Data Centers Powered by Farm Waste Biogas?
At the ASME 2010 Conference, Hewlett-Packard Laboratories researchers submitted a very interesting proceedings paper titled, Design of Farm Waste-Driven Supply Side Infrastructure for Data Centers.” The authors observed that the density of IT equipment in data centers has increased dramatically over time as has their electrical demand. In addition, they presented the concept of a data center powered by renewable energy.
The paper considers a hypothetical greenfield IT data center with a demand of 1 MW receiving reliable energy fueled by biogas produced by anaerobic digestion of manure supplied by a co-located 10,000-cow dairy herd.
Primary efficiencies would be achieved by using excess heat from cogeneration and the data center to power absorption chilling, accelerate the digestion process, and serve other thermal energy needs of the two project participants. This symbiotic relationship would provide reliability of supply and demand while conferring environmental benefits.
The paper largely considered the hypothetical project from a technical perspective and reserved economic analysis for later. Of particular interest to this columnist is the challenge of structuring and performing to achieve legal efficiencies that enhance the project’s beneficial nature.
Projects of this type often involve the creation of an elaborate structure of entities in order to protect project sponsors from risks as well as to allocate the financial costs and benefits of the project. In the co-located situation with the integrated systems envisioned in the paper, cooperation and shared risks would appear to be a more desirable model.
Addressing problems on an integrated, enterprise-wide basis is more likely to lead to success than a power purchase agreement’s (PPA) defensive posture, which is implicit in its allocation of risks.
For that reason and in order to significantly reduce the potential contractual, regulatory, utility tariff, real estate, incentive qualification, and tax complexity inherent in co-locating a dairy farm and a greenfield data center that are separately owned, it may make sense for the company that proposes to construct the data center to create a special purpose company to purchase the dairy farm and construct and own the data center together with the production facilities.
A common ownership structure would also simplify the project’s eligibility for various government incentives. Renewable energy projects frequently rely on a combination of local, state, and federal incentives to make these projects attractive. However, each of these programs has specific requirements in terms of the ownership and structure of the project that must be met for the project to be eligible for these incentives. For example, a Federal Production Tax Credit, Investment Tax Credit, or Section 1603 grant in lieu of the credit is available for the production of electricity from biogas but not for the production of the biogas. Common ownership of the farm project, production facilities, and data center would also simplify the often complex structure associated with renewable energy projects, which in turn will help to ensure that the project is eligible for the desired mix of incentives and eliminate the need for a complex project structure to ensure that the desired incentives flow to the intended party.
A PPA is the primary agreement that would be avoided; although other agreements and instruments would also not be necessary. Financing a PPA requires the seller to establish to the financier that the purchaser is creditworthy. A combined entity might be expected to reduce the concerns that a financier might otherwise entertain when the seller and buyer are separate entities-although it is possible that credit enhancement might be required. The numerous issues that would have to be addressed in PPA provisions-including allocation of risk, whether PPA sales would be on a take or pay basis, availability, inflation adjustment, and quality of power-could be avoided. This would also eliminate the need for negotiating cost adjustment factors based upon the dairy farmer experiencing costs beyond its control or considering tipping fees.
The data center could also have the comfort of not having the dairy farm, as seller, solely handling engineering, constructing, and operating and maintaining the biogas system, cogeneration facility and related piping, wiring, and facilities, or handling contracts with consultants, engineers, equipment providers, contractors, operations and maintenance, and testing providers and operators. Since fiber is a valuable product of anaerobic digestions, these contracts would also contract with a company that could handle the production and sale of fiber.
Common ownership could also avoid certain costs and issues related to interconnection and the transmission of power by the utility, which separate ownership might require. For example, there would be no issues relating to the state’s regulations and the local distribution utility’s tariff regarding “over the fence” electricity sales. Since the data center will require an interconnection with the grid to provide backup, only a single interconnection and a reduced quality of switch gear would be required and related compliance and contractual burdens could be reduced. Given the nature and size of the data center load, a utility-line extension may be required. Although the combined enterprise may be required to purchase power from the utility under an expensive standby tariff in light of its large potential demand, which the utility would have to be able to service, combining these two enterprises may enable a reduction in standby costs as well. Common ownership would also enhance any opportunity for net metering, if available, which permits an owner with on-site renewable generation to sell power back to the utility (at the retail cost) by running its meter backwards.
While common ownership may provide the benefits noted above we have not addressed the possible burdens of such a relationship. The limits of this column permit only a general overview of possible structures for such a project and we are undertaking a more comprehensive evaluation.