Predictions for the Data Centre Industry

There is no doubting that global dependence on data centres for our ever-increasing digitalised economy, and general way of life, is set to continue to grow. However, whilst these digitalised services provide obvious benefits to society, such as immediate access to health care data and supporting developments in AI technology, the data centre industry is under increasing pressure to meet demand whilst also addressing the environmental impact its energy use has.

It is this tension between the obvious societal benefits that data centres support, against the impact that the industry's high-energy use has on the environment, that poses the greatest risk, as end-users are coming under increasing pressure to demonstrate their sustainability, which in turn impacts the data centre industry.

However, it is not just the challenge of sustainability and efficiency that the industry faces. Increasing capacity to meet accelerating demands for digital services and the need to innovate to continue to drive the sector forward are further obstacles the industry will need to grapple with and overcome in the immediate future. How the industry overcomes these challenges won't just be crucial for the sector's growth, but also for the global economy and, perhaps more fundamentally, the environment as a whole.

Following on from our 2022 Data centre podcast series, where we took a deep dive into the world of data centres, our industry experts have come up with some key predictions for the industry.

1. UK to follow EU's regulation for a high common level of cybersecurity?

Regulation to strengthen the security and resilience of UK's data infrastructure is firmly in the UK Government's crosshairs, and we expect regulatory movement in the coming year, particularly following the EU's adoption of the new NIS2 legislation (Directive (EU) 2022/2555 of the European Parliament and of the Council of 14 December 2022 on measures for a high common level of cybersecurity across the Union).   

In May 2022, the UK Government consulted industry leaders for views on how to boost the security of UK data centres and cloud services, saying that any new protections would need to build on existing safeguards for data infrastructure, including the Networks and Information Systems (NIS) Regulations 2018, which covers cloud-computing services. Following this consultation, in January 2023, the UK Government published its proposals for expanding the scope of NIS. Whilst it is not proposing to bring data centres directly within its remit (this is being kept under review), it is important to note that some data centres may fall within the scope of NIS regulations through either (i) the use by cloud service providers, and (ii) forming part of the network and information systems that support the provision of a managed service or managed security service (i.e. companies who provide important essential digital services to organisations, often with privileged access to internal systems). It appears inevitable that the UK's increasing reliance on digital infrastructure and security will lead to more regulation that will affect data centres, and this is something industry should be alert to.

2. End of the diesel generator in data centre design?

Traditional data centre design has involved the incorporation of diesel generators to provide back-up power in case of power interruptions. However, when pressed into action these generators produce carbon emissions which data centre operators would rather avoid or cut altogether, as they push to achieve greener environmental credentials.

To combat this, in the short term, operators and designers have been looking at ways to reduce the time these generators are required to run for, for example by relying on the UPS (i.e. batteries) for longer to support the building load during power outages. However, in the longer term, the industry continues to look at options to replace these generators completely, and we predict that we are likely to see this transition accelerate due to advancements in battery-powered generators (i.e. via gigafactories) and hydrogen fuel cells, as the technology in these areas continues to be refined for use.

3. Pushing to the Edge

As our use of the cloud, artificial intelligence (AI) (including generative AI such as ChatGPT), and internet of things (IoT) continues to increase, edge data centres increasingly will be deployed to provide the necessary infrastructure for their operation, particularly in business-critical operations.

Edge data centres are located as close to end-users as possible, enabling an improved experience by reducing latency in connection, which can have a transformative effect on vital services such as manufacturing, healthcare and security. As society pushes towards modernising these aspects of life, including using AI in its transition towards being more sustainable and environmentally-friendly, edge data centres will play a critical role in this transition.

Further, everyday activities such as gaming, access to social media and the metaverse will continue to require an ultra-dense, low-latency computing network for ultimate user experience. This, coupled with the prediction that more than half of all mobile subscriptions will be 5G by 2027, will mean an increased demand for higher-powered computing in those 5G edge locations.  

