Data centres are sleeping giants and AI is making them wake up hungry

FEATURE: Data centres are a property asset class that has exploded in energy consumption and investment value. At the same time, it’s a sector that supports almost every aspect of daily human life, according to Cushman and Wakefield’s Alex Moffatt.

Data centres have traditionally been identified by giant, unmarked and windowless concrete boxes. Big providers like XDC+ are now starting to unabashedly signpost their centres with its bright red logos.

That could have something to do with the need to signpost “sustainable” energy-sharing precincts that have the data centre at its front and centre, according to industry observers who attended the Sydney Cloud & Datacenter Convention earlier this year.

• Read more about energy sharing precincts in TFE’s special report from our Festival of Electric Ideas

According to Alex Moffatt, Cushman and Wakefield’s Australian lead on the APAC data centre advisory team, the sector itself is now massive, both in terms of asset and energy consumption.

In an interview with The Fifth Estate, he said, “It’s gone from a $300 million asset to a billion-dollar asset and is only increasing in scale. They were 30 megawatts-hour, but now they are 100 megawatts plus [- hour].

“People are starting to realise what data centres are, but many people don’t really grasp the connection between them and everything you do on your smartphone. It’s very rare that what you are doing, aside from taking photos, is happening in the phone – even Spotify and Netflix are all streamed and stored – and the energy usage would be massive.”

In the Australian market and the Asia Pacific market in general, that’s “two and a half times growth between 2023 and 2030”.

Data centres may be giant, multi-billion dollar projects, but there are as many opportunities as there are risks, Moffatt said.

“You’ve got an asset class that’s just exploded in scale, much higher value buildings and a competitive landscape; you have to find the land first in the right location with power as well as everything else; the right zoning, then you’ve got to find the capital to build them. So, it’s becoming a very competitive space but a huge capital intensive space as well.”

The Australian Energy Market Operator’s integrated system roadmap for the energy transition labelled data services as a big opportunity for exporting data processing services.

The Goodman Group is one giant company that has recognised this potential.

Billionaire and owner of the group Greg Goodman recently told The AFR that in the past 12 months, the business has pivoted quickly to the “next big property boom” – data centres.
Driving the growth are tech giants such as Google, Microsoft and Amazon, which are rapidly upscaling in capacity when it comes to the energy guzzling artificial intelligence and cloud computing.

In August last year, Goodman unveiled plans to develop three to four gigawatts of these facilities across its portfolio, initially valued at around $30 billion each once developed, Goodman said in the interview.

He said his company was now delivering fully operational centres instead of a “powered shell”, adding more value to the product.

Around 50 per cent of the company’s $12.8 billion pipeline of work would soon be data centres.

But what about the carbon challenges?

While some owners are tracking operational carbon emissions, the job for renewable energy and carbon offsets is enormous, with even multimillion-dollar conglomerates like Google struggling to keep up with offsetting the greenhouse gasses generated by the increasing use of AI by both businesses and consumers.

In the latest version of the Australian Energy Market Operator’s integrated system roadmap for the energy transition, chief executive Daniel Westerman said that as “Australia’s coal-fired generators are reaching the end of their service life…investment is urgently needed” to meet Australia’s growing demand for electricity.

Moffatt says that while data centres are doing their best to “source green electricity where they can”, whether it is through wind farms or solar, there was no realistic way to track individuals’ and households’ usage of data and correlating carbon footprint, putting the entire onus of the offset on the data centre owner.

Some data centre owners also have green power procurement plans in place, which we are starting to see more of due to rising pressure. “But in some cases, the data centre can’t actually buy enough green power because there’s not enough green power to go around.”

Office and commercial buildings, however, “are a bit easier to track”, although it would be harder to differentiate what was used to process data compared to that of the consumption of IT and software.

Moffatt says that to his knowledge, no property owners are tracking the carbon emissions incurred by the data processing its office or building is using in its operational carbon.

Solutions are in their  early stages

According to ABB’s Mario Macri, data centres were on track to take 10 per cent of global energy consumption by 2030. However, solutions to offset the ever-growing amount of carbon emissions are still in their infancy.

According to Macri, the training of ChatGPT 4 reportedly consumed the energy equivalent of 2.5 million homes per year.

At this point, one of the only solutions to make data centres more efficient was to rely on these energy-guzzling Ais (a kind of Catch 22).

Moffatt said that AIs can automate and schedule data centre workloads to take advantage of periods of low demand on the energy grid.

The other opportunity, he said, was hydrogen fuel cells, with hopes of transitioning diesel-powered backup generators to the potential new technology. The fuel powered backup generators could run for “days or weeks”, and there were “no real viable alternative” or other “solutions in the near term”.

“People are starting to put that connection in place and realise that energy or data doesn’t come out of thin air. But until [hydrogen power] gets to that point, it’s all got to come from somewhere, and some of that is brown and black coal, and some of it is hydro, wind, solar or gas.

“But the chances of people not consuming data, everyone waking up one day and turning their phone off is pretty low.”

Moffatt added that he couldn’t see any other solutions to replace data centres’ reliance on diesel other than waiting for green hydrogen generators.

