Top 10 issues for Data Centres

Data Centres lie at the core of the digital infrastructure platform that enables the modern world to operate. They are the home of the Cloud and the powerhouse of the promise (and challenges) of AI. They are also at the centre of discussions around energy transition and the race to net zero. As the interest in and demand for data centres both as investments and as a service have risen over the past two decades so have the complexity of laws surrounding them. In this note we summarise the top 10 legal issues facing Data Centres.

1. The Impact of AI on Data Centres

The data centre sector is the fundamental foundation of the promise that AI brings. The explosion in AI will potentially drive market growth for the next decade. But AI brings a number of challenges. The biggest challenge is that the technology is still very new and raises a multitude of unanswered questions. What changes will AI require in design, location and connectivity within a data centre? How certain is the consequential demand for data centre capacity and will this be channeled to data centre facilities via hyperscalers and/or other customers of data centres? Depending on the answers to that, how will demand be met in a way that is consistent with operators' sustainable business models? The certainty of demand depends not only on the development of the technology and its use cases, but the dynamics of the development of new government regulations. Addressing the relevant questions and challenges proactively is essential for those who wish to thrive in this evolving landscape.

2. Regulatory compliance in the drive to Net Zero

As global efforts to achieve net-zero emissions intensify, data centres, notorious for their high energy consumption, find themselves in the spotlight of environmental, social, and governance (ESG) regulations. The EU's Corporate Sustainability Reporting Directive (CSRD) entered into force in January 2023, requiring a broader set of large companies, as well as listed SMEs, to report on sustainability. In addition to regulatory mandates, the data centre industry is adopting further self-regulation initiatives (partially in a bid to be more visible in their positive actions in the push to net zero). For example, the Climate Neutral Data Centre Pact, signed by leading data centre operators, promotes specific measures and targets to achieve climate neutrality in the sector by 2030. Adhering to these varying regulations not only complicates operations but also imposes significant financial burdens, including compliance costs and investments in renewable energy, with potential penalties for non-compliance. It remains to be seen whether differing ESG regulation between jurisdictions could be a driver of growth or stagnation in specific markets.

3. Balancing Net Zero with human need

As the data centre industry strives to meet the ever-increasing demands of end users for storage and processing power, it faces the formidable challenge of aligning this growth with the ambitious goal of achieving net-zero emissions. The industry is at a critical juncture where it must innovate to balance the escalating energy consumption required to power data centres with the urgent need to reduce carbon footprints. This involves a complex interplay of adopting renewable energy sources, improving energy efficiency throug advanced cooling and architectural designs, and investing in carbon offsetting initiatives. The path to net zero is not only a technical and operational endeavour but also a commitment to sustainable practices that will shape the future of data centres in the context of global climate goals.

4. Critical Infrastructure for powering data centres

As the world shifts from fossil fuels to renewable energy sources, the growing power demands of data centres are perceived as an obstacle to this transition. Some regions have even imposed temporary moratoriums on new data centres. The challenge of securing sufficient power from ageing grids for large-scale data centres is compounded by the additional demands of AI computing. Solutions such as on-site generation proximity to power sources, and advanced battery storage are under consideration. Collaborative efforts are essential, but the industry also has the opportunity to lead in this area.

5. Mitigating and managing disputes

Data centre outages often make headlines, yet the disputes that arise from them tend to stay out of the public eye as the industry strives to address issues discreetly and efficiently. The most significant risk within operational data centres arises during upgrades, where human error is frequently the root cause. To mitigate this, meticulous planning, vigilant supervision, and strict adherence to industry best practices are crucial. In the event of an incident, the challenge for owners and operators is to engage proactively with customers without compromising the terms of their insurance policies.

In the realm of data centre development, delays are a common hazard. While force majeure can provide some protection, it has its limits. Another concern is the potential misalignment between design and operation, which can result in the installed equipment failing to meet end-user needs. Given the rapid evolution of the industry, it is essential to have clear operational targets and robust procedures for documenting any changes in order to minimise risk.

