WHY ARE ENERGY COSTS RISING?

Energy prices have been increasing globally, with wholesale prices commonly cited as the main driving force, compounded by the conflict in Ukraine. According to the UK’s Ofgem, the annual wholesale price of electricity increased by 220.68%, from £53.68 per megawatt an hour in February 2021 to £172.14 year-on-year, peaking at £240.58 in late December. Remember that other costs for it to reach the end consumer are yet to be applied.

Source: Ofgem – Wholesale market indicators

The Impact on off-prem data centres

Typically, the cost of consumed energy in data centres is ultimately paid for by clients. To avoid following SunGard's footsteps, most centres will have limited options as advanced bulk purchases of energy are standard practice. To provide context, we will estimate what the rise in energy costs means for data centres financially.

“On a global scale, 3 percent of all electricity used in the world goes to data centres. These 416 terawatts are much more than all of the electricity used by all of the United Kingdom.

— Digital Realty Trust (2020)

There were 2,670 data centres reportedly in the US in 2021. A Forbes article estimates that US situated data centres consume roughly 90 billion kilowatt-hours of electricity per year. Divided by data centres, the average annual electricity consumption is 33.7 million kilowatts. That is 2.8 million kilowatts a month or 90.6 thousand kilowatts a day.

Returning our focus to SunGard (UK), variable electricity costs in London during 2021 on a variable tariff were 18.9p/kWh ($0.24) and are estimated to be 28.2p/kWh ($0.35) in 2022, an increase of more than 45%. Based on the above, the estimated impact on operational expenditure (OPEX) for electricity alone is:

With an eye-watering 49.21% increase in OPEX, compounded with SunGard’s cited macroeconomic trends like “delayed customer spending decisions, insourcing and reductions in IT spending”, the impact becomes all too clear.

Risk to the financial industry

Much of the global financial markets market data infrastructures are increasingly situated on off-prem data centre providers e.g., Equinix, Interxion, and SunGard, as efforts to modernise legacy infrastructure are ongoing. As we have eluded so far, even when market data systems remain privately situated on-prem and outsourced solutions are leveraged – market data exchanges, vendors, and service providers – these services are increasingly provided from data centre locations. Data centre providers are ‘space and power’ companies, with ‘power’ being the operative word. As demonstrated, the energy bill for these providers has dramatically increased and is usually passed on to end clients out of necessity.

Increased data centre costs are problematic for financial firms, whose infrastructure and technology budgets are meticulously projected and strictly set. A spontaneous cost increase will likely need to be subsidised from other areas of budgeted IT spending, causing end-users to review data centre usage. However, while the energy crisis is potentially a point of increased costs, it is also an opportunity to evolve, throttle, and even potentially reduce total costs of ownership depending on how usage is managed and deployed.

The energy crisis is currently a UK-centric issue; however, global firms are impacted if they have data centres or providers in the UK. In light of energy prices at an all-time high, affected firms have already begun reaching out to CJC to discuss options.

Risk mitigation

The concentration of data housed in off-prem data centres is a growing risk with potential financial, reputational, and operational repercussions. Considering the recent regulatory focus on operational resilience, risk mitigation needs to be an integral part of operational planning where software, resources, and requirements allow for example:

A PARALLEL MULTI-CLOUD STRATEGY

Also known as a distributed cloud architecture, a multi-cloud strategy utilises multiple CSPs to provide a firm’s IT infrastructure, usually from leading providers like Amazon Web Services (AWS), Google Cloud (GCP), and Microsoft Azure. This approach diversifies risk by spreading a firm’s cloud reliance across multiple providers and is often viewed as an essential risk mitigation decision.

Multi-cloud architects, from a benefits perspective, enable the ability to distribute workloads selectively to various infrastructures and subsequent advantages include cost savings, lower innovation barriers, stronger resilience, and greater efficiencies. It can also be leveraged alongside private cloud and traditional on-premises deployments.

DATA CENTRE DUE DILIGENCE

Choosing data centres is not always straightforward and the decision may have far-reaching consequences. As part of wider due diligence, firms need to be aware of several aspects including the general financial health of a data centre, their daily approach to construction, whether the location fits your needs, the energy consumption efficiency, and whether there are clean energy ambitions.

Financial health; Whilst seemingly obvious, the project manager (PM) needs to ensure short-listed facilities have a healthy balance sheet and cash flow. Insufficient financial buffers to safeguard operations may lead to a second SunGard due to unexpected cost rises, especially since migrations allegedly take at least 18 months once committed.

The PM should also closely inspect the supporting infrastructure construction at the facility. According to PTS’ CEO, look for minimal supporting infrastructure and the adoption of modular construction techniques to minimise scalability risks, as lower construction costs translate into lower OPEX.

Location; Where a data centre is situated will likely directly impact rack rental costs. Central locations with expensive real estate, typically translate into higher rentals due to their geographic convenience, connectivity, and possible bandwidth benefits. Firms should balance cost with requirements by utilising centrally located centres for mission-critical systems and house non-crucial infrastructure in more rural locations where latency and connectivity are less of a priority in exchange for lower costs.

Efficiency and clean energy ambitions; Ultimately, SunGard’s reliance on traditional energy suppliers is a driver of its collapse. As high energy costs and climate change issues persist, efficiency and sustainability are increasingly a business concern. A 2020 article found that infrastructure with identical settings in off-prem hyper-scale data centres used only 16% of the power compared to on-prem data centres. The findings mean migrating off-prem can reduce workload carbon footprints by roughly 84%. Also, a separate IRENA report found that newly installed renewable power capacity is more cost-efficient than the cheapest, fossil fuel-based power generation options.

CO-LOCATION OR DEDICATED DATA CENTRES?

Often referred to as the public and private cloud, co-location and dedicated data centres do not have to be exclusive. Consider a combination of both as part of your multi-cloud or hybrid strategy. By utilising a dual infrastructure, firms can operate in parallel in the event of outages at the primary site to mitigate some risk and can fit into points 1 and 2.

However, IT can expect upkeep costs in addition to co-location subscription costs.