Energy Sourcing for Data Centers

How Transparent Energy’s Managed-Service Approach Maximizes the Value of Your Load and Drives Profitability

By Keith Jennings, Director, Pricing Desk, Transparent Energy

What Data Centers Need to Know About Sourcing Energy

The biggest story in energy this year, and possibly for years to come, stars AI. The short version goes something like this: The AI revolution is going to require massive processing horsepower, and that means more data centers (and more demand on existing ones). In turn, data centers require a lot of energy. So much so that electricity demand forecasts for the next 5-10 years have spiked precipitously.

What hasn’t been addressed yet is what owners of demand centers really need to know about energy and how to procure it effectively to enhance their bottom lines. Sometimes large electricity users mistakenly assume that their massive energy loads will be coveted by the energy-supplier community, automatically resulting in great rates. Demand centers add an additional sweetener to this expectation in that their loads along with being enormous are relatively predictable and 24x7x365, i.e., highly desirable.

But a recent energy procurement orchestrated by Transparent Energy on behalf of a large data center owner highlighted the upside of data centers taking a more strategic and nuanced approach to sourcing energy. This approach not only maximized competition for the data center’s contract, but also illuminated the importance of product choice, standardizing legal language, building in demand flexibility, energy-source transparency (where suppliers get their energy), and using an online, automated platform to orchestrate the entire process and maximize visibility throughout.

This is that story.

Beyond Fixed-Price Auctions

Those familiar with Transparent Energy know it best for its auction approach: Transparent Energy markets its client’s RFP to its unrivaled, extensive supplier network, attracting the largest, and best qualified, group of providers to bid on the opportunity. Next, the company holds a series of online auctions where suppliers bid down their price against each other in real-time to win the customer’s business.

For data centers and other very large energy users, these broad competitive dynamics are still in play, but there are many other variables, and to be frank, flat out differences, to accommodate. First and foremost, data centers likely shouldn’t be pursuing a fixed-price product. Their loads are so large, that the best strategy is more likely one that fixes a portion of the supply components and strategically manages the open commodity positions with hedges, a dynamic, proactive approach that requires more than a “one and done” transaction.

And hedging requires expertise, including deep familiarity with real-time and day-ahead energy markets and an array of hedging products and possibilities. It requires a managed approach.

Adding further complexity, the data center client at the center of this story is also in the process of ramping up its business – perhaps by as much as 4x over the next year. Put another way, it had an immediate need for 50 million kWh annually, but wanted a contract that would accommodate future growth, up to 250 million kWh annually.

These were just some of the factors in play for this procurement. Transparent Energy also knew the client would benefit greatly from supplier contract language that would account for any variance in the data center’s actual energy usage (predicting growth precisely is extremely difficult) in a way that protected the customer from tripping supplier penalty clauses.

Fortunately, Transparent Energy was up to the challenge. It has both the expertise in house to guide data center clients (and the supplier community) through a fair, transparent, and vigorous competitive process, and a robust online platform flexible enough to accommodate all of the variables presented by such a complex buy. As an added bonus, and central to its value proposition, the platform also provides visibility into the myriad pricing details the customer would need to make an informed procurement decision.

An Educative, Consultative Process

Transparent Energy began engaging with the data center client over a series of discovery phone calls to best understand the client’s energy needs and market opportunities. Over the course of these discussions, Transparent Energy learned about the data center’s current Fortune 100 clients and load, as well as the data center’s growth plans over the coming year.

In parallel, Transparent Energy’s team got busy researching historical pricing of that territory’s (the data center is located in Illinois outside of Chicago) real-time and day-ahead markets and began vetting suppliers capable of meeting the large and growing energy needs of the client.

These two concurrent tracks produced a number of useful insights, which informed a series of sealed-bid events on the platform. Following are some key highlights:

1. 1. Transparent Energy conducted a three-year historical analysis of the day-ahead and real-time electricity markets in the data center’s service territory, identifying a $3.00-$4.00/MWh price difference between the two in favor of the real-time market. Importantly, each $1/MWh translates into roughly $200,000 in cost. So with a load expected to soar beyond 1.25 billion kWh over the term of the contract, the savings could approach $600,000 – $800,000 annually, and millions over a 5-year term (the client’s desired term).
2. 2. While the real-time market held significant savings potential, unlocking it would introduce more risk than day-ahead pricing. That said, the data center was large enough that it could take some educated risks and benefit from the real-time market, if managed correctly.
3. 3. Almost immediately, Transparent Energy recognized the customer would benefit most from a managed-service approach, one involving a cross-section of Transparent Energy professionals monitoring the real-time market for buying opportunities.
4. 4. Next Transparent Energy began to formulate a plan with the client to look into a hybrid strategy mixing fixed positions and hedges. This would combine “fixing” part of the data center’s load to capitalize on current low prices and layering in additional hedges over time to minimize exposure at times of highest risk.

Putting all of these ideas together, Transparent Energy architected a productive set of auctions that exposed supplier pricing in a multi-faceted way that helped the client select the truly best offer on the table among seven suppliers.

Before exploring how, let’s take a minute to underscore why “it takes a platform” for large energy users, including data centers, to most effectively source energy. Pricing a deal like this one would be complex enough if only one supplier were involved. But doing it with seven! – in a way that normalizes all the data – is simply not scalable manually.

The platform enables Transparent Energy’s experienced professionals to upload and vet all of the data needed, including contract language; run the auctions; and capture the results all in one secure place for maximum transparency and with all data normalized for easy “apples to apples” contract and price comparison.

And now, back to the auction.

Getting it Done for Data Centers

First, Transparent Energy ran an auction to determine each supplier’s “cost to serve” the customer. This is not a price that includes energy commodity cost, but rather exposes each supplier’s minimum cost to take on and service that particular client.

With that information in hand, Transparent Energy ran a series of additional auctions exploring various hedge scenarios. Prior to working with Transparent Energy, the data center customer had only been counseled on “around the clock hedges,” a block of power that runs 24 hours a day, 7 days a week. But Transparent Energy’s Market Intelligence Team offered more. It identified a number of high-risk pricing periods throughout the year and educated the client about on-peak hedging strategies to minimize their exposure (and cost) during those periods.

As a result, Transparent Energy leveraged the auctions to get pricing from the seven suppliers for summer on-peak hedges as well as for winter peaks. Additionally, the auctions tested peak pricing across various term lengths (for example, 12 months). In all, the auctions elicited an additional 80 bids exploring various hedges, providing the client price visibility into areas it hadn’t known possible and available nowhere else in the market except on the Transparent Energy platform.

Today, Transparent Energy’s newest data center client is sold on energy as a managed service. The data center has fixed some of its pricing for the next five years, taking advantage of today’s favorable, low energy prices, and is relying on Transparent Energy to dynamically hedge the rest, keeping energy cost and risk in check as the data center pursues rapid growth.

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