Unlocking value in growing digital infrastructure

Speaker A: Welcome to Money Multiple the digital economy has experienced exponential growth over the past decade, driven by rapid advancements in technology and the increasing integration of digital solutions into everyday life. This transformation has been fueled by the proliferation of Internet connectivity, the rise of E commerce, and the widespread adoption of digital services across various sectors of the economy. Artificial intelligence is playing a pivotal role in this digital revolution, enhancing the capabilities of digital platforms and services. The integration of AI into various applications has further accelerated the growth of the digital economy, creating new opportunities and efficiencies. As businesses and consumers increasingly rely on digital platforms for transactions, communication and information, the demand for robust digital infrastructure has surged. High speed Internet ensures seamless connectivity and access to digital services, while data centers and cloud computing provide the necessary storage and processing power to handle vast amounts of data generated by digital activities. Additionally, robust cybersecurity measures are essential to protect sensitive information and maintain trust in digital systems. Building out all this digital infrastructure is highly capital intensive and presents a unique investment opportunity for private capital investors. Joining me to discuss key trends and opportunities in the space, we have Jungshik Wang, EY Parthenon Asia Pacific leader and Gilles Pascal, ey, ASEAN power and utilities leader. Welcome to the show.

Speaker B: Thanks for having us.

Speaker A: Jungshik, let me start with you. The global data center market is expected to grow significantly over the next decade. In fact, the global data center market is projected to show an 8% growth rate through to 2029 and result in a uh, market size of about $625 billion by 29. I understand you've been keeping tabs on the sector over the years. Tell us, what are you seeing in the landscape Specifically how you think digital infrastructure landscape will evolve over the next five years and what does that mean for data center operators and investors?

Speaker B: Thank you, Luke. Interestingly, many things have changed. What happened to AI chip control you ask? How does it bring an impact to our data center landscape every five years? We data center sector analysts trying to look at uh market fundamental driver and changes every five years now become every three years. But one thing that consistent is the demand of the data center. What comprise future demand? 50 or up to 70% cloud consumption. The rest of the 30% or 50% largely driven by AI demand is a solid however, supplies are limited even though there is a capital but power land chips we are quite sure that a supply demand gap in the market in general you will be over demand lesser supply. Now what's the implication to us? In US hyperscaler generally owns the 50% of their own data center in Asia Pacific because Of this supply demand gap hyperscaler uh, tended to outsource to third party operators rather than owners. That's one trend that we see Another trend is looking at Asia Pacific top 10 or top 20 cities Data centers are well developed Singapore, Tokyo, Seoul but outside of the doors the tier one cities of the developed country because of supply demand gap we see a lot of data center development happening in South Asia or developing country and tier 2, tier 3 cities because tier 1 cities has a fundamental constraint to supply the new data center. That's the reason why recent lot of data centered project is happening around Malaysia, Thailand, Indonesia. Interestingly, Jakarta itself is well developed, well penetrated however, outside of Jakarta for example Batam would be the next future development of the data center. Last but not least, people are also concerned about the pricing because it's a direct impact to the revenue model of data center in the previous time when the cloud consumption is a major driver the growth of the data center people very acceptable to plan to pricing. Now because of this supply demand gap we see the market willing to accept 10%, 50%, 20% higher pricing depending on demand, depending on commercial model. Lot of pricing dynamics is happening because of this supply demand gap.

Speaker A: Clearly a lot of investment opportunities as we look at digital infrastructure data centers been in large focus but if you can just help to unpack what are the different categories of assets that investors should look at across this whole digital infrastructure landscape.

Speaker B: Ten years ago, 15 years ago largely digital infrastructure driven by the tower business, satellite and subsea cable Recent digital infrastructure focusing around data center data center requires a very strong the fiber capability so the major driver growth of digital infrastructure is logically from data center and new investment in the fiber Meanwhile satellite and tower it's more about how to optimize balances so they divested the tower business subsea cable business for example optimization however, more digital infrastructure demand largely coming from data center fiber also subsea cables because of the regionalization of data center platforms.

Speaker A: Thanks Jungshik Reese, let me turn to you clearly all of the development that Jung Shik mentioned creates a tremendous demand for power and utilities. I understand that data centers, AI and cryptocurrencies currently consume about 2% of global electricity demand and this is expected to approximately double in the next five years. So that means a lot of investment in power and utilities both fossil based as well as renewables at the same time. Countries of course have to take care of their own population demands for power plus all these goals that they've set to get to uh, net zero. Can you take us through your thoughts on the investment opportunity ahead and how the sustainability agenda gets embedded into digital infrastructure development.

