Data centre debate rages on

WILL the data centre (DC) boom in Malaysia translate into the promised economic contribution to the country? This is one of the most hotly debated topics in corporate Malaysia today.

The stakes are high considering the one controversial aspect of DCs – they suck up electricity and water. Hence to justify DC investments, the argument is that they lead to a boon of economic activity and create jobs.

Here is one simple way of looking at things. Malaysia has a peak demand of electricity of close to 20GW and a gross domestic product (GDP) of around US$400bil.

The government has approved new DC developments to the tune of 4GW or 10 times more than the existing DC capacity in the country. This would make Malaysia the biggest DC hub in Asean and among the top five globally.

The new DCs are hyperscale DCs, meaning they are designed to be more intense and powerful than what exists in Malaysia today.

The question is whether this new uptake of electricity will lead to a commensurate increase in GDP? Or should that energy be channelled into other industries where the economic spillovers such as jobs, are more clear, like semiconductor manufacturing?

The worry about DCs is that aside from the initial land sales and construction work and to some extent engineering supplies and work, most of the input is brought in from abroad, such as the hardware and software running the DCs and due to increased automation, the headcount of DCs are not that high.

Most of this foreign input is also likely to enjoy some level of tax incentives.

But the Malaysian government is convinced that DC investments will bring in the necessary spillover.

“The spillover effects from data centres can be significant and multifaceted. Although DCs are primarily focused on data storage and processing, it enhances broader socio-economic activities and development,” notes the Investment, Trade and Industry Ministry (Miti) secretary-general Datuk Hairil Yahri Yaacob in a reply to StarBiz 7.

Keegan Ong, tax partner at PwC Malaysia, notes that the connection between electricity usage of DCs and a nation’s GDP is intricate and multi-dimensional.

He believes the presence of DCs can boost sectors such as software development and telecommunications, and will drive innovation and improve overall productivity.

KPMG in Malaysia head of technology consulting Alvin Gan notes the economic benefits of Malaysia’s expanding DC industry is “undeniable”.

“The influx of capital investments not only bolsters local industries but also elevates Malaysia’s standing on the global stage, contributing to GDP growth through heightened productivity and the creation of more lucrative employment opportunities.”

However, Universiti Tenaga Nasional Institute of Informatics and Computing in Energy (IICE) director Saraswathy Shamini Gunasekaran points out that the economic benefits of DCs depend on the types of services offered and the efficiency of operations.

“Investing in semiconductor manufacturing or other high-value industries may provide a higher economic return per unit of electricity. A strategic approach that balances investment in DCs with other high-impact industries would likely yield the best economic outcomes for Malaysia,” she tells StarBiz 7.

Cold feet

While DCs are mushrooming globally, some countries are getting cold feet with DCs.

Singapore’s U-turn on DCs is well known, having imposed a moratorium in 2019, although that was after the island state taking in as much as 1.4GW of DC capacity, putting them on the DC global map. Then there is the case of Ireland. After feasting on DCs to reach a capacity of around 770MW, state-owned electric utility EirGrid put a moratorium on new DC construction.

In August 2023, South Dublin County Council rejected Google’s application for its third DC.

On the other hand, some governments are embracing DCs.

For example, the United Kingdom’s new Labour government included DCs as part of their manifesto, noting that it will “remove planning barriers to new DCs”.

And just last month, the United Kingdom classified DCs as critical national infrastructure, joining 13 other sectors, including water and energy.

Sustainable DCs

Coming back to the local scene, earlier this week, the Housing and Local Government Ministry introduced the “Data Center Planning Guidelines”. However, these may not be sufficient.

What the country needs is strict standards, particularly around power usage efficiency and water usage efficiency.

PwC’s Ong says DC investments in Malaysia should prioritise sourcing at least 50% of electricity from renewable energy and limit water usage with advanced cooling technologies.

Additionally, he suggests requiring local sourcing of materials, encouraging technology transfers with local universities, and mandating that a significant percentage of employees be Malaysian.

Similarly, KPMG’s Gan suggests that DCs should adhere to specific energy efficiency standards and undergo regular audits to ensure compliance.

In response, Miti’s Hairil says the government is working on a set of “comprehensive guidelines” to address the sustainability challenges posed by DCs, as well as other resource-intensive sectors, expected to be launched in the fourth quarter of 2024.

Hairil adds that the government is also promoting the use of reclaimed water and energy-efficient cooling technologies.

“We believe in a strategic mix of incentives, including tax breaks or expedited project approvals for those that integrate water conservation and recycling technologies.”

There is also a concern that with having to generate more electricity for DCs, Malaysia’s net zero targets could get impacted.

On this, Hairil says: “The government will not compromise on its net-zero obligations and green ambitions, and will strive to create a win-win situation for both investors and the community, promoting long-term sustainability while enhancing the overall attractiveness of DC investments.”

Electricity tariff hike?

DCs will undoubtedly increase energy demand, and this has led to concerns of rising electricity tariffs. This is based on the notion that, under Malaysia’s imbalance cost pass-through (ICPT) model, the substantial electricity consumption of these DCs could lead to higher overall demand, prompting increased generation costs that may be reflected in higher tariffs.

Explains IICE’s Saraswathy: “When demand surges, fossil fuel plants (such as natural gas or coal) may need to operate more frequently to supply additional power.

Given that fuel costs can fluctuate, especially with fossil fuels, this would directly affect the ICPT calculations, potentially leading to higher electricity tariffs for all.”

In response, Miti’s Hairil says: “Take note that Malaysia currently has a 30% excess generation capacity (roughly 10GW in excess) and the DC industry is currently consuming less than 400MW.”

Other concerns over DCs

Aside from energy, there are also concerns about water usage by DCs, which are known to use copious amounts of this resource.

National Water Services Commission chairman Charles Santiago voices his concerns: “While one can invest in as many water treatment plants to increase water supply, it is important to note that there is a finite amount of raw water available. Secondly, we have to ensure that DCs do not pollute our rivers with the chemicals used with the water in their cooling processes,” he enthuses.