Global | Publication | March 2024
At the recent Kickstart Europe Congress, influential leaders and experts converged to discuss the ever-evolving digital infrastructure landscape. Their conversations spanned the present state and future prospects of the industry. Notably, the conference delved into the intricacies of data centres - the backbone of our digital world. In this article, we distil the essential takeaways from these discussions, shedding light on the critical challenges and opportunities that define the data centre market.
Amidst the rising demand for data centres, fuelled by rapid advancements in artificial intelligence (AI), the industry faces a multitude of challenges. These include escalating power requirements, the need for efficient power management, grid congestion, the quest for optimal locations, and mounting costs. Despite these obstacles, the prevailing consensus is that 2024 will witness new heights in data centre service demand.
Driven by hyperscale companies and the rapidly expanding field of Artificial Intelligence (AI), the demand for data centre services continues to surge, even amidst rising costs. Within the traditional tier-1 locations, known as the FLAP-D market (Frankfurt, London, Amsterdam, Paris, Dublin), supply is projected to increase this year. However, the forecasted capacity growth is expected to lag behind supply. Current vacancy rates remain low and experts predict they will dip into single digits.
In response to the ever-increasing demand, new data centre developments continue to emerge in all four regions, including ambitious megaprojects. As a result of these ongoing initiatives, the secondary market is poised for double-digit supply growth.
As businesses digitise their operations, the need for computational resources grows exponentially. Whether it’s hosting websites, processing transactions or running machine learning algorithms, data centres are involved in each process. Consequently, experts assert that power demand is soaring. To address this demand, data centres are actively seeking new power sources beyond the traditional power-grid. Renewable energy, such as solar and wind, is gaining traction. Some data centres are even exploring on-site generation through fuel cells or microgrids. This approach aims to strike the right balance between reliability, cost-effectiveness and environmental impact.
Data centres are no strangers to scrutiny. Being energy-intensive facilities, they find themselves in the crosshairs of legislators, environmentalists and society at large. The pressure to adopt sustainable practices is mounting, requiring sincere commitment. Optimising their efficient use of power and water remains critical for the data centre industry.
Power grid congestion is a genuine concern. As data centres cluster in specific regions, they strain local grids. Smart load management, demand response programmes and grid-level collaboration are essential to alleviate congestion. The industry must work hand-in-hand with utilities to ensure a reliable power supply. Data centres face challenges in securing suitable locations due to zoning restrictions. Balancing the need for proximity to users with environmental considerations is a delicate process. Innovative designs, such as vertical data centres, may become more relevant.
Large-scale data centre campuses are also emerging as a solution. By consolidating multiple data centres in a single location, these campuses achieve operational efficiencies. Shared resources, centralised power management and streamlined operations can reduce the industry’s ecological footprint.
Data centre management software is evolving rapidly, encompassing automation, predictive analytics, and real-time monitoring. These tools are engaged for efficient power management. AI is also being used to optimise resource allocation and minimise energy waste.
An untapped potential may lie in storage consolidation. Many companies maintain in-house data centres, which are less power-efficient, less sustainable, and less cost efficient. By shifting some of these services to external data centre providers, companies may be able to free up part of their available power capacity.
The FLAP-D markets (Frankfurt, London, Amsterdam, Paris, Dublin) have evolved into data centre hubs due to their proximity to internet exchanges, ensuring optimal connectivity. However, these locations were not originally chosen based on the availability of sustainable energy sources. Now, securing power from renewable energy has become crucial to attract hyperscale and other large customers. Driven by stakeholders and regulatory requirements (including ESG reporting), hyperscalers are actively seeking sites with abundant renewable energy availability.
The Nordics lead the way in this regard, with over three-quarters of their electricity consumption coming from renewable sources. Stockholm and Copenhagen are experiencing rapid growth as a result of this trend, but we must not underestimate Oslo due to its cross-continental connections with the US and Canada. It is anticipated that Oslo will surpass Dublin in the foreseeable future, as Dublin’s growth stagnates due to constraints on power availability.
While Warsaw still has a considerable distance to cover in terms of sustainable energy sources, solar energy in Poland is experiencing rapid growth. Additionally, this country is exploring another potential power source: nuclear energy. There has been significant discussion recently about “small modular reactors” (SMRs) as a solution to the existing power limitations. Predictions suggest that data centres in the near future may incorporate their own integrated nuclear reactors. China is presently constructing SMRs, a technology already employed in nuclear-powered submarines.
Other upcoming locations in Europe are Berlin, Madrid, Milan, Brussels, Zurich, Lisbon and Prague.
Greenfield projects tend to have a considerable lead time due to the current challenges related to power and water supply, grid connection and building permissions. It may therefore seem beneficial to acquire a brownfield project where the aforementioned aspects have already been arranged for. Additionally, brownfield projects have the advantage of existing customers, which reduces the need to actively market the data centre. However, good brownfield opportunities have become scarce, especially in the FLAP-D market. Not only are there simply not many opportunities available, but they often come at a price. Sometimes the pricing levels are such that it is hardly possible to achieve a decent return on investment.
Scalability may also be an issue. Larger customers require increasingly bigger workloads, and most brownfield projects are not sufficiently scalable.
Furthermore, investors will be highly focused on ESG standards, particularly energy efficiency, both from an environmental and a financial risk perspective. While greenfield projects are generally being built in accordance with the latest requirements, brownfield projects may not meet those standards and may therefore require considerable investment.
Although single data centre acquisitions are not expected to be common going forward, M&A activity is still anticipated. Many data centre platforms are backed by private equity investors who will eventually want to exit their investments.
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