National governments are becoming increasingly concerned about the digital sector’s impact on power grids. In Ireland, authorities have placed an indefinite pause on new data centre construction projects until such a time as they feel they can adequately support them on a grid served in large part by renewable energy. Meanwhile, in the Netherlands, the government recently announced that it will impose stricter rules for hyperscale data centres, at the same time as banning new projects for nine months while the new rules are written.
While this is clearly a worry for data centre operators hoping to start business in these regions, it is also a big issue for data centres that had been hoping to expand. Now, despite the demand from a customer perspective, data centres are having to wait in a queue for years at a time to be allocated the energy capacity they require.
There is, however, an alternative. To fill that gap in energy demand, it is becoming more common for data centre operators to consider deploying onsite power plants that include technologies such as fuel cells, or combined heat and power (CHP). Sustainable infrastructure companies, such as Generate Capital, finance, own, and operate such plants, and sell the power under a long-term, power purchase agreement (PPA)-like structure.
Macro-factors driving onsite power plant adoption
William Bubenicek, a sustainable infrastructure entrepreneur working as a developer-in-residence for Generate, says that the expected increase in adoption of sustainable onsite power plants can be attributed to the fact that data centres require more and more capacity, and the power grids are not able to keep up with demand in many markets.
It is worth noting that power grids around the world are under huge strain to add more renewable energy and are more imbalanced than they have ever been before. To provide the vast amounts of power necessary to support current and future demand, the entire utility infrastructure must be upgraded and optimised. This is obviously not a quick process, and so operators are looking more and more at adopting sustainable onsite energy generation capabilities to fill the gap in energy supply, while also achieving environmental, social, and corporate governance (ESG) goals.
The growing demand for energy to power the growing digital infrastructure space is a real business issue for data centre operators. As data centre operators require additional power capacity to meet increasing demand from customers, it is imperative from a speed-to-market perspective that capacity is built out to meet market demand.
Aside from addressing the speed to market issue, there are several other notable benefits to sustainable onsite power generation. The most obvious is price, and having power onsite avoids transmission and distribution costs, allowing alternative power sources such as fuel cells, or CHP to compete with utility prices. Additionally, onsite power offers greater clarity in terms of emissions and ESG additionality factors.
Supporting the grid with bi-directional energy capabilities
Traditionally, the power purchased from the utility is one-directional, but with onsite power, bi-directional power becomes possible, whereby you can provide grid-positive services to the grid, such as demand response, where consumers can reduce their energy demand during times of system stress, or frequency regulation, which ensures the balance of electricity supply and demand at all times. This can be a net positive impact for the grid and for the economics of the power plant, argues Bubenicek.
“The ability to enable bi-directional power via distributed, sustainable energy resources, I believe, is where the future of our grid is heading,” Bubenicek explains. “The more deployment of distributed energy resources, including onsite generation, with bi-directional capability, the better the outcome from a power and sustainability perspective, and the more balanced the grid will be over time.
“Generally, it is not ideal for colocation data centres to own and operate their own onsite power generation infrastructure. It is not their core business, nor does it align with their typical real estate investment trust (REIT) structures which would enable them to monetise available tax credits and amortise the cost over a long period of time. Therefore, it is better suited to third-party infrastructure investors, with 20+ year balance sheets, to build, own and operate the project under project finance structures, such as the power purchase agreement (PPA) or energy services agreements (ESA). Such a structure requires the data centre operator, with sufficient credit, to sign a 20-year agreement to purchase the power.
“For the data centre operator, the project finance structure enables a zero capex, pay-as-you-go type of model. The data centre operator is not responsible for constructing, owning, and operating the plant. But they would sign an agreement to purchase 100 per cent of the power produced by the facility at a fixed rate, with an escalator, over the term, typically 20 years. This is what anchors the economics of the project.”
Focusing on deployment
All in all, to make a meaningful impact on our collective decarbonisation goals, Bubenicek concludes that the focus should be on ramping up deployment.
“We have a multi-trillion-dollar infrastructure opportunity to solve, and deployment at tremendous scale is required to get there. Innovation is important and should always continue in parallel, but we must deploy, deploy, deploy; what is sustainable and proven to have a net positive impact today. There is no time to waste here, and this sector is positioned to take a lead role in decarbonisation via sustainable infrastructure deployment, while also positively impacting the grid and the bottom line of the business.“
The rapid rise of digital infrastructure, with its enormous energy consumption footprint, has the potential to take a lead role in the infrastructure revolution, and that leadership should be driven with a core focus on sustainable deployment.