Speaker C: Thanks, Luke. I think as you pointed out and Jung Shik just covered, governments around the region are generally keen to attract investment in digital infrastructure. It's about attracting fdi, it's about creating jobs, it's about future proofing your economy, your workforce. And frankly, there's also a little bit of a cool factor when you can announce billion dollar investments from the likes of hyperscalers, which are all household names. So. So it's about developing your economy. However, data centers, uh, are resource hungry. Electricity, water and the pressure is on the utility provider, the electricity companies around the region to cope with this additional demand. Now if we zoom into this electricity sector and challenge faced, with a few exceptions like Singapore or the Philippines, the electricity sector in Southeast Asia is managed by a single electricity company that handles everything from generation, transmission to distribution. As you pointed out, population is growing, the economy is growing. So fundamentally, these utilities are dealing with the need to increase generation capacity to constantly invest in the grid. Um, there are billions of dollars of investment to serve the natural demand. Additional demand from data centers further increase those massive investments needed. On top of it, utilities are faced with the need to green the grid because governments have made commitments to reduce the CO2 emissions. This is a key component. So electricity company face triple pressure points. They need additional power in the system, they need this to be green. They need to adapt to intermittent renewable energy. The utilities are under pressure and they're essentially pushing back to government saying, well, I can't quite be as fast to meet the demands from data center. If you remember a few years ago, Singapore increased sustainability standards. They said no more investments in data centers unless the DC meets certain minimum requirements. That was driven by land pressure. But also the electricity sector, Singapore is very keen to green the electricity sector. Now, Malaysia and Thailand recently introduced regulatory changes to allow data, uh, centers to procure electricity directly from renewable energy developer as opposed to buying it from the grid. That's to relieve the pressure on the utilities and allow data centers to contract directly and to work with renewable energy developers.

Speaker A: Thanks Gilles. And that is a good segue for us to get into some of the key challenges. Zhuangshi, can you talk us through the key challenges faced by digital infrastructure operators and how investors are influencing these operators to incorporate the sustainability agenda?

Speaker B: Sustainability is a very luxury topic, right? Because uh, today the supply demand gap is coming from constraint of land, constraint of power, before even talking about whether it's a green power or not. So like just Mentioned Singapore already announced the moratorium of the data center. So it's an order in a decarbonization 0 carbon the country want to target which limited any new supply. In Singapore same thing happens. Seoul for example in South Korea there are no available power in the tier one cities. Seoul, that's the only one single demand city where hyperscaler want to uh, install the more data center. But no one can get power. Sometimes residents do a lot of also protest against data center because data center is not necessarily well welcomed in the residential area. And the government also needs to listen to those the residential complaint before we place any sustainability matter. Uh, the data center itself is a fundamental issue around providing the enough supply outside of the power land and the residential complaint. One of the now the key issues is you cannot find a good contractor. There are uh, not enough EPC good general contractor in the market. Sustainability of energy is very very important. However fundamental challenge. It's not easy to source those green energy. Um, I will ask the judge why it's very difficult to source the green energy. And from the data center operator perspective to manage that challenge, they are making effort to improve their energy efficiency. Everybody heard about direct liquid cooling. AI data center requires almost 10x higher the cooling mechanism. It could just think the cloud consumption of the data center can rely on air condition based cooling. However, AI Data center itself because it requires 50kW 150kW per rack. The heat control requires not only just the liquid cooling very AI specialized chips design the data center operator making a lot of continuous effort to improve energy efficiency. However, fundamental challenge is how can source the green energy.

Speaker C: Many countries around the region it is possible to procure renewable energy. There are various forms either from the main utility company because they have a green tariff or directly from the private sector from a renewable energy developer. And for that you have virtual solutions where the contract is not to buy and sell electrons but to buy and sell certificates or they are physical solutions like the one I mentioned was recently introduced in Malaysia and Thailand where it's a real purchase of electrons going through the grid. Each one of these options have a different price point and I will throw a question back to you later is what is the hyperscaler appetite to pay more to get a hundred percent green electricity. So all the hyperscalers have ambitious decarbonization targets. But for now they have been managing this at the global level and they can offset their global carbon footprint through the purchase of carbon offsets or renewable energy certificates. There is a trend, um, regulatory trend to push decarbonization targets to each country level. If you are global operations, you either manage at the global level or you push this to the country level or even at some point to the facility level. Today you have solutions, but they have different price points. If I just buy solar or wind, I can procure electricity cheaper than if I were to buy it from the grid. But you know that this is intermittent. If as a DC I need 24. 7 power, I cannot afford any interruption. So I need to combine solar with battery storage and that solution, solar and battery today is more expensive than the electricity, not green that I can buy from the grid. So eventually it goes back to the hyperscaler. Are you willing to pay more to get a green dc?

