Management of Data Centres in Singapore – Key Legal Issues Part 1 – Energy Use

• Leasing of real estate
• Construction and maintenance of DC infrastructure,
• Procurement of power to serve the DC
• IT systems architecture design and security
• Day to day regulatory compliance
• Storage of data and backup policies
• Management of services

In Part 1 of this series of articles, we provide an overview of the key legal issues that centre around the all-too-critical energy usage for the operation of DCs in Singapore.

Energy Management

According to the International Energy Agency (IEA), data centres consumed 460 TWh of electricity in 2022, which represents 2% of all global electricity usage. This figure could rise to more than 1,000TWh by 2026 in a worst-case scenario. To get on track with Singapore’s Net Zero ambitions, the national emissions must halve by 2030. This will be a challenge, given that DCs are big consumers of electricity. DC emissions can be however curbed with well-considered energy management strategies.

Modern day energy management involves innovative and integrated digital services where technologies are interlinked to enable not just automation but clever customization to meet a DC’s need for uninterrupted power. DC energy management systems incorporate smart technology solutions that make use of AI, data analytics and IoT. The legal documentation we see in this area revolves around long term energy savings and energy performance contracts with customised variations. As energy management solutions may be capital-intensive and a burden to DCs already grappling with an high energy prices and inflationary pressures, energy as a service (EaaS) is another attractive option for DCs. Under an EaaS agreement, the energy service provider (ESP) secures third-party funding to pay for all project costs, so the DC operator has no upfront expenses or internal capital and the DC operator pays-for-performance so the ESP bears the performance risks and is constantly seeking operational efficiencies. ESPs can bundle energy consultancy, financing, asset installation and energy management solutions all-in-one for customers.

Energy Procurement

DCs typically sign on to long term onsite Power Purchase Agreements (PPAs). Onsite PPAs contracts between a DC operator (as offtaker) and a renewable energy project developer or independent power producer (as IPP), in which the IPP owns, operates, and maintains a renewable energy system adjoining the DC for a term of 15-25 years. The DC operator-offtaker benefits from securing a fixed energy price for the life of the onsite PPA, ensuring long-term electrical price stability. In most cases, the renewable energy certificates (RECs) generated from the renewable energy project belongs to the DC operator-offtaker as well.

Offsite PPAs (also known as virtual or synthetic PPAs) are also commonplace. No physical sale of electrons occurs between the DC operator (as buyer) and the renewable power producer (as seller). The offsite PPA is a contract for difference for the DC operator to hedge against volatile energy prices. There is a settlement mechanism whereby the buyer pays if the utility price dips below an agreed strike price, and the seller pays if the utility price rises above that agreed strike price. Most offsite PPAs provide that the buyer owns all environmental attributes from the renewal power projects (ie all credits, benefits, emissions reductions, offsets and allowances attributable to the renewable power generation and its displacement of conventional energy generation). However, it should be noted that renewable energy certificates (RECs) may or may not be transferred to the buyer.

Ideally, 100% of a DC’s power needs come from renewable energy (solar, waste to energy, etc). Where renewable energy supply is inadequate, DC operators may seek to rely on the purchase of unbundled renewable energy certificates (RECs) to offset their carbon emissions and meet their renewable energy targets. Sale and Purchase of RECs are agreements for the purchase by DCs of unbundled RECs (RECs that aren't paired with the underlying electricity and not tied to a PPA). RECs purchases require careful scrutiny to avoid accusations of greenwashing and to ensure that the RECS do legitimately count towards renewable energy targets.  There are available resources to allow DCs to track the RECS serial numbers, generation source and vintage minimally) via blockchain and AI-powered trading platforms.

Many stakeholders consider the market for RECs to be undersupplied and the expectation is that the gap between supply and demand is continue to widen. As such, RECs prices are likely going to stay stubbornly high. Prices notwithstanding, we expect a real tussle amongst the largest DC operators to try to secure a pipeline for the future bulk offtake of RECs, possibly gaining a competitive edge over smaller players.

The energy scene will continue to evolve with more innovations for energy conservation and more creative power procurement arrangements. The DC industry will have to self-monitor, prepare for disclosures, and strive to innovate amidst the increasing regulatory scrutiny on energy consumption of DCs.

This article is produced by our Singapore office, Bird & Bird ATMD LLP. It does not constitute as legal advice and is intended to provide general information only. Information in this article is accurate as of 14 August 2024.