4. AI in data centre management

Having the ability to address issues faced by data centres at a faster rate than a human might, AI technologies are transforming the world's data centres. Improvements in operational efficiency, sustainability, capacity management and cyber security are just a few areas in which AI technologies have provided - and we predict increasingly shall provide - solutions necessary to effectively manage the world's rising data demands.

AI models can be used to analyse a data centre's physical assets so that they can be used as effectively as possible, increasing the life-span of the assets by predicting maintenance cycles and forewarning operators of abnormal operations. Further, AI can monitor a data centre's power usage effectiveness (PUE) and provide solutions to optimise conditions, therefore balancing performance and sustainability in the most effective way possible.

In respect of the ever-present threat of data leaks and cyberattacks, particularly in the current global climate following the war in Ukraine, AI can be used to implement and monitor cybersecurity protocols, including identifying suspicious activity before it becomes a larger threat, and increasingly forms the basis of technical cybersecurity defence networks / solutions.

5. Continued investment in the Industry

With the data centre services market valued at $48.9 billion in 2020, and forecast to increase to $105.6 billion in 2026, we expect to see continued investment and M&A activity in the industry, despite the rise of cloud technology and an expectation that big tech firms such as Microsoft, Amazon and Google (as known as hyperscalers) pose a risk to the future of traditional data centres.

As discussed in our previous article, whilst the likes of Microsoft, Amazon and Google might look to leverage their financial means to meet their precise requirements by building their own hyper-scale data centres, rather than relying on a more generalised outsourced solution, building and operating data centres is an expensive business and one which is increasingly coming under the scrutiny of the ESG lens and the accompanying risk of poor publicity.

As such, with the seemingly inevitable continued growth of the hyperscalers' requirements to use data centres to meet the processing and storage needs of cloud technology, it is likely that these big tech firms will continue to use trusted partners that run and maintain independent data centres to meet these demands in conjunction with building their own bespoke centres.

6. Push for capacity - what challenges will construction professionals face in meeting demand?

Demand for data-reliant services has reached an unprecedented level as the industry continues to grow at a staggering pace, and it is for providers, operators, but particularly construction contractors, to attempt to fulfil users' needs.

From traditional co-location data centres to hyper-scale and edge data centres to smaller community-based data centres, contractors are having to remain nimble to the demands of operators and providers, building highly-complex structures cost-effectively in the shortest possible time. This poses a contradictory challenge to contractors. Throw in other potential pitfalls such as new geographies, environments, markets, jurisdictions, the after-effects of COVID and geo-political headwinds, there remain significant challenges for construction professionals in the data centre industry. However, with careful planning and risk management, growth opportunities exist in the push for capacity.

(i) Supply Chain issues

Given the growth and expansion in the data centre industry, it is highly sensitive to supply chain disruption and the current outlook for the construction industry as a whole means disruption is likely to continue to affect construction projects going forward.

Across the whole construction industry, COVID-19 has had a vast impact on global supply chains and despite the pandemic receding, a second shock in the form of the geopolitical crisis of the war in Ukraine, has further affected crucial supply chains for the data centre industry, including semiconductors and base metals vital to data centre construction. With further geopolitical rumblings around Taiwan, and between the US and China, with sanctions mentioned in recent news articles, supply chain issues are likely to remain high on the agenda for construction professionals. Contractors when entering into new projects, must be alive to these issues and look to address them contractually to ensure prudent risk management.

(ii) New build vs re-development of existing sites or buildings

As the industry pushes to grow capacity whilst also achieving sustainability, quality of service and being closer to centres of population and economic activity, providers and operators are having to consider whether to (i) build new data centres, (ii) re-develop existing sites, or (iii) adapt existing buildings into data centres.

Each option provides benefits and challenges for construction professionals:

• A new build date centre can take advantage of advances in architecture, building materials and construction techniques, to build structures that endure the ever-increasing demand. However, there is only so much space and critical infrastructure available for new sites.
• Redeveloping or upgrading an existing site benefits from having the available resources and infrastructure, but it can be costly for the operator if it needs to close the data centre to carry out the works.
• Adapting existing buildings (e.g. an old factory building) means contractors will face challenges in navigating non-custom spaces for fitting equipment but will benefit from critical infrastructure already in place and these redevelopments may be more attractive to local planning authorities.

