Posted by John Stanley
This is Part 2 of a multi-part post on the SEC’s recent ruling on climate change. The first post provided a brief summary of the ruling itself. This post drills down into the possible effects on data centers.
Q: So climate change is material. Why should my data center care?
A: Fear of rising electricity costs will likely change how data center decisions are made
With the SEC’s ruling, companies will have to report possible risks (or benefits) that may result from climate legislation, climate-related market or technology changes, or physical climate impacts. The question that data center managers should ask themselves is “Will my company’s cognizance of these risks cause upper management to make different decisions about the way our data centers are run?”
There are three points I will make in response to this question, and I’ll expand each one below.
- Yes, reporting of risks will make upper managers more observant of data center energy use.
- Ironically, the risk may not be “material,” except in a few cases.
- Even if the risks of higher electricity cost aren’t material to the company overall, they may be material to the CIO.
Yes, reporting of risks will make upper managers more observant of data center energy use
Having to report climate-related risks to the SEC will almost certainly make upper managers think about what would happen to energy prices under climate legislation, and that will make them think about energy consumption. And once they’re thinking about consumption, data centers will stick out like a sore thumb.
According to Uptime Institute data, at one major financial institution, just 3 data centers out of 3,400 street addresses accounted for 12% of total corporate energy consumption. For three other financial institutions, data centers consumed 15%, 25%, and 33% of total company energy. (This is from the slide deck “Three Imperatives for Making Data Center Efficiency a C-Suite Priority”, presented by Ken Brill at Uptime Institute’s Symposium 2009. The deck is available on Uptime’s website.)
The image of data centers as energy hogs will likely make upper management much more interested in efficiency. The key is for data center managers to eliminate energy use that is genuinely “waste,” while vigorously defending energy use that only looks like waste to higher-ups not intimately familiar with data center operations. Even though a UPS throws away 10% of its energy in conversion losses, you probably can’t meet your SLA without it. That example is absurdly obvious, but there will be subtler situations. We as an industry will come under more pressure to cut energy use, and we’ll be under pressure to justify the energy use we can’t cut by tying it directly to an SLA or other business requirement.
Ironically, the risk may not be “material,” except in a few cases
Interestingly, even though the fear of higher electricity prices will drive increased scrutiny of data centers, I would argue that the overall risk to most companies from climate legislation raising data center-related electricity costs is actually fairly small, maybe too small to be “material” by SEC standards.
For most organizations, the IT budget is less than 10% of revenues. (Thanks to an old article in CIO magazine and their 2009 State of the CIO survey for this.)
Of the IT budget, around 25% goes to data centers in a typical company. (This is according to the Revolutionizing Data Center Efficiency report by McKinsey & Co. and Uptime Institute. The slide deck is available on Uptime Institute’s website, and the full McKinsey paper is available on McKinsey’s website. These reports are well worth reading, to give you the big picture of how a “typical” IT budget breaks down into line items.)
Next, electricity costs account for around 10% of the annualized TCO of a data center and the IT equipment inside it. Around 45% is IT capital costs, and around 31% is facility infrastructure CapEx. (These results come from Jonathan Koomey’s paper “A Simple Model for Determining True Total Cost of Ownership for Data Centers”, which was also written with Uptime Institute. The paper is available via Uptime’s website.)
Overall, then, data center-related electricity bills likely account for only about 2.5% of the overall IT budget in a typical organization, and likely less than 0.25% of company revenues.
Even if climate legislation causes electricity bills to double, it doesn’t make much of a dent in a company’s overall cost/revenue structure. So, this might not present a material risk to the company by SEC standards.
There are a couple of exceptions, though, in which case the risk could be material:
- If your company is in an industry where margins are razor-thin, then 0.25% of revenues might actually represent a significant chunk of profits.
- If your company’s core business is focused on data centers (web companies, co-location providers, etc.), then obviously the percentages above don’t apply. Your data center electricity bills are likely a significant business input cost.
Even if the risk of higher electricity costs aren’t material to the company overall, they may be material to the CIO
This last point has nothing to do with the SEC ruling per se, but it is yet another reason why data center operators will see increased attention to efficiency as climate legislation looms.
Even in a “typical” company where data center electricity use is only 2.5% of the IT budget, keep in mind that the average annual increase in IT budgets is only 6% per year. (Again, this is from the McKinsey reports.) This means that next year’s IT budget could absorb a doubling of electricity prices in its standard annual budget increase, but that’s a huge part of the budget increase chewed up by new electricity costs. For every $100 of IT budget, a doubling of electricity prices adds $2.5 in new electricity costs, on top of the $2.5 that was already there. The overall budget increase is only $6, meaning that only 6 – 2.5 = $3.5 in new budget money is actually left for application roll-out that year. (In fairness, such a price doubling would likely be spread out over multiple years, but each year’s installment would still be a significant chunk of each year’s annual budget increase.)
So, even if the risks of electricity cost hikes driven by climate change legislation aren’t material to your company by SEC standards, they may well be material to the CIO.
