Panel of experts convened by NORD/LB hears that data centre industry may benefit from working more closely with BESS players
Data centre operators should be provided with grid connections much more quickly in return for making investments in grid enhancements, including energy storage. This was among the proposals explored in a recent report by bank NORD/LB, which also warned that Europe’s fragmented capital markets and under-developed asset-backed securities (ABS) markets mean that digital infrastructure could absorb disproportionate capital at the expense of the energy sector.
The report summarised the key findings from a panel of experts – convened by NORD/LB – to look at the challenges and opportunities that exist for the data centre industry in the broader context of the energy transition. In addition to representatives from NORD/LB, the panel included spokespeople from: Matrix Renewables, DigitalBridge Investment Management, investment management firm Asper, Digital Transformation Capital Partners, data centre developer Kao Data, real estate investment bank Estadil Secured, Pexapark and Aurora.
Data centres could benefit from close collaboration with BESS players
Niels Jakeman, NORD/LB head of energy origination, structured finance Europe, said that there was, in his view, “strong support” for the idea that data centre operators could be provided with grid connections much more quickly in return for the operators making investments in grid enhancements. He added that there may be benefits for the data centre industry in working more closely with players in the BESS [battery energy storage system] market, for example.
Meanwhile, there are a lot of private wire opportunities in the data centre industry that renewable energy developers may be overlooking, according to Mike Forber, regional lead – PPA & BESS transactions at Pexapark. He added that if energy project developers and data centre providers communicated better, there was a strong likelihood that they would discover mutually beneficial ways of working together. This could include “grid connection, export capacity and maybe also where the data centre could be struggling on the import side”, Forber explained. One of the biggest challenges in GB market energy transactions at present is price, he said. “Maybe 50 per cent of that cost is non-commodity cost, so there’s a considerable saving that could be made there by looking at these behind-the-meter, private wire networks,” Forber commented. He also argued that there was considerable cost benefits associated with private wire networks: “A private network might have increased upfront costs but over a 20-year period, there’s huge potential savings to be made on grid costs and levies.” Forber also said that there may now be a better way to structure power purchase agreements that “bring in batteries and solar” and enable colocation.
Data centre and energy transition needs must be considered in tandem
Given data centres massive energy needs, it is imperative that meeting the capital needs of the data centre industry is considered in tandem with plans for financing the energy transition, the panel heard. In a similar vein, strategies for financing data centres and energy projects, in turn, needed to be developed within the wider context of more general infrastructure needs and the need for spending on defence, for example. “The digital revolution and the energy transition need to be thought of as being “entangled”,” said NORD/LB global head structured finance and general manager London branch Heiko Ludwig. “They are extremely interlinked and the sooner you bind those two things together, the better.” Ludwig added that, in addition, a significant issue that needs to be considered is that – given the trillions of dollars that will need to be invested in digital, defence, general infrastructure and the energy transition in Europe by 2040 – Europe does not have an integrated capital market similar to that in the US. He said: “If we take the future investments required for all these individual topics, like defence, digital, infrastructure and the energy transition, how can Europe cope with that acceleration without developing a more integrated capital market? From a long-term perspective efficiency and the recycle rate of structured bank debt clearly would need to accelerate.” While the capital exists, Europe’s fragmented and bank-centric system is “structurally inadequate at allocating funds at the necessary speed, volume, and efficiency to the desired areas”.
Capital availability is ‘major obstacle’
The availability of capital is a major obstacle facing the data centre infrastructure and energy industries, Vincent Pena, director at real estate investment bank Estadil Secured said. He added: “Asset-backed securities [ABS] are part of the solution, and Europe urgently needs a more liquid ABS market. However, even in the US where the ABS market is much larger than in Europe, the ABS market size pales in comparison to the gigantic capital required [to build out energy and infrastructure].” Pena added that, historically, institutional investors have allocated a specific share of their portfolios to infrastructure and real estate asset classes, but now digital infrastructure is threatening to consume an ever-growing share of these allocations, thereby potentially taking it away from the “rest of the economy”.
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