Bringing their own power? Options for data centres and renewable energy

Australia is experiencing a wave of investment in data centres. The emergence of data centres arrives at a pivotal moment in Australia’s energy transition. The six key findings of this report are:

1.    Data centres can be ‘climate negative’ or ‘climate positive’ depending on policy and industry choices: there is a wide spectrum of potential scenarios from catalysing fossil-fuel through to unlocking renewable energy supply depending on how data centre growth is managed.

2.    If the goal is to ensure all data centres ‘bring their own power’, the AEMC proposal to base a national energy obligation on renewable energy certificates is risky: the Australian Energy Market Commission proposal is to mandate data centres to retire renewable energy certificates equivalent to their consumption on an annual basis. 

However, there is no precedent for a certificate-only offtake underpinning a new renewables project in Australia; a ‘bundled’ Power Purchase Agreement for electricity and certificates is the standard for a bankable project.  For a certificate-only offtake, very high prices would be required to compensate for the lack of certainty on electricity sale revenues and there may be unintended consequences (e.g. certificate price spikes). 

There is an expectation in some circles that mandating certificates will lead to bundled PPAs as it did when applied to electricity retailers under the Renewable Energy Target. Some data centres will want to purchase both electricity and certificates, but some will just buy certificates. If the goal is to ensure all data centres – and not some – bring their own power then the obligation should be based on a PPA or equivalent contract.

3.    PPAs or equivalent contracts that underpin new renewables and storage can be incorporated into the national energy obligation model recommended by the AEMC: The AEMC model would establish Australia as a global leader on data centre energy regulation. Data centres would be required to demonstrate to the Australian Energy Regulator they hold contracts for firm power supply before grid connection. It is a short step from there to also require a PPA (or equivalent such as an Electricity Services Entry Mechanism contract). Data centres here and internationally are one of the largest contractors of PPAs. New models are emerging to accommodate data centre operations (e.g. firm supply with scope for growth over time as operations scale). 

4.    Growth in new large-scale renewables needs to be accelerated to be sure of avoiding renewables shortages for data centres or data centres crowding out other users: If data centres are mandated to ‘bring their own power’ by contracting for new renewable energy and storage, there is a risk of shortages for data centres and/or crowding out other users - unless renewable energy supply is accelerated.

5.    Data centres should be leveraged to unlock renewable energy supply beyond their requirements – turning data centres from a ‘problem’ to a ‘solution’:  One option is to offer concessional finance for renewables and storage projects contracting with data centres – expediting projects and lowering costs – if they satisfy conditions that unlocks additional new renewable supply; either by signing a PPA that supports the development of industrial or digital precincts, anchoring a buyers group or signing a ‘partial PPA’ that releases surplus renewable energy into the market. 

The CEFC is already equipped to play this role but at a multi-gigawatt scale a Special Purpose Vehicle (comparable to the Tomago model) could contract firmed renewable energy through a portfolio of PPAs for multiple data centres and other large users.

6. A stable, effective policy framework needs both regulatory and financing models to work for data centres as well as the renewable energy sector.

Consequently, there are two major changes recommended:

1. Mandate a PPA (or equivalent contract) with a new renewables project as part of the national energy obligation 

2. Establish guidelines for provision of concessional finance for renewable energy projects for data centres where they are acting as an anchor offtaker enabling renewable energy supply for other users.