Electricity Crisis: The French cloud is raising its prices to survive
It’s a cold shower for Jérémy Martin, head of Techcréa, a company with a micro data center in Marly in the north. While EDF pays around 90,000 euros per year for its electricity, EDF estimates its consumption for the coming year at 400,000 euros, more than the turnover of its data center. Techcréa had benefited for three years from a contract with an alternative supplier based on prices negotiated in 2019 that were much lower than today. But given the massive inflation in energy prices this year, his supplier told him he couldn’t renew his contract due to lack of profitability. However, the amount proposed by EDF and linked to market prices would force EDF to stop its company’s data center activity, which is very much appreciated by many economic players in the Valenciennes economic basin.
And it’s not just small data centers that are suffering from this increase. “The situation was harmless, it has become catastrophic,” summarizes Fabrice Coquio, general manager of Interxion France, a data center hosting giant that increased its prices by 14% in January. Almost all players active in France are affected by this massive electricity price increase and are obliged to pass it on in their offers.
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This is particularly true for OVHCloud, which warned its customers of a 10% price increase at the end of the year. Some sources close to the company believe further increases will be required in 2023. The same applies to Ionos (formerly 1&1), another important player in the hosting and cloud computing sector. “In the first half of 2022, we had an increase in electricity costs of almost 9 million euros in the group,” reports a company spokesman. “These additional costs are not yet included in the current prices, but we cannot rule out adjustments.”
At the same time, the American giants, which also have data centers in France, are much better at withstanding the shock. Google, for example, hasn’t changed its prices since the energy crisis. The same applies to Microsoft, a spokesman assures: “We currently have no intention of increasing the prices of Azure, Microsoft’s cloud service, in response to rising electricity costs..”
The price explosion on the European markets
It has to be said that not all companies in the industry are in the same boat. The largest, like Google, can benefit from long-term contracts negotiated with energy companies and their hosting service providers — Google doesn’t own the buildings — that allow them to buy upfront and take advantage of weaker and more stable prices. On the other hand, the smallest players have to foot the bill at the price of European wholesale markets, which has more than doubled in a year.
The only way to escape from these dizzying prices is to negotiate with your supplier for access to the Arenh tariff, a regulated tariff 10 times cheaper and linked to nuclear energy in France. Jérémy Martin, the head of Techcréa, committed himself to this, which resulted in an offer of 120,000 euros per year. Its data center activity will be saved, even if it will have to do with a price increase and a reduction in margins.
An Arenh tariff that also benefits OVHCloud, which EDF is very reluctant to offer its customers, especially if they are rather small. The limited amount of electricity that it can sell at the Arenh tariff is questionable. However, this contingent is increasingly being used up by the influx of many customers whose previous alternative suppliers have terminated their contracts.
Data center operators also have the opportunity to use PPAs, Power Purchase Agreements, making it possible to bypass electricity suppliers and negotiate contracts directly with producers. OVHCloud states that it uses this type of contract to try to reduce the impact of electricity price increases on its customers.
Another reason why multinational companies have less difficulty in maintaining their usual prices would be the presence of their centers in many countries on different continents. The relative stability of electricity costs in the US, according to an industry insider, would allow them to offset European increases and still offer an attractive price for their servers in the old continent. In addition, Google assures that its investment policy in renewable energies would have offered it more stability today if they had been more expensive in the past.
Difficult to invest to reduce your bill
If electricity prices continue to rise, players could save in innovation. And especially by moving towards processors that consume less energy or more efficient cooling systems. Some companies have already started this process, like Ionos. “We recently launched a new data center in the UK, explains a spokesperson, which will allow us to save much more energy than the 15% agreed by the European Union compared to the old data centres.”
But these high investments, which pay for themselves over several years, are no longer easy to trigger today. “All companies know that they have to invest, but they don’t have the capacity to do so,” counters Jérémy Martin. “We are in an environment of generalized inflation with more expensive and harder to source equipment given China’s semiconductor shortages. In addition, in view of rising interest rates and debt limits, companies can no longer borrow as much as they like.”
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For cloud players, these price hikes, which are expected to continue into 2023, may not be so catastrophic. “Capturing customers and then raising their prices was part of their business model,” explains Jérôme Nicolle, infrastructure expert, “because the cloud is not very reversible.” In other words, it’s difficult for customers to return to on-premises hosting after cloud delights, even if it gets more expensive.
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