Power grid connections for data centers in Germany
Growing market and endless demand
The data center market in Germany has grown significantly in recent years. This growth has been driven by ongoing digital transformation, increasing demand for industry 4.0, IoT, cloud services, Big Data analytics, a focus on data security and compliance and AI applications.
Germany, with its hotspot in Frankfurt am Main, has become one of the most popular European hubs for data centers alongside London, Amsterdam and Paris. There’s almost unlimited demand for capacity from well-known hyperscaler customers like AWS, Microsoft Azure, IBM Cloud, GCP (Google) and Oracle. And new developments like AI and an increasing number of colocation customers and enterprises have made the data center market and capacity in Germany quite tight and competitive.
Established data center developers are launching one project after the other. This growing market comes with several challenges. One is procuring power capacity in a fast-changing political, social and technical environment. Data centers consume a massive amount of electricity. They need a consistent and uninterrupted power supply (a large data center requires a connected load of 90 MVA for an IT capacity of 52 MW, which allows for a maximum annual consumption of 788 GWh, the same as more than 200,000 homes).
Power consumption profiles in data centers can vary based on numerous factors, including the size of the data center, the efficiency of the infrastructure, the demand for data services and advancements in technology. But, irrespective of any consumption profile, procuring a proper grid connection is key for data center operations.
The site matters
The idea of developing a data center starts – like every other real estate development – with selecting the right site. A site usually qualifies for a data center by the available zoning allowing the development of a data center and by having sufficient power capacity via a capable grid connection.
Driven by urban zoning masterplans (like the Frankfurt Master Plan for Data Centers) the zoning is important. And areas where data centers are compliant with the zoning are becoming increasingly rare because of the need to have diesel generators as the power backup. This comes with emissions that put the operation of a data center in conflict with other usages, like residential.
Next to the zoning, finding a site capable of providing the required power capacity with a proper grid connection was and is increasingly important for a successful data center development. Very simply, procuring a grid connection generally involves establishing a usually redundant direct link between the data center and designated substations. The substations (Umspannwerke) usually need to be connected to the (available) power distribution grid (Verteilernetz). The power distribution grid is usually connected to the wider transmission grid (Übertragungsnetz) or is fed directly by (local) power suppliers. But this, of course, depends in the project, and other even more custom-made solutions are possible.
The data center's potential power needs determine the capacity requirements for an appropriate grid connection. This involves estimating current and future power requirements based on the anticipated growth of the data center. Any assessment is usually closely related to the agreement with the actual customer of the data center and any agreed ramp up of capacity.
There’s usually an evaluation of the existing grid infrastructure based on the requirements worked out in the demand assessment. This is crucial to determine its existing capacity and reliability and to identify any deficiencies. Once the evaluation and the assessment on the demand is done, this needs to be addressed accordingly to the grid operator following the formal requirements and the process applicable for any such request.
Grid operators owning the grid are usually monopolists in a certain area, as a parallel grid usually makes no sense from a commercial perspective. That’s why, in real life, no consumer can freely choose their network operator but needs to work with the one serving the area. To prevent grid operators from exploiting their monopoly, the legislator has provided legal restrictions. And these grid operators are not subject to the rules of the free market but are under special control and regulation.
The independent regulatory authority issues special regulations that are specifically tailored to this regulated area and describe the operational framework of the network operators. These rules also stipulate the fee to be paid for the provision and use of the network. Every grid operator – this applies to all voltage levels – must take care of the maintenance and dimensioning of the power grid according to demand. They also have to allow all power suppliers equal access to the grids.
Chicken and egg
Evaluating and assessing the demand and the existing situation usually results in the existing grid infrastructure having to be materially improved or new infrastructure having to be implemented. This is because the requirements and demand of a modern data center usually exceed the limits of existing centers. So the customer (likely the title holder in the site or more often the title holder in the site to be – we will deal with this later) will enter into a negotiation process with the grid operator to sort out the next steps.
Usually the grid operator and the customer will sign a grid construction agreement (Netzanschlusserrichtungsvertrag) to sort out the actual construction of the grid connection line(s) and the substations. As there might be more than one grid operator involved in the grid, the grid construction agreements are backed with another corresponding grid construction agreement between the various grid operators. Or the customer needs to enter into more than one grid construction agreement with several grid operators.
As the substations are usually built next to the data center, along with the grid construction agreement (Netzanschlusserrichtungsvertrag), the parties will also usually sign a lease or usage agreement regarding the substation.
Depending on the extent of the actions required for the construction or the improvement of the new grid infrastructure, third-party consents (eg freeholder whose lands are crossed) or permits from authorities will be required. Besides this kind of top-level agreement, the grid operators will usually need to sign (sub-)construction agreements with their respective contractors. And considering the potential consent and permit requirements, this process usually takes quite some time.
The main costs of construction caused by any grid improvement, or the construction of a whole new grid infrastructure are the material costs. So, in addition to the regular costs charged for the provision of the grid connection, the grid operators and the customers usually agree on building cost subsidies (Baukostenzuschüsse). Any building cost subsidies are typically agreed in the respective grid construction agreement. We’ve seen clients spending around 20% of the purchase price of the site on building required grid infrastructure.
How to handle a transaction
We often face a chicken and egg situation where procuring the grid connection depends on material investments for construction that the customer (mostly being the title holder of the site) is only willing to commit if the transaction on the site to acquire the title is successful. But the transaction itself might only be approved by the shareholders of the title holder to be if the grid connection is secured. What makes this even more complex is that both business decisions (procuring the grid connection and acquiring the title in the site) may be subject to the commitment of the designated customer of the data center and its technical requirements.
Solving this conflict means that any grid procurement needs to be achieved by the existing title holder before disposing of the title in the site. Or the legal agreements for the grid procurement and the transaction for the title in the site need to be linked and subjected to each other. This comes with a certain lack of transaction security as the transaction might depend on the grid provider being a third party as well as several legal challenges and questions, such as the classification of the transaction and the grid procurement as one joint business which requires joint notarization.