Prolific data center build pipeline has knock-on impact to renewable equation
Data centers need to operate 24 hours a day, seven days a week to service their customers.
The notion of data centers being a major driver of power demand in the next decade is not going to abate any time soon. A similar movement is under way to “greenify” new projects.
The result is a massive convergence of interests as data center developers weigh the different options available with both utilities and developers, depending on which market they operate in. At times, data centers owners have even participated in the tax equity funding of their future sources of renewable generation.
Data centers also need to operate 24 hours a day, seven days a week to service their customers, which leads to a complicated question of what mix of renewable and thermal generation is required?
“While we favor solar and wind, it is becoming more common to see hybrid projects that combine the two technologies, as well as add several hours of storage to get relatively close to a baseload product. Our PPAs are always with off-site projects, and we like to see 10-15-year fixed price agreements,” said Travis Wright, Vice-President of Energy and Sustainability for QTS Data Centers in an interview with NPM. Wright says QTS will look at various solutions to combat intermittency including battery storage and pumped hydro storage in select markets.
And there will be more opportunities to explore this mix down the road. The US data center market for new construction was valued at USD 8.4bn in 2020 and forecasted to reach a value of USD 13.9bn by 2026, according to the website Research And Markets. Microsoft, Google, and Facebook already occupy data centers in areas of Northern Virginia and Austin, Texas. Moving forward, what will drive expansion is those companies moving into tier 2 cities such as Columbus, Ohio and Denver, subsidized data centers to handle the healthcare industry and plans by the US Army to spend up to USD 249m to deploy cloud computing services and data centers.
To help meet demand for further datacenters, companies such as DigitalBridge, who did transactions to recapitalize both Vantage Data Centers and Databank in recent years, and publicly traded behemoths such as Cyrus One and Digital Realty Trust are becoming major players. Blackstone, through its various fund groups, closed a USD 10bn take private of QTS earlier this year.
In encountering new builds, data center owners are committed to greenification, but there are challenges on a property-by-property level basis to get there.
Vantage Data Centers sources hydro for its Quincy, Washington data center campus, while other markets might use geothermal, according to Jonathan Mauck, Senior Managing Director for DigitalBridge. Quinbrook Infrastructure Partners also recently opened a data center in Byron Bay, Australia that offers a 24/7 100% renewables biomass powered solution.
However, Quinbrook’s managing partner David Scaysbrook admits that this is more the exception to the norm.
There is “still has a lot of thermal or carbon emitting power supply in the mix for most data centers. Where this is avoidable in the short-to-medium term, most data center operators are ready to offset their carbon emissions with either surplus Renewables Energy Credits (REC) or Voluntary Carbon Credits,” said Scaysbrook. Quinbrook formed a joint venture with Birch Infrastructure PBLLC at the end of 2020 aimed at developing and constructing renewables-powered data center campuses in the US.
“If you look across the US, it is still inconsistent,” adds Mauck.
Solving energy storage, beyond the shorter-term lithium batteries utilized today, could solve a lot of problems here. However, developers are working through those issues at present. Hy Martin, chief development officer of D.E. Shaw Renewables Investments (DESRI), said that it is not a requirement at present for a solar manufacturer to have a co-located storage component.
Microsoft believes it has the formula to knock out thermal generation entirely after announcing on 2 November that it signed 15-year agreement with AES to use around-the-clock renewable energy to power its data centers located in Virginia. AES intends to source energy from a portfolio of 576 MW of contracted renewable assets, including wind, solar as well as battery storage projects as in the PJM.
"The big question in the long term is will it be more efficient to locate data centers where green energy is available or transmit clean energy to the data centers," said Mauck.
AES and Microsoft declined comment for this story.
Markets
Data center owners have the option of procuring power bilaterally with developers or large corporates in specific organized markets or electric utilities to procure renewable power on their behalf in non-organized markets.
The Tennessee Valley Authority (TVA), for instance, through its Green Invest program has struck PPAs on behalf of data center owners for renewable power. DESRI obtained a PPA to supply power to Facebook’s data centers for its 160 MW Chester Solar project in the PJM.
“It varies by what is required in the tariff of a specific ISO,” said Martin, adding that “some organizations are set up to procure clean power directly from renewable developers.”
DESRI has done several projects with the Facebook team having won procured solar projects on its behalf in Utah and the Pacific Northwest in a program with Pacificorp.
Leases for data centers on average had been roughly 10-years, but that has expanded to the seven-to-15-years. The PPA might carry a similar tenor to the lease, but the contract will most certainly differ on pricing relative to other corporate PPA users. Data centers need access to 24 hours of power, while manufacturers are somewhat less.
These are also often virtual PPAs, meaning financial instruments to manage electricity costs rather than direct purchase of the physical electricity. A VPPA is a form of a price hedge, where a price is agreed and payments are made between the parties to the PPA depending on whether the contracted price for power is above or below the market price, according to a white paper from the law firm Norton Rose.
“Data centers operate more hours as opposed to certain industrial manufacturers,” said DESRI’s Martin adding that “the difference will be the shape of the power demand curve in a given day.” The PPA will be correlated between the supply of renewable demand to high demand hours.
Separately, data center owners have also been known to partner with large banks who participate in the project financing, tax equity and wholesale commodity acquisition portion of the renewable project. This typically happens in deregulated markets and QTS has supported projects in partnership with Engie, Calpine and Citi in the past in this manner, said QTS’ Wright.
“Tax equity is always offered to offtakers as there is always a need for more investors in the market,” said a source familiar with the situation. The source added that, from a structuring perspective, it does make it tricky to have the offtake also be the equity provider, but it can be overcome. Separately, an offtake can create some separation by establishing a willingness to participate in the tax equity as opposed to not.*
*This story was originally published exclusively for NPM subscribers earlier this month.