In the drive for economic and environmental sustainability, coupled with the desire to provide a service closer to popular areas and economic hubs, it is the adaptation of existing buildings we expect to see higher on the agenda of construction professionals in the coming years.  

(iii) Challenges of new geographies and jurisdictions

The push for capacity also includes expansions into new geographies and jurisdictions to meet global and local demand, and we are likely to see a push to grow away from the primary markets, which are becoming saturated and where operators face stiff competition. This push will be to secondary markets such as the secondary cities of the main economic nations and the capitals of smaller economic nations. And whilst some contractors are being offered incentives and subsidies to build in these markets, these projects will require contractors to learn the new geographies and jurisdictions they are operating in.

Further, each region poses its own unique environmental challenges, particularly when it comes to building data centres in cooler climates, such as the Nordics, and warmer climates, such as the Middle East. The Nordics possess a favourable climate and natural resources that allow contractors to optimise costs and increase energy efficiency. However, construction conditions during their winter months pose significant challenges. Conversely, the Middle East's incredibly warm climate creates its own significant challenges for constructing, operating and, in particular, cooling a data centre, however new technologies and increasing supplies of renewable energy (such as solar) means contractors can still build to achieve new levels of service and sustainability.

Whilst we expect the growth in both these regions to continue, contractors will need comprehensive planning, supported by experienced and well-equipped suppliers, to deal with these differing climates and achieve successful completion on projects.

(iv) Power infrastructure

The fundamental challenge facing the industry in its push for capacity is the availability of appropriate power infrastructure around new or existing sites. For contractors, not having adequate power infrastructure can bring a project to a halt and cause huge delays, given the importance of permanent power to testing and commissioning data centres.

In some of the largest cities round the world, the power demands of data centres have sparked development bans, and eventual regulations on what facilities can be built. Dublin, Singapore and Amsterdam have seen moratoriums imposed, with those lifted only with tough regulations and requirements now in place. We expect to see further cities consider developments more closely, and more moratoriums announced as power infrastructure of large cities are challenged by data centre developments.

(v) Rack densities

Another area of data centre design that will continue to see changes to meet the needs of operators to add capacity quickly, is rack densities. Higher-density racks are increasingly being deployed particularly among larger enterprise and hyperscale data centres, to meet increased demand and is driven further by developments to liquid-cooled server technologies.

However, greater rack densities increase the power consumption of a data centre, creating higher thermal profiles that require cooling. Contractors will face the challenge of adding further assets to the data centre network, without overloading the system causing outages or excessive thermal radiation. Fortunately, while liquid cooling is not a new concept, significant successful progress in these high-density environments has provided confidence that high-density racks can be adopted further in existing spaces to meet capacity.

(vi) Modular Construction

Fast becoming the new normal in the construction of data centres, modular construction involves pre-fabricated, pre-engineered and pre-integrated units being delivered to a project for installation, making construction less complex and faster, and ultimately meeting user demand quicker. Modular construction has typically been seen in colocation data centres, but it is predicted that operators of hyperscale and edge data centres shall increasingly embrace this method of construction for speed and efficiency.

Contractors that are able to provide modular construction across all types of data centre to meet operator demand, will be in the best position to build highly-complex structures cost-effectively in the shortest possible time.

How we can help

What is clear is that the data centre market will continue to evolve rapidly over the coming years, seeking to address the continued increase in global data usage. This will inevitability present legal challenges to businesses, for example in terms of construction challenges and disputes in pushing to meet capacity, outsourcing requirements, and compliance with ESG requirements. Simmons & Simmons has deep industry expertise and credibility working with data centres and cloud technology providers and customers. If you have any queries or legal needs in this field, then our dedicated data centre team are on hand to discuss your specific queries and would be delighted to assist.