The growth of AI, alongside the continued growth of cloud computing, are the main drivers for data centre demand in Europe, our survey of operators and contractors reveals.

And the industry is bullish for the future: on average, operators expect to commission 65% more data centre capacity in 2024 than last year, up from 16MW of capacity to 26.4MW in 2024 (see figure 1). Contractors expect to build 61% more capacity, up from an average of 14MW in 2023 to 22.5MW this year (see figure 2).

The challenge the industry faces is how to build that capacity profitably and sustainably. Energy is the best-known and most discussed limitation in the sector. “The main constraint to growth is the availability of power,” says Barry Dooley, Data Centre Delivery Director, at data centre operator Ada Infrastructure. “There are very few countries within the EU and the UK that have actively joined up the dots in terms of planning for the grid and the data centre industry.”

But energy is not the only constraint. Europe’s data centre construction supply chain, meaning the companies and logistical processes that supply the materials, components and plant required to build new facilities, has been rocked by the pandemic, geopolitical disruptions and armed conflict. This has exposed the vulnerability of supply that operators and contractors might once have taken for granted, increasing cost and lead-times for construction projects.

“The Ukraine war has had a ripple effect around the construction industry,” says Dave Williams, Senior Director, EMEA Commercial Management, at global digital infrastructure company Equinix. In some geographies, the conflict disrupted the supply of labour as well as construction materials, he adds. “[In Poland] we had a lot of Belarusian and Ukrainian workers on site. They quickly reduced in numbers over the first month of the conflict.”

These supply chain risks have not disappeared. In fact, most of our survey respondents expect the risk of disruption to be greater in 2024 than last year. This proportion is higher among contractors (65%) than operators (58%), perhaps because they have a closer view of the supply chain.

The most likely disruptions to the data centre construction supply chain in 2024 would also be the most disruptive, survey respondents expect, namely increased environmental regulation, geopolitical risk and physical climate risk (see figure 3).

Not only do these risks threaten the ability of operators and their contractors to capitalise on the commercial opportunity in front of them; they also jeopardise Europe’s digital transformation. Seven out of 10 respondents agree that shortages and disruptions in the data centre construction supply chain will limit the pace of digitalisation in Europe in the next five years.

Data centre inflation

One acute symptom of supply chain disruption has been an increase in the price of components. “We had a number of projects where we had agreed costs with general contractors, but the inflationary effects of the Ukraine war meant they were not able to hold their price,” recalls Dave.

Although the price of materials has fallen since their peak in 2022, it has not returned to where it was, says Barry. “Twelve to 18 months on since the start of the Ukraine war, things did seem to rebalance a little,” he explains. “Copper, steel and aluminium prices, which had increased substantially, levelled back down to where they are today.

“But I don’t think they are going down any further, with the demand that’s out there and the constraints on nearly all elements of the supply chain,” he adds. “We could actually see costs increasing over the next three years or so.”

Furthermore, a fall in the cost of raw materials has not translated into reduced prices for fabricated and installed components, as they depend on other inputs – including labour, shipping and power – that are still highly priced.

In early 2024, armed conflict broke out in the Red Sea, a critical link in global shipping routes, adding further upward pressure to prices.

“In 2023, we saw a stable environment for shipping freight prices,” says Dave. “But if you look at current freight shipping indexes, they have doubled this year due to geopolitical events in the Red Sea. They’re not yet at post-pandemic heights, but this will have an effect on all products imported to Europe from the Far East.”

Supply constraints such as these are exacerbated by increased demand, especially the new data centre requirements of AI (see box below).

“As AI data centres get built out, their power and cooling requirements will also grow, which will require more kit,” says Stephen Byrne, Director Business Development for Data Centres at Irish contractor Mercury Engineering. “We are already seeing price creep so operators will also have to be conscious and realistic about their approach to dealing with that.”

As a result, the largest share of survey respondents expects the price of most fabricated and installed data centre components to continue to rise in 2024. For example, 56% expect the price of piling to grow, including 15% who expect it to grow more than 5% (see figure 4).

The same is true for infrastructure components: medium voltage and low voltage switchgear are the only components for which fewer than half expect a price increase in 2024 (see figure 5).

These price increases are set to continue for the next few years at least, respondents expect. Three quarters believe prices will not return to pre-pandemic levels until at least 2026.

Price increases have been so rapid in recent years, says Barry, that customers' expectations have failed to keep pace. “Their baseline data is somewhat out of kilter as well, because what was relevant as a pricing model, even as recently as 2020, is now no longer relevant.”

For operators and contractors, the impact of supply chain disruptions on the time required to procure components has been just as damaging as increased prices. “Components such as generators used to be on a 12-month lead-in time,” explains Barry. “Now it is 27 months.”

This is now the primary constraint on how quickly new data centre capacity can be brought online, he adds. “The critical path of delivering [new capacity] for a client is no longer determined by how quickly we can build it. It is the lead-in time for equipment ordering.”

The heightened risk of supply chain disruption is not something the industry can sit and wait out, respondents acknowledge. Two thirds agree that the way in which data centres are designed and built must be rethought to accommodate supply chain constraints.

But this is not the only transformation underway in the sector, and operators and contractors must undergo this rethink while also meeting their new and growing sustainability obligations.