Disputes are an unavoidable aspect of any business relationship, especially in an industry involving substantial financial stakes and complex contractual and engineering frameworks with numerous stakeholders. Resolving these disputes necessitates deliberate and strategic management.

6. Modular Design to meet evolving needs

Modular data centres, which are typically constructed on-site and offer a more permanent physical presence, are increasingly being recognised as viable alternatives to traditional data centre design and construction. Built from components manufactured off-site and delivered in self-contained, enclosed units, modular data centres are customisable, scalable and importantly flexible, giving data centre operators a way to manage growth of data centre needs whilst reducing construction and real estate costs. They can offer quick deployment and require less on-site construction time which is especially attractive in more remote locations. The modular approach sits somewhere between equipment supply and design and build construction. As such, the contracting approach needs to be bespoke to ensure it is clear where responsibility lies for the ends product once deployed.

7. Ensuring Cybersecurity resilience

Given the significance of services provided by data centres to consumers and businesses alike, proper cybersecurity resilience for data centres has become essential to the basic functioning of our economy and society. And in turn, this makes them an attractive target for threat actors looking to implement cyber-attacks.

For data centre operators, this places them under increasing pressure to implement and maintain robust cybersecurity measures. Considerations need to be made for compliance with applicable rules and regulations in relation to cybersecurity, increased vulnerability in increasing scale, and the use of cloud-based solutions. Cloud services in particular can involve multiple third-party providers, which can pose challenges for maintaining consistent cybersecurity frameworks and monitoring risk. In addition, cybersecurity risk can also arise in relation to the physical security of a data centre (for perimeter security) and also in relation to human error - making proper training for employees an essential component of cybersecurity risk management. Fortunately for data centre providers, the insurance market has starte to soften, providing opportunities to ensure its risk management provides the necessary protection to their businesses.

8. Supply chain challenges

Post-pandemic, the manufacturing sector's challenges have subsided, but the persistent high demand continues to strain supply chains. Data centre developers and operators risk failing to meet their delivery promises to clients. Whilst the significant capital outlay required has trended towards a preference for pre-leasing, this necessitates a commitment to meeting timelines. Similarly, clients are facing their own challenges. The AI-drive surge in demand for graphics processing units (GPUs) is a boon for GPU manufacturers' stock prices but also highlights production capacity as a potential bottleneck in the AI revolution.

9. Lack of skilled labour in industry

The booming demand for data storage and processing has led to a critical shortage of skilled professionals in the data centre industry. This gap is exacerbated by an impending wave of retirements, the 'silver tsunami', which threatens to leave a knowledge void and reduce mentoring opportunities for the next generation. The industry is working hard to engage with the next generation as well as targeting those with transferable skills (e.g. those who have worked in the nuclear powered side of the military). Collaborations with educational institutions and efforts to diversify the talent pool are vital to bridging this gap and ensuring the industry's future growth and efficiency.

10. The end of self-regulation

For many years, the data centre industry has operated with minimal regulatory oversight. However, in the wake of the pandemic and amidst a heightened focus on sustainability, the period of lenient self-regulation has come to an end. There is a marked uptick in both existing regulations and new proposals aimed directly at the sector. Digital infrastructure, with data centres at its core, is now regarded as an essential service, akin to a fourth utility. Consequently, we are seeing and can anticipate more stringent laws concerning security and resilience.

As major consumers of electricity and producers of substantial waste heat, data centres are likely to face both indirect and direct repercussions from environmental legislation. Additionally, the growing use of AI and concerns over its application are prompting further regulatory measures regarding its deployment. The increase in legislation and the need for compliance will inevitably lead to higher operational costs. Proactive engagement with policymakers is crucial to prevent the implementation of well-intentioned but poorly suited regulations that could fail to meet their objectives and adversely affect the competitive edge of a region.

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