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During the last 12-18 months the volatility in the energy markets has increased considerably and is set to continue. This coupled with the continual increases and changes to the value and the structure of non-energy charges means that data centre developers and operators need to consider more than just the price when negotiating an energy contract.
In our experience of managing energy for some of the largest data centres, operators and developers, the following are some of the most important considerations when sourcing an energy deal from a supplier:
Fixed or Flexible Contract
The first decision faced by many is whether to opt for a fixed or flexible price contract. There is no right answer to this question but with increased volatility and the uncertain nature of load growth in data centres the flexible contract approach mitigates risk of buying at the wrong time and offers the greatest flexibility of increasing load without penalties.
The decision on which type of contract to opt for is material in ensuring the optimum energy price is obtained.
When to Buy
In commodity markets, the general rule of the price being cheaper the closer to delivery does not always hold true for gas and electricity. Having analysed the markets over the last 20 years there is no real trend or time of the year that is better than any other.
With that in mind, whether buying through a fixed or flexible contract. A strategy of what price point you would like to secure you price at is a must. The strategy should be dictated through a combination of budget considerations, market conditions, risk appetite and future tenant requirements and ideally set through a workshop with key stakeholders.
If adopting a flexible contract approach, it is essential that any strategy is dynamic and changes with market conditions rather than being fixed at the outset and remaining in place for the duration of the contract – markets change and so should the strategy.
Credit can be a major problem for early stage data centres and often the supplier’s decision on a credit fail is accepted as fait accompli and usually a large deposit is required. Credit as with price can be negotiated and there are several options that can reduce the value of the deposit or eliminate it altogether. It is essential to produce a coherent story around tenants, data centre growth, procurement strategy, debt and financing and to engage with suppliers openly and early in the process.
Non-Energy charges now make up more than 50% of the energy bill and are still treated as though they are non-negotiable. It is true that if your contract starts on 1 April and is for 12 months duration the scope to negotiate these charges through a full tender is limited as most charges are published. However, 75% of the market negotiates contracts in October and each supplier forecasts these charges and take different views on them for 12/24/36 month durations. This presents an opportunity to negotiate and fix some or all of these charges regardless of whether opting for a fixed or flexible contract. This should be treated as an active part of the risk management strategy in the same way as commodity price.
Buying Green Energy
Most data centres are keen to buy green/renewable energy. In most cases there should be little or no price premium associated with green energy as suppliers utilise their existing renewables contracts. There is an opportunity to reduce the cost further by negotiating a reduction on the cashflow element of the renewables premium that are paid monthly as part of the non-energy charges against when the supplier pays this to the government at the end of the year.
In addition, it is worthwhile speaking to specialist suppliers in the renewable space where some energy exposure can be hedged directly with producers or through a private wire directly to a renewables provider if there is one nearby.
Getting the Basics Right
All the advice above assumes that the basics of energy procurement are done well, as a guide the following if executed well should ensure you have a fit for purpose energy contract.
Forecast load projections as accurately as possible for fixed price contracts as in most contracts the volume cannot be changed mid contract and you may incur penalties for over/under usage.
Ensure all charges are included in a fixed price deal as some of the smaller suppliers pass through some of the costs. In addition, be aware that a fixed price contract can be amended if there is material change to regulation.
Understand what is most important to you as a business when evaluating a flexible contract as only 3 elements of the contract can be evaluated quantitatively. The remainder of the terms are qualitative and will be bespoke to what is most important to the datacentre. A scoring matrix can help to analyse these elements.
There are also a number of considerations outside the purchasing and the ongoing management of an energy contract to enable developers and existing operators save costs, as a summary these are detailed in the charts below based on real life conversations with our data centre clients. Use blue and yellow data centre one pagers based on real life examples