Clifford Chance

There is huge global demand for data centres driven by cloud computing, high performance computing, AI and 5G, but the industry faces an increasing number of hurdles. Teams from Clifford Chance recently attended two major events – Data Centre World and The Tech Show – which highlighted some of the challenges ahead. Here are our key takeaways.

Increasing demand in the European market

• In 2023, Frankfurt, London, Amsterdam, Paris and Dublin (the so-called FLAPD markets) saw demand (511MW) surpass supply (467MW) for the third time in five years and increase by 41% in Q4. This trend, alongside increasing construction costs, has resulted in increasing rental rates.
• Expectations are for further growth driven by hyperscale demand and the impact of AI. However, despite the optimistic outlook, there are significant challenges in accommodating AI-specific needs due to the current lack of AI-ready facilities and chipset shortages.
• Over half of the take-up in FLAPD markets came from pre-lets. Developers are ensuring that spaces are committed to tenants ahead of completion to meet anticipated returns for investors, especially with increasing construction costs.
• By the end of 2023, FLAPD markets witnessed a dip in vacancy rates, hitting an all-time low. In the secondary markets they remain significantly higher, suggesting that it is relatively easier to find available space in these areas. However, in some smaller, rapidly growing markets such as Berlin, Milan and Warsaw, vacancy rates have decreased sharply.

Investment trends

• Driven by technologies such as 5G, the cloud and generative AI, the data centre market continues to attract significant investment.
• However, projects must now demonstrate strong sustainability credentials (for example, power usage effectiveness – PUE – scores) to attract funding, impacting both new builds and the refinancing of older facilities.
• The drive towards reducing carbon emissions and achieving net zero operations continues to impact investment decisions. Innovations in cooling technologies, particularly liquid cooling, heat reuse and hybrid solutions, are critical to this transition.
• Developers are leveraging renewable energy sources and looking at the potential of becoming energy producers by contributing back to the grid.
• Grid congestion and local government hesitancy towards new or expanded data centres pose significant challenges to scaling digital infrastructure.

Construction challenges – and a solution

• Planning permission for data centres remains difficult with opposition at national and local government levels. For example, in the US, Arizona has a moratorium on building more data centres due to water shortages, and the Irish government, concerned about pressure on the national grid and the potential for rolling blackouts, has banned the development of new data centres in Dublin until 2028.
• As demand for data centres grows, the main problems for the sector are the time it takes to get to market and the 'race to build'. One solution is to procure data centres on a modular basis (whether this is the superstructure, cooling / hydro modules or power modules), which can help cut the build programme by up to 50%. Modular construction offers cost certainty, quick turnaround, high quality and lower build risk as complex works, for example, pipework, takes place off-site and is then dropped in. Local labour shortages can also be overcome by building modular centres in other geographical regions and transporting them to where they are needed.  
• Modular builds also offer around a 30% reduction in carbon emissions compared with a traditionally built data centre.
• However, supply chain issues continue due to a range of factors including the war in Ukraine, sanctions, disruption to shipping routes and Brexit. There are currently lead times of up to 80 weeks on some key component parts.

Power consumption, cooling and the impact on the environment

• Data centres currently account for 2% of global electricity demand, and by 2026 it will be equal to that of Sweden – in the best-case scenario – and Japan in the worst. Power consumption is driven by AI, gaming, machine learning, cryptocurrency, cloud storage, digitalisation in retail and personal digital footprints.
• Businesses are under increasing pressure to minimise their impact on the environment. This is a particular challenge for the data centre industry, given that data centres are very resource-intensive for power, water and raw materials. Political factors and regulation are driving policy and investment decisions to secure localised energy and supply chains.
• New models for power are beginning to appear including: 'Bring your own power' – new technologies are emerging such as aeroderivative technology, which involves the use of (aero) gas turbines derived from aviation engines platforms to generate power; and microgrids – this is a self-sufficient energy system that serves a particular footprint such as a data centre and allows power producers to control power demand without having to rely on the grid.
• Green hydrogen, could in the future, potentially provide a solution.
• Cooling – in the future we will see liquid cooling technology replace air cooling methods to dissipate the heat generated by higher rack densities extending to 100KW and beyond.

Increasing regulation

• The European Union's AI Act sets a framework that may slow innovation due to stringent rules and potential fines. It also introduces certain ethical AI usage guidelines. Different AI applications will face varying degrees of regulatory scrutiny, with high-risk applications subject to more strict rules, and the most dangerous ones being forbidden.
• The EU Energy Efficiency Directive requires detailed reporting on data centre operations' energy efficiency and sustainability, posing various challenges for platforms.
• European concerns about data privacy and sovereignty are impacting the sector, potentially bringing more workloads from global platforms into the EEA but also complicating operations for data centre operators.