Net Zero: Race is on for data centres as leaders capture value and build lasting competitive advantage

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Jac

Written By

Jac Mathews
Senior Associate

at

Ampersand Partners

Jac Mathews, Senior Associate, Ampersand Partners explains how a strategic approach to Net Zero can help data centers businesses gain long term competitive advantage.

As the world confronts the urgent need to address climate change, the concept of net-zero emissions has emerged as a key strategy for mitigating greenhouse gas emissions. Achieving net-zero emissions means that a company or industry eliminates its carbon footprint almost entirely (by more than 90%) and offsets any residual footprint. For data centres, which consume massive amounts of energy and are responsible for a significant amount of carbon emissions, the value at stake is quite high. To achieve Net Zero, the data centre businesses will have to significantly change the way they construct, operate, power and lease their facilities. Those who move early with a strategic approach to Net Zero transformation will win market share, optimise their costs and build a lasting competitive advantage.

Environmental impact of data centres

The data centre industry accounts for about 2% of the global greenhouse gas emissions. That is more than the entire aviation industry! The majority of emissions are from the generation of electricity required to power the data centres and from the addition of buildings and equipment required for their operation. With the explosive growth of data-driven technologies like artificial intelligence and the Internet of Things, the demand for data centres is only going to increase. A study estimates the emissions from data computing to grow to 14% of global emissions by 2040. Data centres need to find ways to reduce their emissions, immediately and deeply, if we’re going to have any chance of meeting our climate goals.

Gregory Lebourg, Global Environment Director at OVHcloud, calls for an industry-wide action “The route to net zero is not an easy one and requires a radical shift in thinking for all organizations. Complacency is the enemy of innovation, and to tackle the problem effectively, companies across the world must commit to transparency, constantly questioning the status quo and working together to help combat the climate crisis.”

Value at stake

The Net Zero transformation will drastically impact both CAPEX and OPEX of the data centre businesses.

An average sized data centre of 10MW IT capacity pulls a load of 60 GWh energy per annum, enough to power over 16,000 homes. The electricity consumed would cost the data centre between £20 and £30 million, constituting a significant proportion of their operating expenditure. Their profit margins are dependent on their ability to procure energy at cheap rates, hedge against price volatility and pass the costs to their clients. Achieving Net Zero would require a shift to 100% renewable energy, which is contracted differently to conventional wholesale energy.

The sector will have to continue adding large data centre facilities to meet demand. The average sized data centre costs upwards of £100 million to build. To reduce the associated embodied carbon, the businesses will need to revamp their development concepts by incorporating better design efficiency, greener materials, sustainable manufacturing and construction processes, and circularity principles. Such improvements will incur a higher

initial investment. Implementation will require persistent technological innovation, sustained collaboration with the value chain and application of internal carbon pricing. 

Opportunities from Net Zero transformation

For data centre businesses, Net Zero isn’t just about saving the planet. Achieving net-zero emissions is a significant value opportunity. 

Three sources of value for data centres:

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Cost savings

Firstly, decarbonisation measures can bring operational cost savings for the business. The large amount of energy required to operate data centres can be procured through attractive Power Purchase Agreements (PPAs) for Renewable Energy, which can be up to 30% cheaper than the wholesale energy price. PPAs offer not just lower unit price for energy but also price certainty for up to 15 years2 in European and UK markets. This is underscored by the race among the hyperscale datacentre operators such as Google, Meta and Microsoft to acquire the PPA deals coming to the market3. Investing in own Renewable Energy generation can also be a very attractive option in certain markets such as India, where sourcing PPAs is challenging due to regulatory constraints.

In addition, energy efficiency measures can deliver cost and carbon savings. The leaders have moved beyond conventional energy efficiency measure such as hot or cold aisle containment to adopting Artificial Intelligence tools to optimise the server loads and operating parameters in the data vaults. The next level will be to align incentives between the data centre operators and the end users of server capacity to boost resource efficiency.

Business growth

Secondly, Net Zero can be a driver for business growth. The market for green data centres is projected to grow faster than the overall sector at a Compound Annual Growth Rate (CAGR) of above 20%. By positioning strongly on Net Zero, the business can gain a bigger share of this fast growing segment. Also, data centres can provide value add services to their more carbon responsible clients. For example, total Carbon Free Energy (CFE) aka 24×7 time-matched zero carbon energy can attract premiums from clients who are interested in the highest quality renewable energy. Additionally, they can offer clients customised sustainability reports about their carbon footprint and environmental impact. Another opportunity for data centres is to integrate batteries storage in their facilities, which can generate additional revenue by participating in Demand Side Response (DSR) schemes of the grid. DSR involves assets flexing their electricity use in response to a signal from the grid to help balance the system in return for a payment from the grid operator. Battery storage can also help in reducing carbon emissions by offsetting the data centre loads during periods of high carbon intensity of the grid. 

Competitive advantage

Finally, data centre businesses who move early can build lasting competitive advantage. The race to market for Renewable Energy is only going to get more intense as corporates pursue PPAs; hence, locking in supply early is vital. Achieving ultra energy efficiency and developing low carbon data centre facilities will require going through a steep learning curve and building strategic partnerships with the value chain. Starting early will help the data centre businesses to build the essential in-house capabilities and stakeholder relationships that are not easily replicable by their competition. 

Risks of inaction

By not acting on Net Zero, the data centre businesses face a high risk of disintermediation from their clients. A number of technology companies have set ambitious carbon reduction targets and hold high standards for Renewable Energy procurement. If the data centre provider fails to meet these requirements, it is likely that their clients would opt to source their energy directly or even move to other greener data centres. 

Also, acting early on decarbonisation will avoid any penalties or potential carbon tax that could be incurred for inaction by the data centre operators. The emerging regulations around The Task Force on Climate-related Financial Disclosures (TCFD) and The Transition Plan Taskforce (TPT) frameworks will require the organizations to disclose the impact of climate related risks and opportunities on their businesses, strategy and financial planning. Not having a credible transition plan will certainly impact the reputation of the business.   

In conclusion, Net Zero is an imperative for any data centre business. If they move early and strategically it can be an opportunity to capture value and to create a lasting competitive advantage. The irresolute data centre businesses who are late to act stand the risk of losing market share and/or profit margins. 

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