Driving investment into sustainable digital infrastructure

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If the enforced remote working scenario that the COVID-19 pandemic has forced us to adopt has highlighted one thing, it is that the digital infrastructure is fundamental to our connected world. 

However, this growing reliance on an ever-increasing backbone of digital infrastructure will test the aspirations for a low carbon future. “If we create a constraint that all future growth of digital infrastructure should be done sustainably, I think you will find that it increases capital costs only modestly and it will reduce operating costs substantially,” Jigar Shah, co-founder and president, Generate Capital, says.

Shah believes that there are four major areas, where digital infrastructure can reduce its carbon footprint, all of which are interrelated. These are power generation, stranded capacity, energy efficiency and off balance sheet power asset financing.

For on-site generation, the scenario would be to have fuel cell plants or combined heat and power plants on site, providing resilient power in parallel to the grid. “We can structure the financing many ways, but we are particularly proud of a model we created for colocation players, who are typically under a REIT (real estate investment trust) structure where we pay rent, on site as a tenant, while also providing a more reliable, lower cost and more sustainable solution for users of the data center,” Shah says. 

When it comes to stranded capacity, the key driver is the desire to increase billing within the same footprint and achieve increased efficiencies that can lead to the benefits being passed onto the tenants. “This is less obvious,” Shah explains. “The hyperscalers such as Apple, AWS, Google, and Microsoft have already figured this out, but not the colocation folks, due to the reliability factor, over-dimension the power and underutilize what power is available.  This requires a software-defined-power solution. Virtual Power Systems is a good example of a solution here.  Effectively, data centers can unlock unused capacity and the colocation providers can sell that through to their tenants, creating further efficiencies for the data center and its tenants.”

The drive for energy efficiency is related to the desire to increase efficiencies and in many cases can enable the unlocking of stranded capacity through the upgrading of equipment. “For example, our financing of new UPS equipment, leveraging Lithium Ion or other energy storage technologies can not only decrease operating expenses, it can also unlock power capacity upside,” Shah continues. “An old UPS may be rated at 1,000 kVA, which the data center is paying for, but only has a 900-kW output, which is what they can bill to their tenants.  

“By upgrading the UPS and utilizing LiOn, the new 1,000 kVA UPS can output 1000 kW from the same footprint, while also operating at a lower cost.  UPS as a service is a great way to unlock these technologies which already exist and can result in scaled deployment.” 

Other areas for improvement are in cooling, with cooling as a service viewed by Shah as another way to increase efficiency and lower overall power usage effectiveness for a data center. He believes that there are many cooling solutions out there that could benefit from financing as well. 

Off balance sheet power asset financing is a more general concept and refers to all power assets in a data center. “Our ability to provide off balance sheet financing means more options to upgrade to more efficient equipment, and more cash for the data center to allocate to its core business,” Shah adds. “We realise the importance of the data center maintaining control over the power assets and we want that to continue, but allowing Generate to hold the assets on our balance sheet allows the data center to allocate its capital more effectively to its core business and returns to shareholders.”  

The odd couple of power and digital infrastructure

Data centers consume a tremendous amount of power and are typically fed from the utilities. The major vendors in power, such as Eaton, Vertiv and Schneider are already integrated to the sector, but suboptimal financing is optimised for lowest upfront cost instead of lowest overall operating costs. “I think it would be more appropriate to consider how financing could bridge the gap between digital infra and the power sector,” Shah says. “There is a lot of perceived risk in deploying capital into a relatively new (but proven) technology that can increase efficiency, unlock underutilized power and/or provide on site power generation. 

“We work with the vendor to spread this risk more effectively.  By offering such technologies as a service it guarantees performance and fixes operating expenses over the term of the contract, while paving the way for an accelerated integration and additional grid payments for sustainable technology at scale.”    

Renewables are a very cost-effective way to reduce electricity costs in competitive markets.  However, natural gas-powered CHP or hydrogen powered fuel cells provide a more resilient option on site and save money on reduced need for diesel engines to back up the grid.  More importantly, the fuel cells and CHP engines can run on biofuels and/or hydrogen.  “We view natural gas as a realistic stepping stone to renewable fuels,” Shah says. “Data centers offer such large and dense demand for natural gas, there is a business case to be made to produce green hydrogen to fuel these power plants over the next five to ten years.

 The landscape for investment

The growth rate projections of compute relative to efficiency gains are difficult to get a good sense of but based on the best understanding of the growth in all things digital, it seems to be a rising tide.  “From our perspective, it is best to let investors in digital infrastructure continue to do that while we invest our financing innovation into business models to help digital infrastructure accelerate the adoption of proven, sustainable technologies,” Shah continues. “The goal of offsetting the carbon impact of a given data center has more potential than just 100 percent offset.  These data centers are basically microgrids already, and we think there is more potential for them to contribute as sustainable power plants and lead the way in distributed, sustainable generation.

“There is plenty of capital in the clean infrastructure space, but many of these concepts are still too early for large capital pools. This is where we come in.  Our ability to adopt proven project finance models into this sector will help to unlock initial projects at scale and pave the way for larger flows of capital at scale.  This sector can play a major role in the resource revolution and we want to partner at scale to help make this happen.”

 

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