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The global artificial intelligence (AI) race is intensifying as companies compete to dominate the AI market. Dominant players, including Microsoft and Alphabet (Google), are investing billions of dollars in it. This has led to the booming data center industry, presenting it as an attractive investment opportunity.
However, the exponential growth of data centers brings with it a substantial energy demand. This contributes significantly to the generation of greenhouse gas (GHG) emissions. Acknowledging the challenge, industry leaders and governments are actively deploying energy-efficient technologies, embracing renewable energy sources, and implementing stringent regulations.
Today, the data center business is not just about AI and cloud computing. It also encompasses sustainability and green finance agendas.
In this two-part series on green data centers, we will discuss recent data center trends from a green finance perspective. This article (Part 1) will touch upon the basics of data centers, ways to make data centers more sustainable, and the definition of green data centers.
Booming Data Center Industry
In 2022, the global data center market size is estimated at USD 194.81 billion, with an expected CAGR of 10.9% in 2023-2030.
One of the driving forces behind this surge is the rise of Generative AI, a technology widely promoted by major IT companies. Generative AI can create various types of content—text, images, videos, audio, and more—based on specific prompts. This capability is achieved through training machines on vast amounts of data.
As Generative AI and other AI applications continue to evolve, the need for robust and expansive data center infrastructure will only grow, supporting the immense computational power and storage requirements these technologies demand.
The Evolving Data Center Landscape
Traditionally dominated by technology companies, the data center industry landscape is evolving as other companies, such as real estate firms, also actively participate. For example, ESR and GLP are embarking on large-scale data center projects in Japan, diversifying from their historic focus on logistic warehouses and commercial buildings. This shift underscores the growing recognition of data centers as high-growth potential real estate investment opportunities.
Real estate firms, in particular, are increasingly entering the data center market for several strategic reasons. Primarily, they see data centers as a lucrative extension of their existing property portfolios, offering high-growth potential and stable, long-term returns. We will further discuss the advantages of investing in data centers in Part 2.
Moreover, real estate firms already possess many of the core competencies required for DC development and management. They have experience in acquiring and developing large-scale properties, managing complex facilities, and maintaining long-term tenant relationships. The transition to data centers allows them to leverage these skills while tapping into a high-demand, technology-driven sector.
The Power Struggle
One of the biggest problems with data centers are that they are highly power guzzling – and thus, generate substantial GHG emissions.
Notwithstanding huge efficiency improvements, according to the International Energy Agency (IEA), there has been a 20-40% annual increase in data center energy use in the past few years.
Furthermore, Goldman Sachs forecasts data center power demand to experience a CAGR of 15% in 2023-2030, and that data centers will make up 8% of the total power demand in the US by 2030.
According to the 2024 Green data center Roadmap published by Singapore’s Infocomm Media Development Authority (IMDA), the data center sector contributes to 82% of domestic Information & Communications sector’s GHG emissions.
This is not a small problem.
For companies, they have set and disclosed carbon reduction goals, making it imperative to avoid reputational damage resulting from failure to meet these goals. For countries where data centers are built, this could threaten their national energy securities, particularly in regions already strained by tight power grids. For the world, accelerating global warming is never favorable.
Google’s latest 2024 environmental report clearly shows this issue:
“In 2023, our total GHG emissions were 14.3 million tCO2e, representing a 13% year-over-year increase and a 48% increase compared to our 2019 target base year. This result was primarily due to increases in data center energy consumption and supply chain emissions.”
Powering data centers sustainably is a challenge that needs to be solved by all stakeholders.
Energy Usage of Data Center
To solve issues related to power-guzzling data centers, we must first grasp the fundamentals.
Data centers consist of three main components
Energy sources: Energy can be obtained through on-site generation or procured from the grid. Most data centers use a hybrid approach, as on-site generators can provide immediate power backup during grid failures and may even be more cost-effective during peak periods.
Facility systems: This mainly consists of cooling systems and electrical distribution. Cooling systems maintain optimal temperatures for IT equipment to operate efficiently, while electrical distribution ensures reliable power supply throughout the facility.
IT systems: IT systems is the core of a data center, responsible for handling, processing, and storing data. This component encompasses servers, storage devices, networking equipment, and the necessary software needed to manage these hardware resources.
IT systems serve as the productive core, while facility systems provide necessary support. Therefore, a data center is deemed more efficient when its facility systems consume less energy.
A key metric used to gauge this efficiency is PUE (power usage effectiveness), which is calculated by dividing total facility power by IT equipment power.
Lower PUE values are preferable, with average data centers typically operating at around 1.8. Equinix, the world’s largest data center company by revenue, has an average annual PUE of 1.42.
Given that electricity constitutes over 50% of a typical data center’s operating expenditure, achieving a lower PUE not only reduces carbon emissions but also offers a competitive advantage.
