Data Centers lease for Sq ft, kWh, ISP connections, Not Energy Brokers

In the old days, data centers were all about space, # of sq ft.  The power was actually hard to figure out.  The data center salesman would almost always talk in sq ft. 1,000 sq ft. 10,000 sq ft.  How much power?  Ohhh,  10,000 sq ft x 50 watts/sq ft = 500kW.  I would joke that part of why sq ft is used so much in commercial real estate is it is nice easy math.  How much does it cost to build per sq ft.  What is operating expense per sq ft.  What is rent per sq ft.  This set up a bad practice of thinking people would save money by using less space in a data center.  I am charged by space so if I go higher density, then I’ll save money.  Uh NO.  The expensive stuff in a data center is the electrical and mechanical systems.  You talk to any experienced data center operator/designer who has control over his destiny with budget for CAPeX and OPeX, he’ll choose 100 - 150 watts/sq ft.  Any higher density increases the chances of stranded power, cooling issues and a variety of things that could increase costs.  If you don’t know what stranded power is go have a talk with your electrical team and ask them how big an issue stranded power is.  

Those who lease data center space know the stranded power problem which is why they charge for the Power committed to your environment in addition to the power you consume.  If you strand 1/2 your power because you made bone headed decisions in how you designed your data center space, you’ll pay for that power as the data center operator cannot simply use that power some place else.

I read NYTimes’ James Glanz’s post on Landlords Double as Energy Brokers a few times and I am confused.  James makes the point that data centers moved from charging for space to an energy broker.

A result, an examination shows, is that the industry has evolved from a purveyor of space to an energy broker — making tremendous profits by reselling access to electrical power, and in some cases raising questions of whether the industry has become a kind of wildcat power utility.

When I hear the word Energy Broker it makes me think this is like an Enron type of deal

Soaring power prices have pushed the state’s utilities to the brink of bankruptcy and forced Third World-style blackouts across the world’s sixth-largest economy. Enron and other electricity marketers and generators are being investigated by the state attorney general and sued by consumers amid accusations of profiteering and market manipulation. ”Every trading company in the country has been feasting on California, and Enron is the shrewdest of them all. They are like sharks in a feeding frenzy,” says Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego. Enron, an early critic of California’s deregulation plan, hotly denies those charges.

The reason why data centers charge more for power than what they pay is because of the cost of electrical systems and mechanical systems required to deliver the power.

Some data center companies, including Digital Realty Trust and DuPont Fabros Technology, charge tenants for the actual amount of electricity consumed and then add a fee calculated on capacity or square footage. Those deals, often for larger tenants, usually wind up with lower effective prices per square foot.

Regardless of the pricing model, Chris Crosby, chief executive of the Dallas-based Compass Datacenters, said that since data centers also provided protection from surges and power failures with backup generators, they could not be viewed as utilities. That backup equipment “is why people pay for our business,” Mr. Crosby said.


Melissa Neumann, a spokeswoman for Equinix, said that in the company’s leases, “power, cooling and space are very interrelated.” She added, “It’s simply not accurate to look at power in isolation.”

OK, data centers aren’t energy brokers.  They do a bad thing operating as a REIT to save on taxes.

Some of the biggest data center companies have won or are seeking Internal Revenue Service approval to organize themselves as real estate investment trusts, allowing them to eliminate most corporate taxes. At the same time, the companies have not drawn the scrutiny of utility regulators, who normally set prices for delivery of the power to residences and businesses.

Equinix is seeking a so-called private letter ruling from the I.R.S. to restructure itself, a move that has drawn criticism from tax watchdogs.

“This is an incredible example of how tax avoidance has become a major business strategy,” said Ryan Alexander, president of Taxpayers for Common Sense, a nonpartisan budget watchdog. The I.R.S., she said, “is letting people broaden these definitions in a way that they kind of create the image of a loophole.”

So, data centers shouldn’t be able to operate as a REIT because they’ll save on taxes?

I am confused on what points James was trying to make.