Rising Energy Prices Could Hurt Colocation Providers’ Profits, Says FTI

FTI Consulting, an independent global business advisory firm focused on assisting firms in managing change, mitigating risk, and resolving disputes, has released a paper that examines the causes of current high energy prices and its impact on data center operators and providers of colocation services.

Power prices in the UK, Germany, France, and other nations have risen significantly in the recent nine months, according to FTI Consulting. Singapore had a more than twofold increase as well. Meanwhile, the United States was largely spared from the European power price spikes. However, when inflation rises, FTI noted that U.S. colocation providers should assess their risk mitigation techniques in order to help mitigate the consequences of growing power costs.

According to FTI’s study, five main variables coalesced into a perfect storm to force up power costs in the UK and EU after many years of low and stable energy prices. Their brief paper looks at why high energy prices are affecting certain colocation providers and what data center operators may do to reduce the risk of rising energy expenses.

FTI Consulting has determined five main causes for the sharp increase in energy prices in the UK and EU:

  • Natural gas storage levels depleted – A cold winter in 2020-21 resulted in lower storage levels in the summer and fall.
  • China’s energy consumption has increased – Liquefied natural gas (LNG) exports into UK and EU ports are down.
  • One of the UK’s major power lines from France was forced to close due to a fire – The UK’s energy supply has been further hampered by the fact that it only possesses 1 percent of the EU’s total natural gas storage capacity.
  • Price limitations set by OFGEM and legacy policies – The UK regulatory body allows price limit revisions every two years; since 2014, long-term regulatory reforms have boosted total competitors, many of whom are now immobilized as energy costs have grown erratic.

Russian gas export restrictions to the EU – Added higher pricing pressure owing to the EU’s strong reliance on Russian gas imports

All-in Customer Pricing Models

Data center providers using all-in customer pricing models, which are predominately used in the retail colocation segment, would bear the cost of rising energy prices. Data center providers focusing more on wholesale and hyperscale customer segments would be better insulated from volatile energy prices, as client contracts are typically based on metered power that can be passed through to colocation customers.

FTI Consulting informed there is no one-size-fits-all solution for encountering data center energy cost issues. As previously stated, retail colocation revenue generated through all-in contracts would fare far worse than revenue generated by wholesale and hyperscale data centers, which generally utilize metered pricing contracts.

To learn more about FTI’s paper on rising energy costs, the impact on the data center colocation market, and some tips for colocation providers how to respond to these energy cost issues, visit their website here.