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Data centres weigh price hike as energy costs soar

The high cost of energy is forcing data centres in Nigeria to consider increasing the price of their services – a development that would impact the cost of internet and other IT services.

Data centres, often described as the engine room of the internet revolution, are facing tough times with the continued increase in the price of petrol and diesel that have led to a rise in the cost of energy.

A drop in internet consumption can derail the country’s pursuit of 50 percent broadband coverage by the end of 2023. Nigeria’s broadband penetration declined to an eleven-month low of 45.7 percent in August as capital investments in the telecom industry took a back seat and telecommunications companies prioritised survival amid worsening economic conditions. With less than four months to go, the ability of the industry operators to hit the 50 percent mark now hangs by a thread, especially should diesel prices continue to move upwards.

The naira has weakened to around 760/$1 in the official market from 461/$1 rate a few months ago, while the parallel market rate has fallen to as low as N1,040/$1. The price of petrol hovers between N568 and N650, representing an increment of over 200 percent since the removal of subsidy on May 29.

According to experts, diesel-powered electricity now costs over N300/kWh while the use of petrol will cost about N200/kWh.

“The impact of this increase is dire for telecommunications operations, particularly for our members in the colocation segment,” Gbenga Adebayo, president of the Association of Licenced Telecommunication Operators of Nigeria (ALTON), said while meeting Bosun Tijani, minister of communications, innovation and digital economy.

“The 300 percent increase in diesel cost was implemented at the beginning of the year, humongous indebtedness in the industry, lack of access to and increased rate of foreign exchange to service their operations, dire levels of insecurity across the country with increased theft and damage to our members’ sites, have all prevented our members from running their business efficiently and profitably,” he said.

ALTON represents different organisations in the various segments of the telecommunications industry including data centre operators. Nigeria has a total of 11 data centres, with 10 located in Lagos and one in Abuja. It recently disclosed that the number of members has dropped from 25 to 16 because of the economic headwinds in the country.

MDXi, the Nigerian data centre business of Equinix, said the headwinds have seen the cost of everything increase, from diesel to the installation and ongoing maintenance, parts replacement of the mechanical and electrical equipment required to run the data centre – generators, UPS, air conditioning, fire protection, security surveillance and other systems.

“The naira’s fluctuation has led to an increase in our operational expenses due to the higher costs of service contracts with OEMs and third-party vendors, ultimately impacting the data centre’s operational bottom line,” said Funke Opeke, managing director of MainOne, an Equinix company.

While data centres are the lifeblood of the digital revolution, energy is the blood of data centres. Data centres are typically seen as a singular entity, but they are made up of racks, cabinets, batteries, and backup generators in case of a power breakdown. Because they store up to billions of megawatts of information, they also have cooling systems to keep them from overheating.

In Nigeria, energy consumption alone is usually about 25-30 percent of operating expenses for most businesses. This is more for energy-intensive large commercial and industrial businesses like data centres. According to recent reports, the data centre industry witnessed substantial growth over the past decade, contributing significantly to global energy consumption. In 2020, data centres consumed an estimated 196 to 400 terawatt-hours, equivalent to 1 to 2 percent of the world’s annual data centre energy consumption. Experts say this escalating energy demand is expected to persist due to the industry’s expansion.

Experts at Open Access Data Centres (OADC) told BusinessDay that for operators’ reliability and cost-effective energy is essential. This is because a significant amount of the cost of sales is related to power costs. The lower the cost of energy, the higher the competitiveness of the data centres.

Sources of energy for data centres in Nigeria are typically utility, self-generated Independent Power Producers plants based on gas, or running diesel generators. However, diesel generators are seen as incredibly expensive to run as primary power; hence, experts advise they should only be used as a stand-by. But diesel is hardly prone to scarcity like petrol in Nigeria.

The average price of a litre of diesel is N1,000. The energy content in 1kg diesel is approximately 13kWh (approximately 10kWh in a litre). Data centres vary widely in size, ranging from compact 100-square-foot setups to massive hyper-scale 400,000-square-foot facilities housing thousands of cabinets. These facilities house an estimated 18 million servers globally as of 2020, compared to 11 million in 2006.

The average full-scale data centre is 100,000 square feet in size and runs around 100,000 servers, which are essentially powerful computers, according to a report by Institutional Real Estate. Servers are often stored in racks, which is like a cabinet for multiple servers. A rack can hold 21 or 42 servers.

One server can use between 500 to 1,200 watts per hour, according to eHow.com. If the average use is 850 watts per hour, when multiplied by 24 hours, it equals 20,400 watts daily, or 20.4 kilowatts (kWh). Multiply that by 365 days a year, it amounts to 7,446 kWh per year.

OADC said a key impact on the amount of power used is the facility efficiency; a term called Power Usage Effectiveness (PUE). The higher the PUE, the higher the amount of power required for the IT load in the data centre; so the lowest PUE is ideal.

“Prices that affect data centre power are diesel and that price has not been regulated or affected by the removal of subsidy on PMS [petrol]. Naira prices have been more affected by the exchange rate depreciation and rising global oil prices. Of course, the higher naira price is, the higher real costs to the data centre operators, and tough choices have to be made as with other businesses on how these prices are absorbed or passed on in price rises,” said Ayotunde Coker, CEO of OADC.

OADC is on the verge of completing a $200 million tier III certified data centre in Lagos. It will support up to 20MW site power load across more than 7,200m2 of white space, sufficient for up to 3,275 racks and making it one of the largest facilities on the continent outside South Africa.

Other experts note that for a country, the socio-economic engagement depends on backup alternative self-generated electricity, estimated at 40GW (or 10x average daily capacity on the grid) of which the critical diesel-powered element for industry and big businesses is diesel-fired, estimated at 25 percent 10GW, the escalation in petrol and diesel cost is a disaster.

Investments in data centres face the risk of decline due to the triple threats of inflation, currency devaluation, high diesel, and petrol costs as well as impending electricity tariff adjustment. This is because the business case for data centre investment amid these threats does not make sense for new investors.

“New investments will have to allocate additional capital for operations and backup power infrastructure which ultimately impacts the cost of data centre services, potentially affecting demand and pricing,” said Opeke.

Read also: How multinationals can drive growth and skills transfer in African data centre market

Coker also agrees that the price of power is taken into consideration in data centres’ investments. When the cost of power becomes unreasonable, investors are likely to forgo investments in local data centres and rather prioritise international data centres.

“We must recognise that we operate in an international power environment and the price of power is real, either locally or internationally,” he said.

Opeke said MDXi is utilising various measures to mitigate the impact of rising energy costs. The measures include improving the company’s energy utilisation efficiency and leveraging the global supply chain for effective sourcing of equipment to lower costs while adjusting pricing structures to provide stability for customers amid fluctuating costs.

“Outsourcing critical IT infrastructure to third-party data centres like MDXi remains the optimal choice as it enables companies to take advantage of the most efficient economies of scale to manage cost fluctuations,” she said.

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