Data centres: Energy considerations part II – colocation, from resilience to revenue

How Colocated BESS can transform data centre economics

Data centre operators are increasingly exploring the potential of colocating BESS — not just to bolster energy security, but to cut energy costs and unlock new revenue streams.

Utility-scale, standalone BESS have gained strong traction across Australia, providing substantial contributions to the National Electricity Market and supporting grid resilience. In comparison, colocated BESS as a solution to supporting on-site load requirements, including for data centres, remains nascent.

This article dives into three key considerations to allow data centres operators to unlock, and benefit from, the full potential of a colocated BESS, including their:

1. commercial role
2. ownership and/or control, and
3. structuring of offtake contracts.

Commercial role of the colocated BESS

Data centre operators must procure a secure supply of electricity and manage their exposure to volatile electricity prices. Colocated BESS with their fast response times and dispatchable storage capacity could play several potential roles.

Security of Supply

Secure supply of energy is essential to a data centre to meet its almost 100% uptime service levels. To achieve this, grid supply is typically firmed up by on-site diesel generators that are on standby in case of grid outages. However, BESS offer a cleaner, quieter and faster response option. Hybrid approaches involving a colocated BESS can be largely grouped into the below two models:

In deciding which model to operate, there are two important considerations.

Opportunity cost

While the BESS is on standby for outages, its reserved capacity cannot be dispatched. This unused capacity results in opportunity cost from foregone revenue that could have offset data centre energy expenses.

Consequently, it may be optimal to reserve enough capacity only for certain pre-determined events, and operate the BESS in a manner that maximises its effect on lowering energy costs.

BESS size

Is the BESS power capacity sized to provide full coverage for network outages/constraints?

If so, how long could the BESS replace grid supply for?

Ultimately, it is not feasible to provide full coverage on a real time basis for an extended network outage/constraint that span days rather than hours. To account for these scenarios, an extra layer of redundancy (for example, diesel generators) will need to exist.  

Offset energy costs

Through strategic charge and discharge of a colocated BESS, the data centre can reduce net energy costs and enhance its overall returns. Two ways to approach this is from the perspective of the BESS as a means to manage the data centre’s spot price volatility risk profile, or as another revenue stack component. This could be achieved through two models. 

Integration into book of power contracts

The BESS can be perceived as part of a data centre’s book of power contracts and dispatched to minimise exposure to high power prices – acting as an alternative to entering into hedging arrangements.

By minimising exposure to electricity prices and volatility risk, and thereby facilitating more predictable electricity expenditure, the data centre can position itself to reduce its energy costs over time.

Opportunistic energy arbitrage

The BESS can take advantage of intraday price fluctuations in the electricity market by charging during low prices and discharging during high prices.

If the BESS is operated independently of the data centre’s book, it creates a parallel revenue stream that helps offset energy costs without disrupting existing procurement strategies. Essentially, this allows data centres to turn price volatility into a financial advantage rather than a risk.

Ownership and control of the colocated BESS

After determining the commercial role of the BESS, the question that follows is – who is best placed to own and/or operate the BESS? For example, should the data centre operator own and control it to give itself undisputed priority, or does it make more sense to procure BESS services from a third party (for example, a BESS developer). There are several key considerations to take into account when drawing a conclusion.

Security of supply and BESS control

The importance of the BESS to the data centre’s energy security can vary - from serving as the first level of redundancy for all outages to opportunistic energy arbitrage. How critical the BESS is to data centre operations (for example, whether it’s effectively treated as ‘life support’) is a key consideration.

Availability and cost of capital

If the data centre operator has access to low-cost capital - either through shareholders or investors with deep reserves - it may choose to finance the BESS directly. This can be more cost-effective over the long term, as it avoids paying a tariff that incorporates a developer’s financing margin.

However, if the data centre operator is capital constrained or wishes to deploy its available capital to grow its core business, partnering with a third-party BESS developer may be necessary, despite the higher overall cost of outsourcing.

Balance sheet impact

Topical in discussions around BESS contracting models is the effect that the offtake contract may have on the offtaker’s balance sheet. If a data centre operator enters into an offtake contract with a third-party BESS developer, and it is deemed to have ‘control’ over the asset from a lease accounting perspective, it may trigger on-balance sheet recognition as a lease.

BESS expertise

If the BESS is to be operated to maximise revenue generation, the data centre operator may not be the right party to accomplish this if it has not previously participated in the electricity spot market and is not prepared to be exposed to the downside risk.

Instead, if the third-party BESS developer has a team with prior trading experience in the electricity markets and superior software capabilities (for example, trading algorithms and protocols), it would be better placed to extract maximum value from the BESS and manage downside risk.

It becomes even more complicated in a ‘campus style’ data centre, where hyperscale customers lease entire data pods/halls within a single secured site. For such developments where customers are seeking greater control over energy usage and sustainability profiles, the question arises as to whether the data centre developer or the customers should own or dispatch the BESS.

Structuring BESS offtake contracts

Ultimately, there is no ‘correct’ answer on who should own and/or control the BESS, but the guiding principles should focus on the commercial role of the battery (such as security of supply and offsetting energy costs) and who is best placed to benefit from, and manage the BESS. The desired outcome will affect the structuring of the BESS offtake contracts.

Commercial structure

To assist with conceptualising the different options available for structuring colocated BESS contracts, we set out three potential structures:

1. Structure 1 (BOO): Data centre operator builds, owns and operates the BESS
2. Structure 2 (Only operation): Tolling arrangement where the BESS is built by a third-party developer and the ‘keys’ handed over to the data centre operator, or  
3. Structure Example 3 (EaaS): Energy-as-a-service with control retained by a third-party developer and a co-optimisation protocol that prioritises data centre needs but in all other instances maximises revenue.

Legal structure

Following from the decision on the commercial structure, it will need to be facilitated by the legal structure. Common legal conceptualisations of BESS offtake contracts include:

• ‘physical’ tolling arrangements: where the ‘keys’/physical control of the BESS is handed over to the offtaker
• ‘virtual’ tolling arrangements: a financial instrument that provides the offtaker with synthetic exposure to the economic performance of the BESS, with settlement based on nominal energy or capacity quantities, and
• revenue sharing arrangements: where the BESS revenue is allocated between the owner and offtaker based on a predefined percentage or performance metric.

Different conceptualisations are appropriate for different commercial structures, and while it is important to pick an appropriate combination, this is only the start of the journey. After deciding on the path to take, these models will require further detail and fine tuning to meet the desired risk profile and commercial objectives. In situations where a third-party BESS is on the data centre land, these further details may involve issues regarding tenure rights, access, responsibility for permitting, use of common connection infrastructure and utilities, end of life repurposing / dismantling and step in rights to name a few.

Colocated BESS solutions offer data centre operators the opportunity to enhance service reliability, reduce energy costs, and unlock new revenue streams. However, realising these benefits will depend largely on how ownership, control, and offtake arrangements are structured. Establishing these foundations in a manner that reflects commercial intentions is critical to transforming a technical solution into a lasting commercial advantage.

Data centres - APAC regulatory guide (coming soon)

Keep an eye out for our inaugural Data Centre Guide. It explores key considerations across 13 countries, including power & water sourcing, land acquisition & use, telecommunications, tax & incentives, data protection & location, critical infrastructure, foreign investment & ESG.