Multigrid analysis: Factors Conducive for Hyperscale Data Center Growth in Scandinavia

Executive summary

Seven mutually reinforcing factors jointly build a strong case for the expansion of hyperscale computing in Scandinavia. The transition to cloud services makes computing internationally footloose and facilitate agglomeration in cost effective locations. Abundant supply of renewable energy, internationally competitive power prices and considerable investment in energy infrastructure is a solid foundation for large scale exports of energy intensive cloud services from Scandinavia to the rest of Europe. The EU Digital Single Market – trade creation internally, trade diversion externally – in combination with recent international political events should contribute to relative competitiveness.

1. The global growth of cloud computing

The transition to cloud computing will change the ICT industry fundamentally over the next five to ten years. Growth of cloud services at the global level is continuing at a very rapid pace. Gartner estimated the public cloud market in 2016 to be USD 208 bn on an annual basis and forecasts that it will grow a further 83% in the four years to come to approximately USD 380 bn in 2020.

The fast growth of cloud services is reflected in fierce competition between four major cloud providers; Amazon Web Services, Microsoft, IBM and Google. AWS reported USD 11 bn in revenues for the four quarters ending in September 2016 and 54.9% growth between the third quarter of 2015 and third quarter of 2016. Microsoft’s commercial cloud annual run rate increased with 58.5% from USD 8.2 bn in Q1 2016 to USD 13.0 bn in Q1 2017 (ending 30/9/16). IBM’s cloud as a service business grew 66% from USD 4.5 bn to USD 7.5 bn over the same period. Google Cloud is a significant challenger but with less transparent reporting and therefore more difficult to assess.

The growth of cloud companies and hyperscale computing has profound implications for green computing. First and foremost, the transition from legacy equipment and data centers to cloud computing result in significant gains as computing is concentrated to larger, better utilized, more homogenous and more energy efficient computing environments. Second, cloud computing allows for geographic re-location of resources. Cloud companies are, due to fierce competition, scale and the multi-national nature of cloud services, more footloose and more responsive to opportunity to save cost and to realize productivity gains. These underlying technological and economic factors are likely to contribute to an internationalization of computing and, to the extent that sustainable and energy efficient computing is competitive, a faster transition to, and concentration of, global computing to locations with safe and stable conditions, abundant supply of energy and reliable infrastructure.

2. Sweden reduced the specific tax on electricity for hyperscale computing on January 1, 2017

On November 23, 2016, the Swedish parliament approved the government’s budget for 2017, including a dramatic reduction of the specific tax on electricity. On January 1, 2017, the specific tax on electricity for data centers with a minimum capacity of 500 kW fell from 3,06 Eurocent per kWh to 0,05 Eurocent per kWh. The cost of electricity, including the price at the Nord Pool spot market, the cost of electricity certificates and the specific tax, overnight dropped from 5,67 Eurocent per kWh to 3,10 Eurocent per kWh. The reduction of one of the most important inputs in hyperscale computing should make Sweden an attractive location in an international cost comparison and one of the most cost effective locations in the European Union. In addition, the change in the specific taxation of electricity practically eliminates the tax distortion that risks causing suboptimal utilization of computing assets. This should improve productivity further. Moreover, the attractiveness of locating hyperscale computing in urban areas rather than rural locations improved. While previous taxation was relatively more favorable in less populated areas and regions, the new taxation is symmetric.

3. Incentives for substantial expansion of supply of renewable electricity in Sweden and Norway

The Swedish-Norwegian system for electricity certificates, incentivizing investment in renewable power generation, was expanded on January 1, 2016. The system is designed to add a further 30 TWh per year of renewable electricity supply from 2012 to 2020. Due to existing production, particularly hydro and nuclear power, having mainly sunk cost and low variable cost, the electricity certificate system results in considerable competition between producers and abundant supply of power at low end-user prices. The average daily spot market price in the Nordic market was 2,69 Eurocent per kWh in 2016. Moreover, in the fall 2016, the Swedish Energy Agency, based on a request from the government, presented a proposal to incentivize a further expansion of annual production of renewable electricity with 18 TWh by 2030.

4. A new regulation for power grid companies in Sweden

The regulation for power grid companies was changed on January 1, 2016. In September 2014, the government enacted a regulation that compensate power grid companies for interest on the depreciated value of distribution assets. Assets that are older than 40 years result in lower or, in the case of 50+ year old assets, no compensation. In combination with a granted weighted average capital cost, which an administrative court on December 14, 2016 ruled to be 5,85%, the electricity distribution companies are undertaking significant investment in the power grid at the local, regional and national level.

5. Heat purchase agreements in Stockholm

In the last couple of years, multiple district heating companies have started to purchase recovered heat from data centers. This allows data centers to turn computing waste heat into a revenue. The current compensation for recycled energy paid in Stockholm by Fortum Varme is 1.8-1.9 Eurocent per kWh of heat; potentially offsetting a considerable share of the variable cost of electricity used in servers and by heat pump compressors used for heat recovery/cooling. The potential for heat recycling is further improved by equipment tolerance for higher operating temperatures (standard Dell and HPE servers now allow for continuous operation with an air inlet temperature of 35°C) and new fan speed algorithms are raising the exhaust air temperature considerably (with a maximum between 58°C and 60°C for most servers; ASHRAE [2016]) facilitating and improving the prospects for heat recovery. The introduction of more climate friendly refrigerants, such as HFO-1234ze, in heat pumps and chillers in response to the EU F-gas regulation that took effect on 1 January 2015 by companies such as Carrier yields higher condenser leaving water temperature and better heat recovery productivity – in addition to the positive effects for the climate.

6. The Digital Single Market

The Digital Single Market strategy was adopted by the European Union on the 6 May 2015 and included 16 initiatives to be delivered by the end of 2016. Successful implementation should facilitate trade in cloud services within the EU. Notably, the EU General Data Protection Regulation (GDPR) was adopted on April 27, 2016. It will come into force on May 25, 2018. The objective of the GDPR is to give citizens control over their personal data and to make it easier for multinational companies operating across the EU to comply with data protection laws through the harmonization and through the introduction of a “one stop shop” whereby companies will only have to deal with one supervisory authority. This should facilitate concentration of computing within the internal market and, possibly, allow cloud companies to exploit increasing returns to scale to a greater extent.

7. Brexit

The UK vote to leave the European Union has added significant uncertainty to the future of Europe’s most important computing market. This could foster a faster re-location of computing to alternative and more cost-effective locations, such as the Netherlands and Scandinavia. The risks associated with Brexit are multiple and difficult to assess while the future terms of the United Kingdom’s trade with the European Union has not been negotiated. One should, however, expect remaining EU Member States, particularly Germany and France, to strive for a re-location of financial activity to Frankfurt and Paris, which might have profound implications for the UK data center industry – both directly and indirectly. Moreover, diverging regulation and policies related to privacy and e-government could make it difficult for UK locations to compete for European government cloud business.