Meeting the demands of the digital infrastructure evolution

Sustainability matters

With the increase in data usage and subsequent expansion of new data centre builds, an obvious question is whether data centre operators can take higher power loads from the grid in a responsible and sustainable manner. Power efficiency is the key metric operators focus on, primarily the power usage effectiveness (PUE) ratio. This measures the relative power used to run core IT equipment within a data centre versus ancillary equipment, such as cooling and power distribution equipment. A PUE above 1.0 means more power is being expended on ancillary functions rather than IT equipment. The lower the figure, the more efficient the data centre is in terms of power usage.

Considerable progress has been made in terms of efficiency gains over recent years, particularly by the largest cloud providers ie, ‘hyperscalers’ such as Alphabet, Microsoft and Amazon. Indeed, Alphabet’s current trailing 12-month 2024 PUE is 1.1 – sharply better than the industry average of 1.58⁴.

Overall, whilst data centre power usage is clearly increasing, efficiency gains from improved hardware and cooling, as well as the intrinsic efficiency of hyperscale centres, have helped limit growth in energy demand. As evidence, according to the International Energy Agency (IEA), from 2015-2022 whilst data centre workloads increased by 340%, the respective increase in energy use rose by only 20-70% over the same period⁵.

Water use, a key element in cooling systems is also a key sustainability factor, and here there has been solid progress particularly with increased use of air-based systems and advances in immersion cooling. Regulation also plays a part in promoting greater efficiency as shown in Germany with the new Energy Efficiency Act in 2023. 

Selective investment opportunities

For an investor, the obvious questions are what will be required to support this growth, and which particular areas of infrastructure stand to benefit most? In our view, the clearest beneficiary will be data centres with new builds required to support the increased storage and processing capacity needed. Already however, data centre demand is outstripping available capacity creating an interesting opportunity to deploy capital. However, there are key factors potential investors need to be aware of.

When it comes to grid constraints, practical considerations persist which may temper the rate of growth. Prime among these is power consumption. As already highlighted, growth of digital data leads to growth in power consumption. And this is a very real pinch point. Supply-side grid constraints led by data centre growth has already led to moratoriums in cities such as Dublin, Singapore and parts of the US. The IEA estimate data centre power consumption will likely double from 2022 to 2026 – an increase greater than total energy demand in Germany.

The data-driven demand for more power is compounded by an existing lag in new grid investment. In Europe, an estimated €580 billion of grid investment is needed by 2030 to meet EU green goals, in the US this figure is closer to $2 trillion⁶. Highlighting the gap between demand and supply, in the US the average time between a commercial enterprise requesting interconnection to the grid and this being achieved is almost five years (up from less than three years in 2010).

Clearly the demand is there, but the ability for investors to deploy their capital is constrained. This implies market selection and an ability to be an energy solutions provider will be key to successful execution.

Whilst demand overall for data centres is high, it is less clear that all data centre locations will retain their attractiveness over time. At some stage demand will stabilise with a clear risk that certain assets become ‘stranded’ as tenant contracts expire. Securing a location able to optimise demand both today but also into the future is crucial. Equally important is not overpaying when speculatively acquiring sites.

The value of a data centre investment depends on the contract which underpins the asset. Understanding where the balance of power lies is important in contract negotiations. On the one hand, data centre operators have pricing power given the development and construction constraints involved in building the asset. However, the most attractive customers are the ‘hyperscalers’, who clearly have bargaining power due to their scale.

Does skilled labour exist locally to allow the execution of new data centre business plans? In certain markets this is a real issue and can threaten the deliverability of projects.

The supply chain hangover post-COVID persists. The supply chain for essential equipment continues to be disrupted with extended lead times for delivery of critical kit. Whilst normalisation of supply chains and lead times remains a distant prospect, it seems likely that those data centre operators who can order equipment at scale will be preferred by suppliers. 

Overall, it appears we are now in an environment where the spread of investment outcomes across different asset classes is wider than historically has been the case. Selectivity therefore is important – partnering with operators with a demonstrable track record of value-creation, or ‘alpha’ generation, is imperative. This expertise can be leveraged to fully exploit the two clear investment themes we believe have emerged:

1. Provision of digital capacity, primarily through investment in data centres and adjacent infrastructure.

2. Provision of energy solutions, unlocking capacity constraints and, in the process, decarbonising the energy mix.

In our view, success factors will likely include:

• Partnering with experienced operators, particularly those with relationships with high-quality customers.

• A holistic approach encompassing energy solutions and environmental considerations.

• Focus on newer more efficient data centres likely to retain long-term value.
  
  
• Capital protection secured through high-quality contracts.

Why private markets?

We believe using private markets to access these growth opportunities should be the preferred route for investors. Public markets usually tend to have a bias against capex strategies and a focus on delivering quarterly earnings and yield. In contrast the ‘patient capital’ nature of private markets lends itself to this once in a generation opportunity.

There has also been a ‘take-private’ trend within the data centre market – this is not a coincidence with many of these larger operators destined to become the preferred partners with hyperscalers looking to quickly add more capacity. Many of these larger players are backed by large infrastructure funds with substantial amounts of fresh capital available to fund construction of these new sites. In our view, this presents a compelling long-term opportunity for private market investors. 

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.