Solar panels on the roof of an Iron Mountain data center in New Jersey. Operators are increasingly looking to green energy to power their facilities. Source: Iron Mountain Inc.

As square footage in Europe's data center industry rises steadily, so too does the sector's power demand. And against the backdrop of corporate sustainability targets, that means an increased focus on renewable electricity.

But in the race for the green jersey, the sprawling, deep-pocketed tech giants from Silicon Valley have a natural edge.

The five Big Tech companies — Amazon.com Inc., Apple Inc., Google LLC, Facebook Inc. and Microsoft Corp. — have all signed deals in recent years to purchase renewable power in Europe and are also at the forefront of the corporate push for green energy globally.

While data center electricity demand is set to grow fastest in Asia-Pacific and Latin America, growth in the Europe, Middle East and Africa region is projected to be slightly steeper than in North America. Utilized power in EMEA data centers is set to increase by 2.8% in the next five years, according to 451 Research, an offering of S&P Global Market Intelligence, compared to 2.7% in North America.

For the energy sector, this increased power demand is a boon, particularly in Northern and Western Europe. A sizable chunk of the wind farms put into construction in the Nordic region in the past five years, for instance, have benefited from contracts — known as power purchase agreements, or PPAs — with Big Tech companies, said Justin FitzHugh, vice president of business development at Oslo-based advisory firm Arctic Securities AS.

"Google, I think, has been the most active. But I think all of the major names are here and have written PPAs. And there's no doubt that that has helped the development of wind power across the Nordics. ... [Renewable energy is] becoming a must-have for them," he said.

For companies like Vattenfall AB that either develop the renewables plants or facilitate transactions with corporate customers, such deals mean revenue visibility and stable returns in an environment of falling government subsidies for new projects, said Erik Suichies, head of Vattenfall's European wholesale customer business. The Swedish state-owned utility has signed PPAs with several tech giants in the Nordics, and Suichies sees growing demand from members of RE100, a group of companies targeting 100% renewable electricity by 2030.

Beyond the Nordics, data center capacity is rising quickly in cities like Amsterdam, Dublin and London, as well as secondary hubs such as Zurich, Milan, Warsaw and Madrid, said Kelly Morgan, research director at 451 Research.

Contracts with data centers are bespoke and tailored to site requirements, Suichies said. "Additionality is quite a big point," he added, referring to companies' desire to sign deals with new projects that depend on the PPA in order to get built, maximizing the green benefit, rather than with wind or solar farms already in operation. "That can make it challenging, because those things need to come together," he said.

In order to achieve additionality, corporate electricity buyers, also called off-takers, have to enter deals before projects enter construction, which inherently raises some risks. "If the project is being built already, then any additionality argument is weakened," said FitzHugh. At that point, there is an element of construction risk, which in practice mainly relates to construction delays.

'Not for the faint-hearted'

In the data center universe, these challenges are creating a divergence in PPA activity between the Big Tech companies that generally own their own facilities and the operators who rent out their servers to third-party clients.

"PPAs are not for the faint-hearted. You need deep pockets, appetite for risk, and in-house expertise," said Emma Fryer, associate director of data centers at TechUK. Fryer added that Microsoft and Alphabet Inc.-owned Google are leading the charge.

TechUK, an association which represents large tech companies including Amazon and Google's U.K. divisions, is in talks with the U.K. government about how PPAs can be de-risked, Fryer said. Ways of doing this include encouraging longer tenancy agreements, up to 20 years.

While some multi-tenant operators like giants Equinix Inc. and Digital Realty Trust Inc. are also routinely contracting green power through PPAs, they are the exception among their peers, who are generally less active on the PPA scene. One risk lies in the uncertainty of tenancies, said Fryer. Operators are reluctant to build new data centers near renewable power sources, which tend to be further away from cities, in case they will struggle to rent them out after a few years.

Executives at independent data center operator Iron Mountain Inc. concur. The company has signed PPAs for some of its facilities and is covering demand with green power certificates as well as co-located renewables such as rooftop solar panels. "If you control both the facility and the IT infrastructure it gives you more chances to optimize," said Eric Lisica, operations director for Western Europe at Iron Mountain. "It's always easier to drive an initiative when you've got a single tenant. Sometimes [the Big Tech companies] may have an advantage."

