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How Data Centers Have Weathered the Storm

Feb 22, 2021 by Matthew DiLallo
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Data centers play a crucial role in storage and transmission of data, making them vital to our increasingly digital economy. In addition to giving customers a place to store their data, data center companies provide three essential services: high security, regulated temperatures, and reliable power. For the most part, the data center sector passed one of its biggest stress tests last week when a deep freeze knocked out most of Texas' electrical grid, as data center companies stayed online. Here's how data centers weathered this storm.

Delivering during a dark stretch

Winter Storm Uri wreaked havoc on the Southeast last week. It crippled Texas' power grid as a combination of limited natural gas supply, low gas pressure in pipelines, frozen wind turbines, and frozen instruments caused 185 power-generating sources to go offline. As a result, millions of homes and businesses lost power, and sadly, several people lost their lives due to the freezing conditions. The storm also caused significant economic damage, as companies had to close their doors and manufacturers shut down production.

However, data continued to flow, as most of Texas' nearly 200 data centers remained online, including those operated by leading data center real estate investment trusts (REITs) Digital Realty Trust (NYSE: DLR), Equinix (NASDAQ: EQIX), and QTS Realty Trust (NYSE: QTS), which all reported their data centers continued to provide uninterrupted service during the storm. One crucial factor was that many data center operators quickly transferred to onsite generator power, allowing them to maintain 100% uptime. Further, by running generators, these companies reduced the overall power load on Texas' grid system.

Some data centers were even able to provide outside assistance. For example, Digital Realty secured more than enough diesel to run its generators, enabling it to provide excess fuel to others in need. The company also offered its facilities as a place for those without power and heat to use if cities needed overflow capacity.

Getting out ahead of the next storm

Data centers are significant energy consumers, making their ability to remain online during the recent power crisis in Texas a noteworthy achievement. According to a study in Science, data centers consume about 1% of the world's energy. While they're becoming more efficient, demand for power from data centers will continue to increase as data usage keeps growing.

Because of that, data centers will need to put an even greater emphasis on their ability to withstand the next storm. While they weathered the recent one with relative ease, as only a few had issues transferring their power source from the grid to backup generation, the storm exposed some potential problems in the sector.

For starters, most data centers rely on diesel generators to provide backup power during a grid failure. While they could secure diesel this time, they might not be able to during the next storm, considering this past one temporarily impacted more than 20 refineries in the Texas, Louisiana, and Oklahoma region, affecting a large portion of the country's diesel-producing capacity. At least four of those refineries will be down for weeks, which suggests there could be prolonged fuel shortages.

Another issue with using diesel as a backup fuel source is that it has a high carbon emissions profile, which goes against most data center operators' green strategies. Digital Realty, Equinix, and QTS Realty all currently utilize power purchase agreements to buy renewable energy from third-party producers as part of their green data center strategies. For example, QTS signed a 10-year contract in 2019 to purchase wind power to support its data centers in Irving and Fort Worth, Texas. However, with wind turbines across the state freezing during the recent cold snap, data centers will need to consider other power alternatives.

One option is to co-locate distributed generation systems (i.e., behind-the-meter options like rooftop solar) paired with enough battery storage capacity to weather a prolonged blackout affecting their facilities. That's becoming an increasingly viable option, thanks to the dramatic drop in costs for both solar panels and battery storage.

For example, the levelized cost of solar has plummeted from $140 to $150 per megawatt-hour (MWh) in 2010 to $30 to $40 per MWh last year and is on track to decline to $25 to $35 per MWh by next year. Similarly, the cost of a four-hour battery storage adder system has plunged, going from $71 to $81 per MWh to $6 to $12 per MWh during that timeframe and could reach $3 to $7 per MWh by 2024.

Alternatively, given the dramatic decline in energy storage costs, they could replace diesel generators with utility-scale battery systems like Tesla's (NASDAQ: TSLA) megapacks for energy storage they could utilize during an emergency.

Data centers aced this test, but more will come

Most data centers remained online despite the recent power outages in Texas, thanks mainly to backup diesel generators. However, they might not be as lucky next time if another storm impacts their ability to procure the diesel needed to run their generators. Because of that and the industry's green push, data centers and their investors need to consider cleaner alternatives like distributed generation or backup battery systems so that they can weather future storms without running up their carbon emissions profiles.

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Matthew DiLallo owns shares of Digital Realty Trust, Equinix, QTS Realty Trust, and Tesla. The Motley Fool owns shares of and recommends Digital Realty Trust, Equinix, and Tesla. The Motley Fool owns shares of QTS Realty Trust. The Motley Fool has a disclosure policy.