Overview and impact of power price increases to data center operators over 2021 and 2022. Discusses power price hedging and data center efficiency in the face of power market price volatility.
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Summary
Power is the primary operational overhead cost of operating a data center. Electric power prices increased significantly in 2021 and 2022, which has a direct and negative impact on data center operational economics. How does this affect data center operators, and how are prices changing in 2023?
Power price increases and the reasons
Since 2014, US power prices have enjoyed low volatility on average annually. In 2021 and 2022, US power prices increased between 7% and 17%, depending on the consumer rate classification, according to the US Energy Information Administration (EIA) data.
Figure 1: Energy costs continue to rise
Source: EIA
Kevin Ooley, President and CFO of DataBank, and another well-known US colocation service provider, cited power increases ranging from 8% to 12% in the last couple of years. Both companies pointed out rates will vary for each market and even by facility based on power consumption. Severe weather and resource scarcity globally affect pricing in some markets beyond geo-political impacts.
Beyond US prices, global power prices have also increased. The reasons vary from market to market, but according to commentary from the International Energy Agency (IEA), a historic plunge in global energy consumption in 2020 because of the COVID-19 pandemic primarily drove increases in 2021. This event caused prices of many fuels to their lowest level in decades.
Since then, prices have rebounded strongly thanks to global economic recovery from the pandemic, plus a weaker-than-expected increase in supply combined with a cold winter in the Northern Hemisphere. Additionally, the Russia-Ukraine war drove natural gas prices up in 2022, creating widespread disruption in European markets. Consequently, this cascaded globally, continuing the increase in power market prices. The war has also accelerated the switch to sustainable energy to reduce the reliance on Russian gas, a big factor in the European Union. The Saudi-Russian deal to hold oil prices high is also a factor in increasing alternative energy sources. In Germany, green energy was already 46% in 2019.
Equinix pointed out significant power price increases in Singapore in 2022, where regulated electricity tariffs increased by 20.8% from an average of 22.1 cents per kWh in 2020 to an average of 26.7 cents per kWh in 2022. In its 4Q22 earnings call, Equinix commented that it anticipates higher power prices in 2023, largely in Europe, resulting in an incremental $350 million in revenues and costs (revenue it will receive from customers to cover the power costs their customers incur).
There could be many reasons for power price increases at any given point in history or the future. Still, the outcome is the same—it’s a headache for power-dependent industries like data centers.
Where power headaches hit hardest
Hyperscalers that operate extensive data center footprints are hit particularly hard as they incur electricity costs all on their own. Not that those costs don’t eventually get passed along to customers, but adjusting price models in real-time isn’t that easy. Plus, power prices typically increase or decrease over time as opposed to a single “shock event” like airlines might experience with a sudden jump in jet fuel costs, which they might mitigate with a passenger fuel surcharge.
In Amazon’s 3Q22 earnings presentation (transcript), Brian Olsavsky, CFO, stated, “We’re also seeing energy costs that are materially higher than they had in pre-pandemic, electricity and the impact of natural gas pricing. So those prices have up more than two times over the last couple of years and contribute to about 200 basis point degradation versus two years ago.” Two hundred basis points (2% in financial speak) doesn’t seem like much and is not near the 7% cited above, but there could be various reasons for this.
Because power is the greatest operational overhead expense, colocation service providers build safeguards into their respective customer contracts to cover power price volatility. That doesn’t always make it easy for them, as some overhead power is at their expense. Power costs are built into the monthly fee cost structure for retail customer contracts, but even these contracts commonly allow for adjustments based on increased power costs.
The average enterprise on-prem data center operator, like the hyperscalers, also takes a direct hit on power cost increases. However, the “average” on-premises data center operator doesn’t consume that much power, and many don’t pay their electric bills. Rather, the facilities department takes care of that. Plenty of large enterprises, financial service firms, for example, have large data center footprints that feel the impact of higher power prices.
What can data center operators do?
Hyperscalers, colocation service providers, and large enterprise on-premises data center operators do benefit from their large-scale power purchasing. Beyond better prices for volume, they are commonly sophisticated in taking advantage of power purchasing hedging strategies where they can. Power purchasing options in regulated and unregulated markets are complex for the average organization. However, there are third-party consultancies and power brokers that assist large power consumers in navigating this tough market.
Power price increases make anyone consider how to mitigate the additional cost best. DataBank’s Ooley and other well-known colocation service providers quickly pointed out that ongoing attention to facility power efficiency is necessary. From a colocation operator’s perspective, this has three key benefits:
- It lowers their internal power overhead expense.
- It reduces costs for their customers, increasing competitiveness.
- It is an obvious and practical improvement to sustainability.
Examples of power efficiency improvement areas include:
- More efficient IT and physical infrastructure equipment – newer equipment with better power/performance characteristics and management of rack design and power density
- Management of data center operation environmental factors – optimal thermal management (air flow, air-side economization), using liquid cooling (direct to chip and/or immersion), addressing ASHRAE temperature recommendations
- Power distribution optimization to reduce power loss
- Workload management – running amenable workloads during off-peak hours or in markets with a more optimal power cost structure
All of the above contribute to lower power costs and a better sustainability story.
Power pricing in today’s market
Moderation in power prices compared to the significant peaks in 2022 has already occurred in 2023 in many markets globally. Europe has made progress adjusting to the lack of Russia-supplied natural gas, global recessionary fears seem to be subsiding, and inflation in the US has subsided from a high of 9% in June 2022 to 4% in May 2023, according to the US Bureau of Labor Statistics (BLS) Consumer Price Index (CPI).
DataBank’s Ooley said, “Dropping gas prices combined with recessionary fears appear to be leading to lower prices in some markets. In addition, we see natural gas prices dropping in markets where we aren’t hedged. And in those where we are hedged, while we won’t see prices drop until we renew, we are already seeing upcoming hedged priced proposals much lower than last year and more in line with pre-Ukraine war levels.”
For 2023 and 2024, the market sentiment can be mixed depending on which markets you look at and who you listen to. IEA forecast data on global power prices reflect notable moderation globally for many markets compared to 2022. Power prices in Europe will moderate somewhat from the peak in 2022 but will most likely remain elevated in 2023 and 2024 compared to 2021 and before.
As mentioned above, Equinix anticipates increased prices to $350 million, particularly in Europe, where it has a significant operational footprint.
For data center operators with a lot of skin in the game, you don’t plan based on where you “hope” power prices will be; you plan on where they “might” be. For lack of a crystal ball, they might be anywhere as power markets navigate the unanticipated events that spur market volatility.
Appendix
Author
Alan Howard, Principal Analyst, Cloud & Data Center Research Practice
