government’s recently signalled commitment to support the data centre industry by designating it as a critical national infrastructure (CNI) has only served to reinforce the momentum for this industry’s rapid expansion.

Data centres, as an integral part of the infrastructure supporting the growing global digital economy, present as an asset class with enormous opportunity, relatively low risk and reliable returns. Whilst these features may hold true, there remain some key issues, concerns and considerations that any prudent investor or financier would do well to factor in.

1.Power: The impact of the need for a continuous power supply

The International Energy Agency has cited data centres as a significant driver in the growth of electricity demand in many regions, estimating that by 2026, data centres’ global electricity consumption could reach a level equivalent to Japan’s annual consumption. These levels of consumption impact not only the national power grid demand but the sustainability reporting and environmental permitting requirements of data centre projects.

(i) Pressure on the grid and back-up power sources

Recent experience in Ireland illustrates the tension between a drive for data centre expansion and the national grid’s limitations. In 2021, the Irish utilities regulator, CRU, issued a directive that offers of new connections to the national grid would be contingent on the data centre applicant bringing onsite dispatchable generation (and/or storage) with a capacity equivalent to or greater than their demand. Singapore also imposed a three-year moratorium on data centre construction between 2019 and 2022, citing the pressure on its grid among the reasons.

In response to grid capacity constraints and the substantial power demand of data centres, many data centre developers are investing in renewable power sources through corporate power purchase agreements. However, simultaneous investment in the development of a data centre and renewable energy projects introduces an element of project-on-project risk, whereby investors take on the risk not only of a new data centre but a new utility supplying it. It is therefore important for investors and funders to keep this in mind when evaluating a data centre project and consider the means and tools available to minimise it; which include flexible financing arrangements and insurance. Furthermore, the intermittency of power supply from renewable sources like wind and solar power is contrasted to data centres’ need for uninterrupted power, which has typically been met through use of diesel or gas generators as a source of back-up power (which introduces issues of its own from a sustainability perspective). 

This highlights that the expansion and success of data centres cannot be viewed in isolation or as an open-ended pipeline of opportunity. Whilst the designation of data centres as CNI demonstrates the positive direction of policy, in nearly all cases, data centres are dependent on power infrastructure. In the event of a future shift in policy restricting development due to grid capacity constraints, investors and financiers should take into account the current demand on the grid and any planned policy to expand its capacity. This is particularly important for the larger hyperscale data centres, which typically have a 10-to-15-year offtake period. 

(ii) Sustainability and environmental permitting

Both data centres’ substantial electricity consumption and their potentially carbon-intensive back-up generators raise questions about the sustainability of data centres’ power supply, which cannot be fully mitigated by intermittent renewable power sources.

In the EU, earlier this year the Commission adopted a delegated regulation to establish a rating scheme for the sustainability of data centres, as part of a wider package of measures to reduce energy consumption by 2030. Under the scheme, installed power demand and total energy consumption are among the key performance indicators. The scheme is an example of the wider trend of increasing transparency and reporting obligations on companies. Due to their intensive power consumption, this impacts data centres acutely. It is therefore vital for investors and financiers to be alive to such regulatory advances, as the regulatory framework surrounding data centre projects is likely to become more complex. 

The use of diesel or other carbon-intensive back-up generators also introduces planning and permitting considerations for data centre developers. Whilst such back-up generators may be used rarely or for testing purposes only, the significant capacity of the generators may subject data centre providers to environmental permitting rules. For example, in the UK, data centre providers with back-up generators with a generating capacity exceeding 50 MW may be required to apply for a greenhouse gas emissions permit to operate under the Environmental Permitting Regulations (implementing the Industrial Emissions Directive). The need for back-up power is creating opportunities for alternative fuels, including in the hydrogen fuel and battery storage sectors.

It is therefore important for investors and financiers to consider not only how data centre projects will be powered day-to-day but to also their emergency back-up power sources, and how both can be achieved sustainably and in compliance with any applicable environmental permitting requirements.

2. Water: The impact of the need to cool data centres

Data centres have traditionally required large volumes of water for cooling systems so that servers are maintained at optimal operation. Whilst more modern cooling systems either use much smaller quantities of water in a closed-loop system or avoid water altogether, the use of water remains an important cooling method in the sector. In recognition of the sustainability implications of this water consumption, the EU data centres sustainability rating scheme mentioned above also requires data centre providers to report on their water usage.

Whilst water usage limits have not been specifically mandated on data centre providers, large data centre operators have already taken voluntary steps to address this, with some pledging zero or positive water usage by 2030. Furthermore, the international climate commitments to reduce water consumption and the emphasis on transparency through sustainability reporting obligations in the EU means we are likely to see data centre providers under increasing scrutiny to minimise their water usage. In light of this, it is important for investors and financiers to understand how this is addressed as a long-term consideration in the context of the selection of the location data centres.

3. Waste: Management and decommissioning

Another key concern with the scaling up of data centre operations is the substantial quantities of wasted heat produced during their lifetime and, at the end of their life, the electronic waste which needs to be responsibly managed.

Under the new EU data centre sustainability rating scheme, operators must report the amount of waste heat reuse at their data centres on an annual basis. However, there are many cases of data centre providers taking the opportunity to use waste heat for district heating. For example, the Old Oak and Park Royal Development Corporation in London, which is expected to be the first in the country to recycle waste heat from data centres to supply heating for local communities.   

As servers in data centres require replacement and upgrades over time, the amount of e-waste will continue to grow. Existing electronic waste regulations apply to new data centres (for example, the Waste Electrical and Electronic Equipment Regulations 2013) and many data centre providers are very much alive to the issue of managing e-waste, demonstrated through their voluntary commitments to reuse, repair and recycle electrical equipment. However, there are currently no mandatory decommissioning regimes comparable to those in the nuclear sector for data centres. Given the scale of the electronic waste produced by these digital infrastructure assets, and the length of their operations, this may become a policy focus in future and a consideration that financiers and investors may wish to keep in mind as they evaluate data centre projects.