Sustainable Power for Digital Infrastructure
The opportunity to finance sustainable power to the digital infrastructure sector is driven by business needs and offers a healthy return profile for investors. It also has a positive impact on our global emissions profile.
Why is this space attractive for investment?
- Asset-backed (project) finance structures for long term yield
- Attractive counter-party risk, contracted revenues over 10–20+ year terms
- 15%-40%+ compounded annual growth rates
…and the byproduct of investment will offset a tremendous amount of carbon emissions.
…and the opportunities are here today. The technology is already here. We just need to implement at scale.
Capital and business model structures are key to this equation.
Based on the growth rates, return profiles/structures and impact potential; I find the digital infrastructure space quite attractive, and other investors should too.
I compiled this as a basic primer for any investor, developer or sustainability advocate who cares to learn, or get involved in this space.
So what is Digital Infrastructure?
Digital infrastructure is the physical hardware/systems that enable the digital communications, the internet, cloud, IoT, etc. It’s easy to forget that the apps we use, the movies we stream, the IoT we leverage and the cloud services we use for storage; are all powered by physical servers/hardware.
So when I refer to digital infrastructure, I mean data centers ( large cloud/compute services, think AWS), edge modular data centers (smaller compute, closer to user, highly distributed), and cell towers/5G (the wireless “pipes” for communication/bandwidth, highly distributed).
Data Centers (edge included) are the biggest component relative to power consumption/carbon emissions. The digital infrastructure space is consuming an enormous amount of electricity, and may consume between 9% to 20%+ of global electricity by 2025.
As of today, in aggregate, the digital infrastructure space also emits 2x more CO2 than the entire airline industry.
And this growth is not stopping anytime soon — our digital world and reliance on it, is growing rapidly — consider our phones, computers, the cloud, movie streaming, IoT, blockchain, crypto mining, and autonomous cars…data is being created so fast, and requires so much compute power, that infrastructure cannot keep up.
Annual global IP traffic will reach 3.3 zettabytes by 2021; global data growth CAGR is 61%.
Power hungry “modular data centers” are continually being built closer to the end users to minimize congestion-slowed response times. The data centers must be replicated closer to the end users to minimize latency (response time).
And 5G (faster, more bandwidth) cell technology requires that cell towers be replicated closer together, due to the 5G spectrum frequency’s distance limitations. (5G leverages high frequency spectrums, which can only travel short distances, therefore requiring a higher density of 5G base stations for coverage). 5G is projected to grow at a staggering CAGR of 111% from 2019–2025!
Following close behind is the deployment of modular edge data centers, to provide the compute power necessary to support the 5G bandwidth (pipes) increase — The CAGR for modular edge data centers is projected at 41%.
The business case to go green in data centers:
The explosive growth of 5G, followed closely by modular data centers (new and retrofit) requires solutions aimed at:
- Improving energy efficiency (e.g. cooling solutions)
- Improving the cost, resiliency and reliability of critical power (e.g. micro-grids, onsite power)
- Complete “Green” data center builds and/or upgrades (e.g. fully integrated green data centers)
Lastly, “software defined power” solutions unlock unused capacity.
“Going green” is driven by business economics and necessity. In the colocation data center market (think Equinix or Digital Realty), capacity is sold based on power metrics, i.e. 100kW of capacity (critical power) is sold to the underlying tenant.
The power used to power the IT (computer servers) is sold as the critical power (100kW), but the customer also pays for the power required for cooling, lighting, security etc. The Power Usage Effectiveness or “PUE” determines how high the total cost of power will be to the tenants and owner of the data center.
A lower PUE, brings a lower total cost of power for the tenant. And a lower or stabilized cost per kWh of power, provides an additional benefit to both data center owner and the tenants.
But it also must be noted that POWER AVAILABILITY, i.e. power uptime (99.999% uptime requirement) is the most important metric and cannot be sacrificed for any price.
This must be understood as developers work to find new business models and solutions. It is key to shaping the business case for the customer. Although, it should also be noted that not all compute functions require such power availability, certain applications can be “batched.”
The tenants ultimately require sufficient resiliency and prefer a lower total cost of power. By improving PUE and the total cost of power, the data center can achieve a competitive advantage against its competitors as its tenants and lower overhead for themselves.
This is what drives the business case. And due to the carbon intense nature of the business, one can anticipate regulations coming down the pike as further incentive.
A lower carbon impact is the important byproduct and consequence of the above, but as with any scalable opportunity, it is and must be driven by a compelling business case. Luckily, that is what we have here.
The business case for micro-grids:
Micro-grids are simply a combination of assets such as a natural gas generator or fuel cell, battery/energy storage and solar/wind generation combined to provide a more stable, and lower cost of power due to the power being consumed where it is generated.
The micro-grids can provide increased resiliency, while keeping the existing grid connection in place, and through managing the assets optimally, can achieve a price per kWh that matches or is below the grid price (market dependent).
The micro-grid model fits well into a project finance model, coupled with a PPA to the data center, (can include a rental model to the landlord), who then passes the lower cost of power through to the tenants. The counter-party to the financing is generally credit-worthy (think Amazon, Netflix, Verizon) and should be willing to match the term of the contract to 10 years or more, making this financeable through a project finance structure.
In energy efficiency, there is also a clear business case. I.e. if today, your power usage effectiveness (PUE)is measured at 1.7 (70% of power used is for non-compute items such as cooling), and you can reduce that to 1.2 (20% of power used is for cooling), you just achieved a massive savings on power costs. Therefore, the equipment can be financed with sufficient returns, and still produce significant savings to the customer.
The digital infrastructure sector represents a huge opportunity for scalable deployments in micro-grids, energy efficient cooling solutions and “green” data center projects.
The projects are highly financeable with the right structures, and the technology is already proven.
But we need implementation at scale to make a dent in this space. This requires more capital, more developers and more focus in this space. The space presents a great investment opportunity for healthy financial, social and environmental returns.