For data center owners and operators, this means increased profitability or the ability to offer more competitive pricing due to lower operational costs. For data center developers and landlords, this allows the charging of higher rent fees as tenants enjoy lower operational costs.
Nonetheless, PUE should not be the only measure considered because PUE is calculated using IT equipment power as the denominator, so it does not account for the energy efficiency of IT equipment. Focusing solely on PUE overlooks the potential energy savings from using more efficient servers, storage devices, and networking equipment. Hence, other metrices, such as energy usage intensity (EUI), could also be used alongside PUE.
Boosting Energy Efficiency
Now, how do we improve PUE?
Servers generate significant heat, requiring optimal cooling to maintain peak performance. Consequently, cooling represents a major portion of a facility system’s energy consumption and is pivotal in improving PUE.
This focus has spurred innovations in data center cooling technologies. For example, liquid cooling systems are increasingly replacing less efficient air-cooling methods traditionally employed in data centers.
Renewable Energy in Action
Data centers are inherently power guzzling due to their high-density computing, continuous operations, and extensive cooling needs. Hence, increasing energy efficiency alone is not enough to address their substantial energy demands.
In addition to enhancing energy efficiency, utilizing renewable energy stands out as a primary method to mitigate power-related challenges. Moreover, the decreasing cost of wind and solar energy means that renewable energy offers not only environmental benefits but also long-term economic savings.
In 2023, Equinix achieved a renewable energy coverage of 96% and aims to reach 100% by 2030. Similarly, ESR DC has established a target of 75% renewable electricity consumption by 2030 and 100% by 2040.
Defining Green Data Centers
In general, there are three main factors that makes a data centre sustainable: high resource efficiency, usage of renewable energy, and sustainable construction.
Resource efficiency: Having low power usage effectiveness (PUE), water usage effectiveness (WUE), energy usage intensity (EUI), etc. This could be achieved through measures such as installation of a water leak detection system, upgrading into more efficient equipment, and deploying innovative cooling solutions.
Renewable energy: Can be done through onsite generation (e.g. rooftop solar panels) or procured from third parties (e.g. power purchase agreements/PPAs).
Sustainable construction: Proper environmental impact and risk assessment during site selection, obtainment of high green building ratings/ certifications, usage of low carbon construction materials, recycling of demolition and construction waste are some steps that could be done to constructs data centers sustainably. Sustainable construction is crucial, yet often overlooked. Sustainable construction addresses embodied carbon — emissions produced during the manufacturing, transportation, and installation of building materials. Without understanding and reducing embodied carbon, which contributes significantly to Scope 3 emissions, net-zero will not be achieved.
However, how energy efficient should a data center be to be considered green? If a data center operates using renewable energy but consumes so much water, can it be considered green? For now, the distinction between green and brown data centers varies and lacks a universal definition, much like sustainable investment products.
Hence, this distinction is typically delineated by local regulations and standards. For instance, Singapore requires companies setting up new data centers to fulfill a set of criteria, including having a PUE of at least 1.3, obtaining Platinum certification under the BCA-IMDA Green Mark for New Data Centre, and submitting a renewable energy or carbon offset plan*.
*Note that this isn’t a criteria per se. Singapore's DC-CFA, which will be explained further in Part 2, does not award a data center license to all proposals that meet the criteria — only the top few are selected.
Conclusion
The rapid expansion of the data center industry is both an incredible opportunity and a significant challenge. While these facilities are essential for supporting the growth of technologies such as generative AI and cloud computing, their immense power demands contribute heavily to GHG emissions.
By focusing on resource efficiency, renewable energy adoption, and sustainable construction, data centers can evolve into greener facilities that not only mitigate their environmental impact but also provide long-term economic benefits.
However, the definition of a "green" data centre remains fluid, varying based on local regulations and technological advancements.
In Part 2, we will shift our focus to the investment opportunities within the data center sector. We will explore the properties of data centers as an investment and how green finance can support the development of sustainable data centers.
Disclaimer:
The information provided by REANGLE in this article is for informational purposes only and does not constitute investment advice. Any investment decisions made based on this information are solely the responsibility of the investor. REANGLE disclaims any liability for financial losses or legal consequences resulting from investments in any companies or assets discussed in this article. Readers are advised to conduct their own thorough research and seek professional financial advice before making any investment decisions.
REANGLE Services
REANGLE extends its Green Finance Consulting services to institutional investors and corporations across Southeast Asia, Japan, and beyond, harnessing Singapore’s pool of talent. With global sustainable finance platforms and highly motivated green talent, REANGLE delivers Green Finance Analysis and Green Data Analytics services quantitatively, alongside providing Green Investor Relations advisory service to drive authentically sustainable investment decisions.
Do check out REANGLE’s past articles for further clarification or reach out to us at kazu@reangle.co (Kazu Watanabe).
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