Data centres and climate change: a silver lining to cloud computing for investors?

Thomas Leys, Investment Director, Fixed Income, Aberdeen Standard Investments

Is watching half an hour of Netflix as bad for the planet as driving an ordinary car four miles? So claimed online blog Big Think in October 2019 in a story that quickly made the headlines. Most consumers will be unaware that their video streaming and cloud computing habits are facilitated by energy-hungry data centres all over the world.

Estimates vary, but in 2018 data centres globally may have consumed as much as 400 terawatt-hours of electricity – roughly the same as the entire demand of France. As two thirds of global electricity production still comes from fossil fuels there is a danger that our insatiable demand for data becomes incompatible with efforts to mitigate climate change. With data centre company bonds worth $47 billion is this something investors should be concerned about?

In simple terms, data centres are buildings that house tens of thousands of servers containing large quantities of information and connect these to the wider internet. To access and process this information requires energy and to prevent the servers from overheating requires even more energy. One of Equinix’s New York data centres has 182.5 megawatt back-up generators – each capable of powering a small town. This explains how five billion YouTube views of Justin Bieber’s song, Despacito, consumed the same power as 40,000 US homes do in a year.

When pitching to investors, data centre landlords find no shortage of future growth sources. Increased cloud computing; higher quality and quantity of video streaming; 5G; increased smartphone adoption worldwide; the Internet of Things; autonomous vehicles and artificial intelligence are all listed. History suggests they are not exaggerating: in 1992, the world consumed 100 gigabytes of data a day. Ten years later this was consumed every second. Cisco estimates that by 2022 the world will consume 150,700 gigabytes a second, increasing at a rate of 33% each year.

In 1992, the world consumed 100 gigabytes of data a day. Ten years later, the same amount was consumed every second.

These demand forecasts have lead many observers to claim that data centres will soon overtake the airline industry when it comes to carbon dioxide emissions. Anders Andrae of Huawei expects them to consume as much as 8% of global electricity demand by 2030. This comes at a time when the world is seeking to reduce energy consumption and the related greenhouse gas emissions. Will investing in the data centre sector increasingly be seen as a reckless contribution to climate change?

Efficiencies continue to be found

There are reasons for optimism. First, increased data consumption does not equate to increased power consumption. Named after the Stanford professor who published work on it, 'Koomey’s Law' states that the energy intensity of a gigabyte of data delivered via data centres halves every two years. This is supported by Google’s experience, whose data centres today deliver seven times as much computing power using the same electrical power as they did five years ago. Increased computing efficiency, better cooling systems and artificial intelligence to direct power are some of the many ways in which this is achieved. When Digital Realty, the largest data centre landlord in the world, moved from water cooling to refrigerant pumps in its Californian data centres it saw a 13% reduction in energy use along with a 4.4 million reduction in annual water use in each property.

Strong incentives are in place for this to continue, both for equipment manufacturers and data centre operators, who are used to saving power in order to reduce costs and meet the sustainability objectives of their clients. Contrary to the alarming forecasts made by Mr Andrae, a paper published in Science in February found that the proportion of electricity consumed by data centres is the same today as it was in 2010. So data consumption may continue to surge without driving up power consumption and emissions.

Still, even if the sector manages to avoid a boom in electricity consumption, data centres remain highly energy intensive and will face pressure to ensure this does not translate into excessive greenhouse gas emissions. Take Digital Realty, the only data centre company to issue green bonds: in 2018, the power it purchased emitted 720 tonnes of CO2 (equivalent) for every million dollar of revenue at the company. This is double the average emissions intensity of the gas industry and just 20% less than the airline industry average. However, unlike these, and other traditionally ‘dirty’ sectors, data centres have a clear and viable route to slashing their emissions to zero: renewable energy.

The journey to lower emissions

Recognising this, Digital Realty has moved its entire European portfolio to renewable energy sources and set a goal of making it available to customers across all 275 data centres it owns. Having 324 megawatts of wind and solar projects under contract in the US will help, but around 70% of the company’s data centres continue to be powered by fossil fuels. This still compares favourably to smaller US-focused rival, CyrusOne, who has no renewable energy targets and is yet to report on its business’s carbon emissions. On the other hand, Equinix, which also operates over 200 data centres, has an exemplary track record. Despite doubling the size of its portfolio in the last five years, it was able to move from 33% renewable energy (similar level to Digital Realty) to 92% today. This helps explain how Equinix’s purchased power emissions are over 90% lower than Digital Realty’s. The carbon footprints of data centres can therefore be dramatically reduced relatively quickly, particularly as renewables are increasingly the cheapest source of power.

The international rise in public concern over climate change has pushed it to the top of many policymakers’ and investors’ agendas, with scientists reiterating that this needs to be the decade of change. Data centre company bonds have, on average, over six years left to maturity and some are as long-dated as 30 years. Over this period, it is inevitable that pressure to move away from fossil fuels will intensify from customers, regulators and investors. Identifying those issuers that are proactively lowering their emissions today is vital for bond investors assessing credit risk. Equinix and Digital Realty fit this profile, supporting our overall positive view on the companies and their bonds.

Our insatiable appetite for data is not going to slow down, but computing and data centre efficiencies will keep energy demand at bay. Data Centre Knowledge calculates half an hour of Netflix streaming today as equal, in terms of emissions, to driving a car 460 feet – not four miles. Meanwhile, the increased adoption of renewable energy by data centre companies will cut this further. This is something which should be welcomed and encouraged by investors, who may eventually be able to binge-watch Netflix guilt-free.

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