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Navigating volatile energy markets

Image: Adobe Stock / NicoElNino

Before delving into the energy market as it stands today and what can be done by data centres to safeguard against its volatility, it is first worth showcasing just how energy-intensive the industry is.

According to a report by the International Energy Agency, the energy consumption of data centres worldwide was around 200 terawatt-hours (TWh) in 2020. This is about 1% of global energy consumption. And usage is not slowing down. The same report estimates that this consumption could triple by 2030.

While lots of good work is happening in the data centre industry to implement energy efficiency measures and adopt more sustainable practices, the fact remains that the industry relies on a plentiful supply of energy – and that isn’t going to change anytime soon.

Resultantly, both the volatility of the energy market and the way in which it can be navigated when it comes to procurement must sit high on the list of priorities for data centres – with such high levels of energy consumption, even small fluctuations in energy prices can have a significant impact on a data centre’s operating costs.

The energy market – expect the unexpected

The key with the energy market is to expect the unexpected. In early March, it looked as though Europe was going to come out of a difficult winter period relatively unscathed – with better-than-expected energy storage levels on the continent – but this forecast was shattered with an announcement on 10 March that EDF, France’s state-controlled utility, had discovered a stress corrosion crack at one of the reactors in its Flamanville Nuclear Power Plant in Normandy.

The Nuclear Safety Authority (ASN) reported that, “the case of Penly 1 [the shutdown reactor] seems to highlight a new cause of stress corrosion near welds that have undergone major repair” and that “this phenomenon can potentially concern all reactors, as all have repaired welds”.

This announcement sent shockwaves through the already fractious energy market. The Q1-24 contract in France was most-affected, rising by almost 60% over a couple of days. While UK contracts were affected to a lesser-degree, the Winter-23 contract rose by around £20/MWh in the immediate aftermath.

More recently, the energy market has been preoccupied with the worsening banking crisis following both the collapse of Silicon Valley Bank and the ’emergency rescue’ of Credit Suisse. While the extent of the crisis is still to be seen, previous banking crises have had ripple effects across entire economies, leading to a contraction in credit markets, a decline in economic activity and increased volatility in financial markets. Given the extent to which the energy market relies on access to capital and financial markets to fund the development and operations of energy infrastructure, it is clear that the volatility of wider financial markets could rub off on the energy market.

Plus, investor confidence in renewable energy projects could be jeopardised. Perhaps wider financial uncertainty will lead to increased investment in more stable energy assets. Time will tell.

The point is that the energy market continues to be pushed and pulled by drivers that will do nothing to tame its volatility. The most forward-looking organisations within the data centre industry must get ahead of the game and implement energy procurement strategies that can navigate the volatile market.

Building an effective energy procurement strategy

At its most simple, a good energy procurement strategy will provide organisations with a stable and predictable energy supply at a competitive price.
Here are some general factors to consider when pursuing a good strategy.

1) Understand your energy usage: it’s important to understand your organisation’s energy usage patterns, including when and how much energy is consumed.
2) Determine your risk tolerance: it’s important to determine your organisation’s risk tolerance when entering the energy market.
3) Explore procurement options: there are different procurement options available, such as fixed-price contracts and flexible contracts. Each option has its own advantages and disadvantages, and the choice of procurement option will depend on factors such as market conditions, risk tolerance and budget.
4) Consider renewable energy options: renewable energy sources, such as solar and wind power, can be an effective way for businesses to cut down on their carbon footprint.
5) Factor in regulatory requirements: a strategy must consider any regulatory requirements related to energy procurement and usage. This might include renewable energy mandates, energy efficiency standards and emissions regulations.
6) Choose suppliers: businesses will need to choose suppliers that can provide the energy products and services that their strategy requires. It’s crucial to evaluate suppliers based on their track record, pricing, reliability and customer service.
7) Monitor and adjust the strategy: as explored, energy markets are unpredictable. Businesses must monitor procurement strategies regularly to ensure that they continue to meet their needs.

Outsourcing energy procurement

While these guiding principles are important to bear in mind for businesses intent on implementing their own effective energy procurement strategy, the real benefits come when partnering with an external specialist.

Not only can outsourcing energy procurement save businesses time on research, analysis and negotiation, but it also has the potential to deliver significant cost-savings. Energy procurement specialists will leverage their expertise to negotiate better rates and contracts. Not only this, but businesses like Open Energy Market have expert traders monitoring real-time market data intelligence to make informed decisions about energy procurement. With the energy market constantly evolving, it can be challenging to keep up with changes in regulations, pricing and suppliers. By working with a specialist, organisations reduce the risk of making costly mistakes or missing out on opportunities.

A final point to make is that external providers of energy procurement can prioritise helping their clients to source energy from renewable sources.

A final word

The data centre industry’s energy consumption is showing no signs of slowing down – and this reliance on energy means that the volatile energy markets that we are seeing today have the potential to seriously impact the financial performance of data centres across the UK. Thus, it is important that organisations implement effective and robust energy procurement strategies. There are many factors to consider – energy usage, risk tolerance, procurement options, renewable energy, regulations, suppliers etc. – but to best navigate this volatility associated with the energy industry, it is always best for businesses to outsource the expertise that is required to keep up with changes in the market and deliver serious cost benefits while also incorporating green energy.

Ruari Cairns
Ruari Cairns
Director of Risk Management and European Operations at True, Open Energy Market

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