Blog The Twin Transition: Refineries for the Twin Transition - If data is the new oil, then what are data centers and how do we regulate their energy efficiency?

Nine years ago, The Economist coined data as the most valuable resource. Even without more recent economic assessments, it hardly seems a stretch that data has only become more valuable. From the perspective of the twin transition, both data and oil present interesting and thought-provoking challenges. As regards the green transition, it is obvious that oil must be phased out. Yet, it is also clear that this fossil fuel will not completely disappear from the energy mix. Large scale commercial air travel, for example, is currently technically impossible with fully renewable energy sources. Other fossil fuels will have a role to play in the future energy system to ensure generation adequacy. As a result, oil refineries will probably be around for some time. This is only the green component of the twin transition. What about the digital component?

By Hans Vedder, Professor of Economic Law, University of Groningen

As we’re switching to an increasingly data-based economy (and society), we encounter an ever growing need to store and – more importantly – process that data. Demand for data storage and processing capacity (‘compute’) has grown considerably and is projected to grow even faster. One of the effects of this is that the energy consumption by data centers is projected to double to a staggering 945 TWh in 2030 (IEA). This makes regulating the energy efficiency of these data refineries of paramount importance.

A primer on data center energy efficiency

Data centers require energy for essentially two reasons. The first is for the actual IT process. All those hard drives and processors need electricity to do their thing. The second is related to cooling. As all of that IT hardware does its thing, it generates heat and most of that heat needs to be removed. As a rule of thumb, reliability of compute decreases with 2% for every degree of temperature increase (H. Wang, 2024, p. 2) which also explains why much of this hardware will automatically throttle above a certain temperature. Keeping all of that IT equipment cool involves a significant amount of energy as large amounts of air are forced through those server racks. Given that cooling is not the primary purpose of a data center, the energy used for cooling, as opposed to number crunching and storage, is considered an inefficiency. A common metric in this regard is the power usage effectiveness (PUE), which divides the total power used by the amount of power used for the IT processes. A PUE of 1.41, the weighted average for data centers at the moment according to the IEA, means that for every kWh used for IT purposes, 0.41 kWh goes to cooling. This means that every data center operator has a really good reason to want to bring that PUE as close to 1 as possible: energy is costly and a higher PUE means a higher energy bill and thus more expensive storage or compute.

Data centers in the twin transition

Beyond cutting compute costs, the simple constraints of the current electricity system also make energy efficiency a prime factor in both the competition and the regulation of data centers. Data centers can play a positive role in the twin transition as they, for example, enable video conferencing instead of physical travel. Moreover, AI is already used for energy system optimization and may, on a more futuristic note, help discover materials and methods for better and cheaper energy generation and storage. With data centers projected to grow in an increasingly stressed electricity system, regulating data center energy efficiency becomes more important.

The regulation of data center and oil refinery energy efficiency

Oil refineries are pretty well regulated under, inter alia, the Industrial Emissions Directive (IED). The IED regulates a wide variety of industrial activities that lead to various emissions and prescribes an integrated permitting regime for these activities. In a nutshell, emissions are to be regulated in accordance with the so-called best available techniques (BAT). These BAT are prescribed in BAT reference documents (BREFs) that essentially lay down the environmental state of the art for a certain industrial activity. The refining of mineral oils is currently subject to the 2015 BREF. This is a 754-page document that, quite literally, describes the environmental technology available for every nook and cranny of a refinery. It addresses the energy efficiency of refinery activities at various stages, both in the abstract in prescribing an energy management plan, and in detail when providing methods to enhance the energy efficiency of, for example, coking installations.

Data centers, on the other hand, are barely regulated. Essentially, only their fossil fuel-based backup power generators may qualify under the IED or other forms of environmental regulation. They are treated as activities that consume energy rather than as sources of emissions. Whilst this makes good sense from a regulatory perspective, it ignores that the massive energy consumption of data centers makes them an important indirect source of emissions. Data centers, with their largely constant base-load consumption pattern, are responsible for more than 20% of all energy consumption in Ireland, for example. This means that, beyond an indirect effect on emissions, data center electricity consumption will also affect electricity prices. This, in turn, impacts the societal acceptance of data centers as is evidenced by widespread resistance against the construction of new data centers.

So, if increased energy efficiency is the way out of this conundrum, how is this regulated? Article 12 of the Energy Efficiency Directive essentially provides for a limited reporting obligation. It is limited in that it only applies to large-scale (>500kW installed IT capacity) data centers and only covers the information set out in Annex VII. This covers, among others ‘energy consumption, power utilization, temperature set points, waste heat utilization, water usage and use of renewable energy’. The big proviso here is the carve-out for ‘trade and business secrets and confidentiality’ in Article 12(1) EED. Given that pretty much all data center operators consider their energy consumption to be a key competition parameter, much if not all of this information is not published. As a result, the utility of what is only a reporting obligation is even further reduced in practice. Further fluffiness is added by Article 12(4) EED that requires Member States to ‘encourage’ data center operators to ‘take into account’ the best practices from the European Code of Conduct on Data Centre Energy Efficiency. These best practices are somewhat like the BREFs, but far less binding.

The bottom line is that data center energy efficiency is currently barely regulated at the EU level. Germany has taken the minimum harmonization of the EED to heart and laid down more specific and ambitious rules in its national energy efficiency act. In a nutshell, new installations must have a PUE not exceeding 1.2 and meet increasingly stringent waste heat reuse percentages (paragraph 11).

Needless to say, this absence of clear and binding rules regarding data center energy efficiency at the EU level is undesirable and raises many questions that I hope to address in following blog posts.