Encoding technology refreshes are seldom CFO driven. For European data centers, over the next few years, they may need to be as reducing power consumption in data centers becomes a primary focus.
Few European consumers or businesses need to be reminded that they are in the midst of a power crisis. But a recent McKinsey & Company article entitled Four themes shaping the future of the stormy European power market provides interesting insights into the causes of the crisis and its expected duration. Engineering and technical leaders, don’t stop reading because this crisis will impact the architecture and technology decisions you may be making.
The bottom line, according to McKinsey? Buckle up, Europe, “With the frequency of high-intensity heat waves expected to increase, additional outages of nuclear facilities planned in 2023, and further expected reductions in Russian gas imports, we expect that wholesale power prices may not reduce substantially (defined as returning to three times higher than pre-crisis levels) until at least 2027.” If you haven’t been thinking about steps your organization should take to reduce power consumption and carbon emissions, now is the time.
HARD QUESTIONS ON HOT TOPICS – EUROPEAN ENERGY CRISIS AS PER MCKINSEY REPORT
WATCH THE FULL CONVERSATION ON YOUTUBE: https://youtu.be/yiYSoUB4yXc
The war in Ukraine is the most obvious contributor to the energy crisis, but McKinsey identifies multiple additional contributing factors. Significantly, even before the War, Europe was in the midst of “structural challenges” caused by its transition from carbon-emitting fossil fuels to cleaner and more sustainable sources like wind, solar, and hydroelectric.
Then, in 2022, the shock waves began. Prior to the invasion of Ukraine in February, Russia supplied 30 percent of Europe’s natural gas, which dropped by as much as 50% in 2022, and is expected to decline further. This was exacerbated by a drop of 19% in hydroelectric power caused by drought and a 14% drop in nuclear power caused by required maintenance that closed 32 of France’s 56 reactors. As a result, “wholesale prices of both electricity and natural gas nearly quadrupled from previous records in the third quarter of 2022 compared with 2021, creating concerns for skyrocketing energy costs for consumers and businesses.”
Figure 1. As most European consumers and businesses know, prices skyrocketed in 2022
and are expected to remain high through 2027 and beyond.
Four key themes
Looking ahead, McKinsey identifies four key themes it expects to shape the market’s evolution over the next five years.
Increase in Required Demand
McKinsey sees power usage increasing from 2,900 terawatt-hours (TWh) in 2021 to 3,700 TWh in 2030, driven by multiple factors. For example, the switch to electric cars and other modes of transportation will increase power consumption by 14% annually. In addition, the manufacturing sector, which needs power for electrolysis, will increase to 200 TWh by 2030.
The Rise of Intermittent Renewable Energy Sources
By 2030, wind and solar power will provide 60% of Europe’s energy, double the share in 2021. This will require significant new construction but could also face challenges like supply chain issues, material shortages, and a scarcity of suitable land and talent.
Balancing Intermittent Energy Sources
McKinsey sees the energy market diverging into two types of sources; intermittent sources like solar, wind, and hydroelectric, and dispatchable sources like coal, natural gas, and nuclear that can be turned on and off to meet peak requirements. Over the next several years, McKinsey predicts that “a gap will develop between peak loads and the dispatchable power capacity that can be switched on to meet it.”
To close the gap, Europe has been aggressively developing clean energy sources of dispatchable capacity, including utility-scale battery systems, biomass, and hydrogen. In particular, hydrogen is set to play a key role in Europe’s energy future, as a source of dispatchable power and as a means to store energy from renewable sources.
All these sources must be further implemented and massively scaled, with “build-outs remaining highly uncertain due to a reliance on supportive regulations, the availability of government incentives, and the need for raw materials that are in short supply, such as lithium ion.”
New and evolving markets and rules
Beyond temporary measures designed to reduce costs for energy consumers, European policymakers are considering several options to reform how the EU energy market operates. These include
- A central buyer model: A single EU or national regulatory agency would purchase electricity from dispatchable sources at fixed prices under long-term contracts and sell it to the market at average cost prices.
- Decoupled day-ahead markets: Separate zero marginal cost energy resources (wind, solar) and marginal cost resources (coal) into separate markets to prioritize dispatching of renewables.
- Capacity remuneration mechanism: Grid operator provides subsidies to producers based on forecast cost of keeping power capacity in the market to ensure a steady supply of dispatchable electricity and protect consumers.
McKinsey closes on a positive note, “Although the European power market is experiencing one of its most challenging periods, close collaboration among stakeholders (such as utilities, suppliers, and policy makers) can enable Europe’s green-energy transition to continue while ensuring a stable supply of power.”
The future of the European power market is complex and subject to many challenges, but policymakers and stakeholders are working to address them and find solutions to ensure a stable and affordable energy system for consumers and businesses.
In the meantime, the mandate for data centers isn’t new as video engineers are being asked to reduce power consumption to save OPEX, reduce carbon footprint to ensure ESG metrics are hit by the company, and minimize the potential disruption of energy instability.