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Most energy markets around the world, and in Europe particularly, have ageing transmission and distribution (T&D) infrastructure, rising generation costs, decarbonization targets and rising energy demand, all of which are contributing to a ‘perfect storm’ for energy policy and politics. The ability of governments to prevent power system failures is coming under close scrutiny, and several countries have forecasted a significant decrease in generation margin (the headroom between generation capacity and peak demand) over the coming years as they struggle to balance demand with environmental targets and integration of new supply sources.

An inevitable consequence for data center operators will be an increased degree of scrutiny and pressure, as governments explore all options open to them to avoid brownouts and blackouts. It hasn’t been easy for data center operators. Based on Eurostat’s 2012 findings, data center operators have absorbed a 40-60% increase in electricity costs over the past ten years, to the point where energy costs are now a primary component of their operational budgets. Mastering technology innovation and implementing new business models will be critical to future success.

DRP – a revenue source
This article considers how demand response programs (DRPs) have not only become a tool for grid operators to manage demand, but also a source of revenue for DRP participants. DRPs are in operation today in many commercial and industrial sectors but, ironically, data centers are largely non-participants, even though they are the fastest-growing part of the grid’s load.

Managing the ‘peak’
The concept of a DRP is to incentivize large consumers of power to moderate demand at times of constrained supply to ensure grid stability and security of supply.

By its nature, delivering power to homes and businesses is about optimally managing supply and demand. Utility providers’ greatest challenge is to build ample generation capacity to meet peak demand.

It’s a very inefficient use of resources; most grids operate in the top 10% of the peak curve for only 1-3% of the time, so they have a substantial amount of underutilized generation capacity sitting in reserve.

It’s easy to understand why any opportunity to help smooth out the peaks could be attractive to governments, grid operators and regulators, but can it also be attractive to consumers? The data center industry should now consider the opportunities this presents, not only in terms of revenue and stability but also in support of corporate social responsibility objectives.

Not only can DRPs obviate the need to build new generation or peak response infrastructure, they can also create attractive entry points for microgrid renewables and can potentially offer competitive advantage to countries vying for investment by having a secure and stable supply. However, despite some clear environmental, financial and political benefits, the adoption of DRP across Europe has been sluggish.

The political discussion emerging across Europe to use DRP to defer major infrastructure investments is gaining support, so what is holding it back? The 2011 Smart Energy Demand Coalition (SEDC) report suggests that the barrier to adoption is largely regulatory, but there is also some evidence that economics are not quite attractive enough to drive mainstream adoption. Both these issues can be resolved, and as generation margins get increasingly squeezed, it is more likely they will be. If data centers participate in DRPs, it is reasonable to expect to share in the economic benefit of not having to build and operate a new generation plant to satisfy peak demand.

Overcoming hurdles
The potential business impact for data centers will be largely the same as for any other energy-intensive business. Once the regulatory hurdles are overcome and the financial rewards for participation make sense, then operators can develop robust business plans for the necessary investment. Participation can be described in terms of demand reduction, in which data centers go offline from the grid and either suspend operations or are powered by on-site supplies, such as CHP, fuel cells or diesel generators. With supply augmentation in the future, industrial campuses might have myriad microgeneration capabilities and will be able to supply power to the smart grid based on price signals, while becoming more reliable from a supply perspective.

Factors to consider
In the SEDC report, it is worth noting that for most major European economies, there are no significant technical barriers to participation. So what are the different factors to consider?

1. Regulatory framework
Is your power market deregulated? Do you have an independent energy regulator? If not, it is most likely headed that way very soon. To be prepared, consider getting expert and independent advice on how local energy regulation can be used to your advantage. Is there an active DRP in your location (for example, the STOR programme in UK)? What environmental or other restrictions apply to running a generation plant in your location?

2. Maturity of the market
Are there already aggregators (companies that pool the generation capacities of a number of smaller generators)? If so, what are they offering? What other industries in your market are already participating in DRP, and how have they made it economically successful?

3. On-site infrastructure
Most data centers already have the required technical infrastructure to participate – perhaps just the addition of an interlocked two-way grid connection (G59 panel in UK) and an approved metering method would be required. Note that the higher your connection voltage, the more you can participate. Similarly, the more on-site generation capacity you can make available, the more you get paid. Finally, if you have the possibility to temporarily lower your consumption at the same time as backfeeding to the grid, you can significantly increase the financial benefits. Some advanced data center infrastructure management (DCIM) systems provide this functionality.

4. Risk management
Data centers are generally in the business of maximising uptime rather than that of selling power to the grid. However, if it can be done in a safe way, the financial benefits are increasingly hard to ignore. The key to minimizing risk while maximising return are accurate load forecasting, with tightly automated and safe operational procedures to manage dynamic workload migration. The IT industry continues to refine technical capabilities in relation to power-capping, load management and virtualization of workload that will help manage any perceived risk.

What’s next for DRP?
DRP is poised to become a strategic lever for balancing the grid. If grid operators can smooth the peaks, they can reduce the need for new generation capacity and perhaps focus their investments on making renewables work in a smart-grid context. That being the case, it is clear how the data center industry can participate and share in the benefit.

With data centers becoming a larger component of the load, it is vital that we find both technical and sufficient regulatory-approved incentives to facilitate participation. An alternative scenario could center on governments using regulatory instruments to mandate or force non-critical loads (in a national context) to go offline for periods of supply emergency. There is no evidence of this happening today, but the agency responsible for this in the UK – the Office of Gas and Electricity Markets (OFGEM) – has warned that margins between supply and demand are getting dangerously thin.

It has become clear that steps need to be taken to somehow manage the demand peaks that are stressing our grids. It is preferable to do this in a controlled and economically attractive fashion that has incentives, rather than through the application of a blunt regulatory instrument. A solution that provides revenue and savings for data centers helps ease the challenges regulators face in trying to meet the generation gap, and satisfies the public as a whole in the form of lower costs and more secure, sustainable supply within reach. Let’s continue the dialogue so that all the stakeholders can come to an agreement on how to make this work.