Beyond uncertainty over future power requirements, smaller entities also often cannot fulfill the credit requirements that financiers of renewables projects need. "Only 25% of the market seems to be creditworthy enough to also connect to longer-term contracts. … It's a tricky balance," said Vattenfall's Suichies.

For Big Tech, creditworthiness is no longer an issue, said FitzHugh. "Given the scale of these businesses now and also the scale of their cash reserves, they're very bankable these days. I think we've got beyond that," especially in the context of the wider pool of corporate consumers, he said. "How many AA-rated carmakers are out there?" FitzHugh said.

Backup technology 'ripe for overhaul'

While power consumption is increasingly being switched to green sources, some elements of data center operations are much more difficult to decarbonize. Backup generation used during power outages is overwhelmingly diesel, not only in Europe but also in the U.S., where data center hubs in California and beyond continue to see their air quality affected by the fumes. In EMEA, diesel capacity at data centers has steadily risen in the past five years, standing at just over 6 GW today, according to 451 Research.

"Backup power is one of the biggest parts of our industry that is ripe for overhaul now," said Alex Sharp, global head of design and construction for data centers at Iron Mountain. "There's a resistance to move away from diesel generators," but cleaner alternatives are coming onto the scene, chiefly natural gas units, he added. Iron Mountain is also looking at fuel-cell solutions for backup power in some core markets, including Virginia in the U.S.

Owner-operators of data centers have a natural advantage when it comes to reducing the need for diesel backup power, as they can switch between data centers in the event of an outage. Big Tech is investing heavily in building this sort of resilience, said Andrew Jay, head of EMEA data center solutions at commercial real estate firm CBRE Group Inc.

As a result, "In the next 10 years some of the [Big Tech companies] will go to no backup at all," Jay said. Older facilities, typically owned by multi-tenant operators, may find eradicating diesel more difficult, Jay said. Switching to lithium-ion batteries as an alternative backup power source is expensive and inadequate for outages lasting more than a few hours.

Carbon neutral by 2030

This could go some way to explain how the Big Tech owner-operators will achieve ambitious corporate sustainability goals. Microsoft said it will shift to 100% supply of renewable energy for its data centers by 2025, as part of its goal to be carbon negative by 2030. Facebook said it would use "clean and renewable" energy for its operations by the end of 2020. The EU wants data centers to be carbon neutral by 2030.

The 2030 target is "exceptionally ambitious," Mark Chester, partner at Eversheds Sutherland, said. So much so that it may only be met by "greenwashing" at a company-level, said Jean-Pascal Boutin, who heads up the law firm's energy regulation team.

Companies may procure electricity directly from wind or solar projects, but they also need to mix that supply with dependable, or baseload, sources of power. They can purchase green electricity certificates on the market that are labeled as renewable, but in fact this baseload supply could actually include power from the burning of fossil fuels, Boutin said.

As data center operators become more sophisticated actors in the power market, venturing for example into contracting green power on an hourly basis to match requirements, more are looking for a one-stop-shop solution, FitzHugh has found.

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This trend plays into the hands of larger integrated utilities. "It is quite time-consuming and complex for a large off-taker to deal with a small independent developer of a pre-construction wind farm. It's much easier for them to deal with a large utility that can probably solve all of their problems in one go," FitzHugh said.

National and regional regulations will tighten the screws on fossil-powered data centers as pressure for more efficiency is mounting, but TechUK's Fryer said the carbon calculation is complex. "I would love to see us not need diesel generators," she said. Fryer added that their actual usage in hours each year is "minuscule" in Europe as grids are much more reliable than in the U.S.

Greening legacy assets can also add to the carbon budget, she said. "You have to take account of the embedded carbon which will be released if the diesel generator is removed."

For new data centers, there will likely be a pivot toward greener backup power, however. Vattenfall's Suichies said while there are initial requests for battery storage backup solutions, the cost calculation is not quite adding up just yet. "I think we will see quite an interest in the coming years," he added.