How rising energy costs are impacting the datacentre market

How rising energy costs are impacting the datacentre market

Rising energy costs are taking a well-documented toll on the disposable income of households and are a major contributor to the intensifying cost-of-living crisis that is playing out in the UK.

At a time when consumers are being told to brace themselves in anticipation of energy prices rising even higher from the start of April 2022, concerns are being raised about how the UK’s datacentre operators will fare in the face of even higher power prices.

This follows the news about the UK arm of US-based colocation provider Sungard AS entering administration, with spiralling energy costs – coupled with a dampening in demand for its services during the pandemic – name-checked as a key cause of the financial difficulties it has experienced.

Energy prices have risen considerably over the past year, with data from the UK government’s Office for National Statistics confirming that the wholesale price of gas was four times higher in January 2022 than it was at the start of 2021.

Prices have risen because of supply constraints exacerbated by geopolitical unrest overseas, and in the wake of the Office of Gas and Electricity Markets (Ofgem) opting to raise the energy price cap in October 2021 and at the start of April 2022.  

Given the upward trajectory of UK energy prices over the last few months, it is perhaps unsurprising that some members of the the power-hungry datacentre sector might be feeling the pinch.

“Unlike other businesses, where the biggest expenditure is usually on wages, the largest line item on the balance sheet for a datacentre is energy costs,” Adam Bradshaw, commercial director at Stevenage-based colocation provider ServerChoice, told Computer Weekly. 

“What Sungard’s UK arm going into administration demonstrates is that increases in energy prices present a huge risk for datacentres, and, as such, providers need to have a constructive dialogue with energy wholesalers to help protect against this, if they haven’t done so already.”

From looking over Sungard AS’s accounts, its company reports for the 2018 and 2019 financial years both make references to the fact that the firm has been grappling with a decline in demand for its services for some time.

“This [downturn in client spend] has resulted in certain datacentre and workplace facilities becoming unprofitable, with fixed lease and energy costs no longer being offset by customer revenue,” said the company’s 2020 accounts.

Colocation boom period

This might seem strange, given the reams of analyst data and reports that keep reinforcing the fact that colocation providers are currently going through a boom period, fuelled by the seemingly insatiable appetite of the hyperscale cloud and internet giants for datacentre capacity.

Unfortunately, as Steve Wallage, managing director of datacentre-focused analyst house Danseb Consulting, points out, Sungard AS has missed out on this trend because its focus has been primarily on courting enterprises and providing them with business continuity services.

The company operates 16 facilites across the UK, including a mix of standalone datacentres and hybrid sites that comprise server farms that are paired with office space for firms to use during downtime incidents. The latter sites are known as Workplace Recovery Centres.

“Given the continued growth in the broader colocation market, there are issues here that are more specific to how Sungard’s business was run,” said Wallage. “They have a lack of exposure to the hyperscalers, which have been driving growth in the broader market and been exposed to weaknesses in the business continuity market.”

As Wallage says, the Covid-19 pandemic has shown enterprises that in times of crisis, it is possible to pivot their operations to use public cloud services, which enable remote working to keep their businesses running, rather than move to an alternative office location.

On this point, Bradshaw said: “Sungard was already exposed to a greater degree than other providers due to its own focus on business recovery solutions.”

He added: “The pandemic has shown that businesses can make excellent use of a well-defined datacentre and hybrid strategy without having to accommodate seat and workstation space, and this often represents a much better bang for buck than old-fashioned workplace recovery plans.”

Avoiding administration

The Sungard AS 2020 accounts go into some detail about the steps the company has taken to try to balance its books in the face of lower client demand and energy costs rising to what its report terms “unprecedented levels”. 

During the second half of 2021, the company sought to mitigate the impact of its growing cost base by negotiating with its landlords and invoicing customers to cover the additional costs it had incurred, but to little avail, the accounts confirmed.

The document also revealed that the company had secured financial support from its investors to the tune of $20.5m, which was due for repayment by 31 May 2023.

It had also sought support from its landlords, customers and its parent company to secure a “consensual restructuring” of the business but, as confirmed by the firm overseeing its administration, Teneo Restructuring, these discussions proved unproductive.

Teneo confirmed it has succeeded in securing a limited amount of funding to enable Sungard AS to keep trading while discussions with its landlords and customers continued, while also giving the administrators time to find a buyer for the business.

