Energy pricing and the green data center

The competition to build the “greenest” data center recalls the fact that it’s mostly a game being played by companies like Facebook and Google, which have lots of money at their disposal and a sincere desire to be environmentally conscious. These are companies with less price sensitivity.

But could the green data center someday have pricing benefits because of the nature of renewables? It caught my this week Norway’s Green Mountain Data Center, which advertises itself as the greenest data center in the world due to its renewable power sourcing and seawater-based free cooling, disclosed that it would offer long term electricity pricing contracts.

In order for green data centers to move beyond the Facebook and Google’s of the world, they’ll need to compete based upon simple economics. Green Mountain Data Center is offering specific electricity rates at terms of 3 to 10 years, starting at 37.5 Euros per megawatt, which translates into around 5 cents a kilowatt. That pricing would even be competitive in the U.S. where it’s believed that rock bottom electricity pricing in North Carolina and Oregon is 3 to 4 cents a kilowatt-hour.

More importantly, though, is that those prices are very competitive in Europe where electricity is much more expensive. Which is why the green data center has such good prospects in Europe, perhaps better than in the U.S. Countries like Iceland are attracting European clients, with colocation providers like Verne Global offering long term electricity pricing contracts for as long as 20 years.

Iceland built 28 terabytes of fiber cable capacity recently precisely to provide a quick connection between its data centers and the European mainland. Not surprisingly, Iceland can offer these pricing rates because the country’s grid is powered by hydroelectric and geothermal (apparently the Blue Lagoon is good for more than just a relaxing soak).

And in European markets where state owned, heavily unionized electricity providers are poor competition, being able to tap into long term pricing guarantees, because the energy source is renewable, offers a distinct advantage.

On the flip side, many in America are heralding an era of inexpensive electricity owing to the boon in natural gas discovery here. In fact, cheap natural gas is one of the biggest threats to the growth of renewable energy development in the U.S., and should provide a disincentive to built out green data centers for mere long term pricing competition.

But the risk of course with any fossil fuel based electricity source is that prices will fluctuate and potentially rise. One of the key arguments in favor of residential solar installer SolarCity ‘s IPO last year was it’s data showing that retail electricity prices had increased 3.4 percent annually between 2000 and 2010. Now, large commercial users may be able to lock in some pricing stability, but unlikely on the 10 to 20 year timescale that we’re seeing from renewable providers.

Even in the case of natural gas prices, it’s economically unfeasible for prices to stay where they are because fracking is more expensive than conventional natural gas exploration. Myself and others have said that natural gas prices can’t stay where they are and since hitting rock bottom in the spring of 2012 at $2/MMBtu, they’re slowly creeping up to today’s price of around $4/MMBtu. I expect them to climb higher, particularly since sooner or later the U.S. will open up export terminals and domestic prices will gravitate north, closer to at least $6/MMbtu.

So there’s risk for a data center that ties itself to electricity pricing that’s linked to traditional fossil fuels. Which also explains why in the U.S., big data center operators are gravitating toward nuclear and hydroelectric sources, where pricing is more stable.

Unfortunately for renewables, hydroelectric remains king as the cheap source of renewable energy. Both Norway and Icelandic data centers largely rely on hydroelectric. But the core principle could inform the future of the green data center—that with pricing volatility occuring on the fossil fuel side, stable pricing on the renewables side is increasingly attractive.


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Adam Lesser

Analyst Gigaom Research

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