Speaker B: I can't represent the hyperscaler stance, but let me put this way. There are pricing dynamics. There are some rooms that in a hyperscaler to pay some premium. However, energy cost is already 40 to 60% of the opex. It's already very high. It's a very very critical and sensitive expense. So I would look at the more fundamental change of infrastructure rather than paying the very spot price to comply to the decarbonization. So for example co location between data center and power plant. Why not we plan together to source the green energy, especially for the AI data center which requires a minimum 100 megawatts. It's a large scale project which is worthwhile. And then discussing with the energy service provider earlier than later.

Speaker A: That's an interesting observation. Let me address this to both of you. Given the direct correlation between digital infrastructure demand and the need for stable high quality supply of power and utilities, do you see opportunities for collaboration and convergence and maybe even the emergence of new business and financing models?

Speaker C: Things change really fast on the electricity side. Prices are coming down. They've been coming down over the last few years and it will continue to do so for any DC operator. I would recommend a strategic review to look at the solutions on the potential business model when it comes to greening your electricity. You can bring the development of renewable energy in house and start doing your own projects attached or linked to your dc. You can externalize it. Go and talk to renewable energy developers and see the developments happening in each country. And whether you can sign a single contract or explore partnerships models whereby for the whole of APAC partner with an existing large or small scale renewable energy developer, a, uh, regional party, a domestic dominant player and I would even say likewise to the renewable energy developers the skills to develop renewable energy. It's selecting a site, it's managing permits, managing the construction of an asset. The two asset class renewable energy investments, solar project, wind project and uh, D.C. they are both considered infrastructure assets meaning from investor's point of view they have a similar risk and return consideration. Typically DC investment will require a slightly higher threshold because there's a little bit more uncertainties on the cash flows than your typical renewable energy project. But fundamentally it's similar capital infrastructure, long term risk return consideration. So there is a key question whether we will see a convergence of the platforms, the developers, renewable energy players getting into data centers, D.C. operators getting into renewable energy. And those are the strategy questions that we need to solve with clients.

Speaker B: That's the great suggestion. Jules. Let me put this way, even though it's a two different infrastructure data center itself has a little bit more infrastructure risk. However, commercially is very much bigger than renewable energy infrastructure investment. So that's the reason many of the capital markets are coming now because the cost of capital can be lower, however the return can much higher. Going back to your question, how about those two assets can be converged because there are benefit of the convergence the asset.

Speaker A: Why?

Speaker B: Because everybody needs a green energy. But there are technical challenge which requires a long term investment period as well as offstream and very upfront collaborative planning with a large capex. Today it has been driven by the data center business, but the energy service provider come up with a debt plan combine project from the finance perspective, technology perspective. I think if the project has that angle, whether it's driven by the renewable energy operator or the data center operator or through partnership, I think that's a fantastic idea. And um, I mean this idea itself can be a comparative advantage.

Speaker A: That's fascinating. What you're basically saying is the first step could be a strategic partnership business model, but as you take this forward, you'd actually see convergence and that could be backward integration of the data center, uh, of forward integration of the PNU providers or there's opportunities to split the infrastructure layer from the operating layer and all of that creates investment and financing opportunities for our private capital investors.

Speaker C: Yes indeed.

Speaker A: Jungshik, Gilles, I'd like to thank you both for joining us. Before we close, given the fascinating investment opportunity this space presents, I'd like to ask each of you to share a final thought with the audience.

Speaker C: Well, from my end Luke, really it's if I'm a DC operator today, I would undertake a comprehensive review of the strategy when it comes to renewable energy procurement. Whether to internalize, whether to externalize, whether to create partnership and with whom. And if I'M a renewable energy developer, I would do exactly the same. How do I get into the DC market? Internalize, externalize, or partnership? It's all about strategy.

Speaker B: I really enjoyed today's discussion, especially because the capital market excited about this demand cycle. But beyond the super demand cycle, I think the conversation that we had today, it's very much a cutting edge business idea which requires maybe more than five years preparation in terms of the technology, commercial planning. Convergence generally creates new idea, innovation and solution. So we should have more open ecosystem approach rather than just only sitting under your own segment. Thank you Luke.

Speaker A: Thank you very much.

Speaker C: Thank you.

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