IT is boom time for data centres in Malaysia, with massive investments pouring into setting up these facilities here.

Estimates are that the number of data centres could rise tenfold, especially with foreign investors coming in.

But do data centres bring in sufficient economic value considering they have the potential to consume huge amounts of the country’s electricity supply?

This, in turn, could make it more difficult for the country to achieve its net zero targets. There is also the opportunity cost element - should that electricity be provided to other industries that may be creating more jobs for Malaysians?

These data centres are physical facilities that house critical applications and data, especially for tech giants which require more data storage resources that enable the deli-very of shared applications and data. They consume a lot of energy because they have to provide many services and support at once. The facilities also require a significant amount of cooling.

Some governments are realising that the economic value derived from data centres is not commensurate with the energy and other resource demands.

Singapore, for one, imposed a moratorium on data centres a few years ago. Today, the republic allows limited expansion of existing players but applicants have to undergo stringent testing. One of the assessments is the number of local jobs and salaries that will be paid by the data centre investor.

The Financial Times reported in February that governments around the world are intensifying scrutiny on the building of data centres over fears that the huge energy usage is putting excessive pressure on national climate targets and electricity grids.

The report cited countries such as Ireland, Germany, Singapore and China as well as a US county and Amsterdam in the Netherlands which have introduced restrictions on new data centres in recent years to comply with environmental requirements.

The top line investment figures of data centres sound appealing. It costs around US$10mil to build out one megawatt (MW) of a data centre. (Data centre investments are generally gauged by the megawatts of electricity they consume.)

With as much as 1,400MW reportedly planned to be built up in Malaysia over the next five to 10 years, the investment amount is staggering.

However, only around 30% of that value flows into the local economy because data centres are run largely on imported hardware and software and are highly automated.

Hence data centres do not have a direct substantial spillover into the local economy, aside from the one-off land and construction jobs.

Wooing them also deprives other foreign investments that could create more jobs on the same land.

On the flip side, the argument for attracting data centres into the country is that it could act as a catalyst for the growth of our local technology industry. The thinking is in line with the fact that artificial intelligence (AI) is a big growth segment and that this is linked to the usage of data centres.

For example, Microsoft Corp’s recent announcement that it would invest US$2.2bil over the next four years in cloud and AI infrastructure in Malaysia should entail the setting of data centres here. That is bound to have positive spillover effects into the local technology sector.

However, the actual spillover effect of data centres into local economies has yet to be verified. Perhaps more study should be undertaken on this before we invite more data centre investments.

What then of the huge electricity demand of data centres? Just using 1MW of electricity per hour translates into a yearly usage of 8.8 million kilowatt-hours of energy.

If Tenaga Nasional Bhd (TNB) is expected to supply this electricity to the data centres, and amplified by its own decarbonisation efforts, could this lead to higher tariffs for the rest of electricity users in the country?

Malaysia will not be expected to charge higher rates to woo data centres as that would make it less attractive to them.

As TNB pumps more electricity into these data centres, it will also burn more coal or gas to fire up its generation plants, nudging us further away from our net zero targets. It will not be enough to power data centres with solar power.

Lastly, the data centres being built here are banking on increasing demand for their services. What if no one comes? What if tech giants decide instead to team up with property developers and build their own data centres there?

The standalone data centres in Malaysia could then end up as white elephants.

This article first appeared in Star Biz7 weekly edition.

https://www.thestar.com.my/business/business-news/2024/05/06/data-centre-boom---at-watt-cost