“I feel like that will probably come in the next 10 years – and that’s probably the best solution there is.”

On top of that, general consumers and businesses are not given choices of where their data gets processed.

Despite this, Moffatt says data centre clients, consisting of hosting services, are pushing forward the sustainable agenda for data centres. Groups such as Google, which has commitments to renewables and 100 per cent green energy, can choose to only go to data centres with similar policies or power purchase agreements for green power.

“So, 100 per cent, it’s the clients that dictate that.”

Building a power plant around data centres

Another concerning trend that’s popping up is building power plants next to a data centre to power its operation. According to Moffatt, the preferred form was gas – which was “not as bad as coal”. Solar was just not realistically an option.

“There’s a conversation about – if you build a data centre big enough, do you just build a gas fired power plant together – and that’s viable at the moment,” Moffatt said.

“You’re talking about hundreds of acres of solar panels to generate that scale of power. It’s hard enough to find 10 hectares for the data centre itself.

“The idea of you buying 200 to 300 hectares next to it for a solar farm just doesn’t really work.”

However, the trend of owning both is still in its early days, with Moffatt adding that data centre owners of the two assets would still need to use the public grid to transfer the power.

“It’s not necessarily better or worse – it’s just beneficial if you think there’s a commercial return to owning both.” 

The need for data centre operators, grid operators and regulators to come to the table

Unlike industrial shed owners, data centre owners aren’t cherry-picking clients that match their ESG agenda. Instead, Moffatt said that owners are working with their commercial clients to manage workloads at certain times of the day.

 “You’re starting to see a lot of this conversation like can your AI only run for a certain time of the day? Can you schedule it to run at 11 am on a negative feeding tariff? That way, you are getting paid to take that power out of the grid to run an AI model – then that solves a problem with the grid.

However, the practical application of it is still theoretical.

“We don’t have AI learning data centres, so until that comes along, or a version of that comes along, it’s more theoretical than practical.”

For now, operators looking to offset the energy consumption of their centres are predominantly looking at purchasing power purchase agreements (PPAs) that are sustainable and green.

However, Moffatt said his company was trying to be ahead of the curve, noting that the developers were working with clients who were on board with their ESG agenda and goals. It was also crucial for owners to consider offsetting embodied carbon when operational emissions are so high.

“[We are] helping our clients go down that ESG journey so that we’re getting there together and helping to basically make sure that these data centres are as green as can be.

“That’s not just the energy by itself, there’s the construction methods, construction materials, working with architects and engineers to make sure [embodied carbon] is considered at the start rather than trying to offset it at the end.”

Where to from here?

Moffatt added that the grid operators, data centres, and generators are all on the same page trying to find a solution. “It’s a conversation that takes years to resolve and regulate, and it will take a few more years to really work that out.”

Another story – if necessary.

How cities are planning for data centres and who’s building them

According to Moffatt, grid stability was a core requirement when it came to planning for data centres. “No one wants to be dealing with rolling blackouts – it’s the fundamental piece that dictates how everything else is done.

“The grid has to remain up and running as for as much of the day as possible. What you are seeing now is that certainly in parts of Sydney, you just can’t viably build a data centre because there’s not enough power left in the grid, in the terminal stations and substations.”

He said that over 60 per cent of the nation’s data centres are currently based in Sydney, although many also don’t realise how many are in Canberra.

“You’ve got Sydney as the major market, then Melbourne, then Canberra, so very much east coast centric. It’s unlikely to change because Sydney is the historical centre for data centres in Australia, which has all the cable landing stations. There’s no reason for that to change.

“Our latest report found that data centres are in single-digit vacancies in the country, and that’s putting pressure on the prices. But it’s economics; anytime there’s that kind of shortage of supply, someone will build more supply, and that’s what we are seeing at the moment.”

According to Moffatt, many data centre operators are now expanding to meet growing demands, including NEXTDC, Macquarie (Data Centres), and AirTrunk.

“It’s kind of a genie out of the bottle situation; you can’t put it back in. You’ve got to make it more energy efficient and create power that’s renewable.”

The trends so far

According to Cushman and Wakefield’s H1 APAC Data Centre report released in August, there has been an addition of more than 177 megawatts in operational capacity in Sydney in the six months prior.

Greater Western Sydney has the largest cluster, operating more than half of Sydney’s operations and accounting for about  72 per cent of projects in the pipeline.

The report adds that the “power capacity of data centres being announced in Sydney is getting larger”; current facilities are averaging 18 megawatts, while those under construction are now averaging 34 MW. Current operators looking to expand have even bigger plans to increase the size of their data centre to accommodate around 63 MW.

CDC, the largest provider of data centre services to the Australian government, said they are accelerating development to meet growing demands, planning a 504 MW data centre campus in Eastern Creek.

The campus will be six four storey buildings with a 720 MW substation on a 21 hectare site. According to the report, the federal government had “identified AI as a critical technology in the national interest” and is developing plans to develop and adopt AI regulations and practices.

The government will soon be tightening energy regulations for data centres hosting federal agency workloads, with mandates that all data centre service providers to the government achieve a five-star data centre rating from NABERS.