Funds Europe - May 2024
To meet ESG objectives, EU data centre operators are reducing their dependence on traditional sources of power.
The emergence of generative artificial intelligence (AI) is driving a surge in demand for power-hungry data centre capacity in Europe. This demand faces a number of obstacles including grid capacity constraints and an energy mix that is increasingly prioritising and reliant on domestic intermittent low-carbon intensity power generation.
One solution that has the potential to help address grid capacity limitations and the inherent intermittency of traditional renewable power is the use of small modular reactors (SMR) and micro modular reactors (MMR) as a rapidly deployable, low carbon and (relatively) cost-efficient method of increasing distributed base-load capacity. Whilst obstacles to adoption such as perceived project-on-project risk, cost concerns and challenges associated with schedule alignment have been widely noted, the concept of SMR/MMR powered data centres nonetheless presents strategic, logistical and technical benefits which compliments the imperatives of onshoring critical infrastructure, maximising energy efficiency and mitigating environmental impact.
Unsustainable strain
In 2023, data centre demand significantly outstripped supply in the FLAP (Frankfurt, London, Amsterdam and Paris) regions which are now considered to be Europe’s “mature” data centre markets. Scarcity of supply, caused by a shortage of space for new sites in densely populated areas, rising construction costs, community resistance and Europe’s grid crisis, has been compounded by the widespread pre-selling of data centre capacity to hyperscale consumers (such as cloud and AI providers) attracted by high density colocation.
Generative AI, which requires more performance-intensive and specialised infrastructure than conventional data centres, continues to drive unprecedented demand for high density data facilities with AI processing. To accommodate the changing demands of data centre customers and alleviate capacity constraints, data centre providers are increasingly considering SMR/MMR powered data centres which offer the benefit of being compact, portable (in some cases) and can be installed closer to data centre consumers.
DATA CENTRES ARE EXPECTED TO REACH 3.21% OF TOTAL EU ELECTRICITY USE BY 2030
The rapid growth in demand for European data centre capacity is placing unsustainable strain on the European electricity grid. Data centres in the EU account for approximately 2.7% of total EU electricity use and are expected to reach 3.21% by 2030. As a consequence, data centre energy consumption has attracted the scrutiny of EU policymakers and investors increasingly focused on maximising energy efficiency and reducing environmental impact.
From May 2024, data centre operators will be expected to report on metrics specified in the EU’s Energy Efficiency Directive (EED) including energy performance and renewable energy integration. In order to meet ESG objectives and address sustainability pressures, data centre operators are reducing their dependence on traditional sources of power and considering distributed energy resources such as SMR/MMR which offer a consistent supply of carbon-free electricity and eliminate intermediation by outdated transmission grids.
The Covid-19 pandemic, Russia’s invasion of Ukraine and other geopolitical circumstances have caused European governments to focus on onshoring critical infrastructure. Energy security has already been a major part of this trend, but onshoring data centres is also important. As well as decreasing latency and improving reliability, onshoring also reduces reliance on undersea cables that have been shown to be vulnerable to both deliberate attack and accidental damage. Coupled with governments’ increasing focus on onshoring energy production, we expect there will be significant appetite for collocated SMR/MMR data centres throughout Europe. We might also expect that investors will be able to leverage governmental enthusiasm to assist with negotiating burdensome regulatory and planning approvals, which would otherwise make these projects hard to get off the ground in many countries.
The growing demand for data centre capacity coupled with the advancement of SMR/MMR technology in the context of grid and low carbon-intensity power generation constraints and geopolitical priorities presents opportunities for those that are willing to invest into these converging spheres.