“The ability for the business to continue to trade in the medium to long term, either to enable a rescue of the business as a going concern or to deliver individual asset sales, will be reliant upon the burden-sharing from both customers and landlords alike,” said Benjamin Dymant, one of the administrators overseeing proceedings at Sungard AS, in a statement to Computer Weekly.

Referring back to the continued high demand for datacentre capacity in the UK, there is some potential for an edge datacentre purveyor to swoop in and buy up some of its sites, said Wallage.

However, some parts of the Sungard AS UK datacentre estate are likely to need upgrading, which will affect how much they sell for.

As previously detailed by Computer Weekly, the datacentre market remains a hive of activity for mergers and acquisitions, with some of the asking prices running so high that these sites remain off-limits to anyone but private equity investment groups.

“The very high valuations we have seen for datacentres are for premium assets, so they may need to sell the datacentres off individually as differing assets, locations and potential buyers,” said Wallage.

Could other datacentre operators be at risk? 

It remains to be seen whether Sungard AS’s slide into administration is an isolated incident or if other players may also fall into financial difficulties because their energy costs become too big for them to manage comfortably. 

Much of this depends on how much financial cushioning they have to see them through this period of high energy prices – which shows no signs of letting up yet.

Computer Weekly understands that some larger operators tend to pre-contract for power at fixed prices through brokers, which means they are less exposed to the risks of commodity price fluctuations for as long as those contracts are in place.

“The impact of electricity costs is affecting operators differently depending on how they contract for fuel, which in turn depends on how big they are and whether they are coming up for renewal and how much they might need to hedge forward,” Emma Fryer, associate director of datacentres at UK tech trade body TechUK, told Computer Weekly.

The biggest issue facing the industry in all this is the lack of certainty over how long energy prices will remain elevated, she added.

“The fact that the UK has no gas storage to speak of compared to other European counterparts does not position us well in terms of being able to buffer short-term spikes [in prices],” said Fryer.

Some operators have contracts in place that allow any increase in power prices to be passed on to customers. Depending on the industry in which those clients operate, sustained and ongoing price rises may prove untenable in the long term for them, too.

For clients that are relying on older, less modern facilities, continued price rises might prompt them to consider how much value for money they are getting from their current colocation setup, and make them less willing to overlook the shortcomings of their incumbent provider.

In turn, this could prompt some enterprises to consider shifting their workloads to an alternative provider once their contract comes up for renewal, said Eyjólfur Magnús, CEO of Nordic datacentre operator atNorth.

“We will continue to see soaring electricity prices, not just in the UK but in other parts of mainland Europe as well,” he said. “This will inevitably cause a continuous migration of IT workloads to places with more favourable electricity prices, such as the Nordics, where there is better access to an abundance of renewable energy at stable, cost-efficient prices and a colder climate, which means less energy is required to cool servers.”

Wallage said such migrations could lead to the pace of “obsolescence” for some older facilities in the UK accelerating, but datacentre migrations are projects that enterprises rarely embark on without good reason.

“There is a resistance to move datacentres – ranging from risk and security concerns, as well as the [dangers of damage caused by] the physical movement of racks and servers,” he said.

There is also the “hassle” of finding and selecting alternate suppliers, said Wallage, and there are sometimes challenges over migrating the organisation’s existing relationships with its telco partners over to a new site.

Bradshaw agrees with Wallage on this point, while also casting doubt on whether the UK’s energy crisis will prompt a mass migration of enterprise datacentre workloads to the Nordics.

“Some customers may change providers if they feel they’re not getting what they’ve paid for, but I don’t see this being a broad market trend,” he said. “We’ve seen customers remain in datacentres that have experienced serious outages because the difficulty involved in moving out is significant.

“Datacentres that can assist in this transition will likely snap up those prospective customers looking for value elsewhere, especially those that have optimised their energy efficiency and services to provide greater value to the customer. In this light, it is difficult to see customers moving to the Nordics.”

Bradshaw added: “Nordic operators have already been trying to find routes into the traditional Frankfurt, London, Amsterdam and Paris [colocation market] customers, and haven’t gained any real traction outside those who operate on a large scale – the likes of HPC, artificial intelligence and hyperscalers. This is down to a variety of factors, such as no local support available, the region lacking the same density of connectivity options, and the growing demand for data sovereignty.”

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