The Ripple Effect of Regulations: How Policy Is Reshaping the Data Center Landscape

Data centers play a significant role in energy consumption, water use and carbon emissions, contributing to the sustainability problem caused by the exponential growth of data. As the demand for accelerated digital transformation increases, the environmental impact of data collection, storage, cloud compute, and artificial intelligence (AI) deployment becomes a concern.

However, with different rules in various jurisdictions, what does this mean for the future of the industry? In a recent discussion, data center expert John Booth, managing director of consultancy Carbon3IT, provided insights on emerging regulations and how they may reshape where workloads are located.

Europe Leads the Way

Europe has long been at the forefront of efforts to reduce energy use and emissions. To accomplish this, the European Union (E.U.) passed an updated Energy Efficiency Directive (EED) in the summer of 2023. Under the recast directive, data centers in the E.U. with installed IT power of more than 100 kilowatts will need to publicly report energy performance.

Booth notes the E.U. had implemented a voluntary Code of Conduct for data center efficiency for more than 14 years, but uptake remained low. Only around 550 facilities representing an estimated 140 organizations have participated to date. “Part of the problem was lack of oversight and no real enforcement,” said Booth.

Seeing this as a market failure, the E.U. passed the EED to mandate reporting of energy consumption from large data centers. Facilities must provide metrics like total energy use, renewable energy percentage, water consumption and waste heat reuse to a central registry.

“Part of the overall registration piece will not just be the metrics that are required, but also some information on how you’re actually doing your energy efficiency and energy optimization projects,” says Booth. This will give regulators visibility into current performance and opportunities for improvement.

Once baseline data is collected, Booth expects the E.U. will then incentivize further reductions through subsidies or penalties. Data centers with a Power Usage Effectiveness (PUE) over 1.5, for example, may face fines until that metric is lowered. Others may receive funds to install more efficient equipment.

Regulations Spread Across Borders

Booth believes regulations will inevitably become global as concerns over AI’s energy demands grow. The U.S. has taken initial steps.

Several U.S. states are also implementing stricter regulations. In Virginia, pending laws focus on carbon reduction and sustainability through more stringent requirements. Similarly, Oregon has proposed reducing carbon emissions 60% by 2027 for data centers and cryptocurrency mining, imposing fines for noncompliance. 

The White House Office of Science and Technology Policy published a report in 2022 on the energy impacts of cryptocurrency that found consumption comparable to conventional data centers. This raises the question of also regulating traditional colocation facilities. In response, Senator Sheldon Whitehouse has proposed draft legislation addressing both crypto and conventional data centers modeled after the EU directive. 

In 2016 Lawrence Berkeley National Lab was tasked by the U.S. Senate to study American data center energy use through consultations with stakeholders.

Rather than reinventing the wheel, during the consults Booth advised Berkeley to adopt the metrics already established in the original EU Directive. With the bulk of data centers located in Europe and North America, aligned regulations between the two regions could help establish consistent sustainability standards worldwide. This would prevent a regulatory race to the bottom as workloads shift between unregulated jurisdictions.

China is also tightening regulations, with strict design PUE limits that must be met to obtain operating permits. As the two largest markets, the E.U. and China are demonstrating regulations can drive sustainability where voluntary programs have fallen short.

Impact on Data Center Siting

Differing state and local rules in the U.S. have allowed data centers more flexibility to locate in areas with tax incentives and lax oversight, at least for now. But long term, regulations may reshape site decisions.

Booth notes facilities have gravitated to places like Arizona for short-term benefits like subsidies. However, “I can’t personally believe why you’d want to put a data center in Arizona, to be honest, I just can’t see why you’d think that way.” The hot, dry climate is poorly suited from an efficiency and water usage perspective.

As regulations tighten, locations like Spain also face challenges as water-stressed countries. Booth expects the E.U. will formally designate approved “data center zones” with guaranteed access to renewable energy and without causing water or grid stress.

Rather than viewing regulations solely as constraints, forward-thinking companies see them as drivers of innovation. The groups that proactively reduce emissions and invest in more suitable geographic locations will gain a first-mover advantage over late adopters. 

As Booth notes, “If I was a betting man, I’ll be buying land in Canada. I’ll be buying land in Iceland. And the Nordics” for the long-term sustainability and data center location opportunity regulations will foster in those regions. Early implementation of best practices could also influence policymakers as rules continue taking shape globally. 

Sustainability will increasingly factor into both public policy and client/investor decisions, shifting the data center landscape in unprecedented ways.

Standards will drive the industry

While federal laws may be years away, proactive preparation is key. Data center experts recommend creating a reporting compliance strategy, collecting necessary operational data and increasing workload efficiency. Additionally, engaging with industry groups and developing standardized metrics will smooth future regulatory transitions. 

Growing regulatory focus on data center energy use and emissions signals the need for enterprise leaders to carefully track policy developments. Strategically optimizing infrastructure and partnering with experts ensures ongoing compliance and competitive advantage amid this transition. As the digital economy expands reliance on data centers, balancing efficiency, transparency and business objectives becomes ever more important.