Investing in data centres as an opportunity for (the capital of) Poland

What are data centres?

The continuous evolution of technology and the accelerating digital transformation have led to an increased demand for digital data storage infrastructure. Data centres are specifically designed to address this need. While there is no legal definition of data centres in Polish legislation, it is important to note that they are specific commercial properties where servers are located for the storage, processing and distribution of large amounts of digital data.

Data centres house computer systems, telecommunications systems, memory and additional components that enable all equipment to operate efficiently. Without such facilities, it would be impossible for the digital services we deal with every day to function.

The largest data centres are currently located in Western European countries in the so-called FLAPD group, which includes Frankfurt, London, Amsterdam, Paris and Dublin. However, given the numerous legal and regulatory restrictions imposed on these countries, Poland, mainly Warsaw and its vicinity, is becoming an alternative location for data centres. The development of the so-called 'national cloud' is also of significance here. 

Concurrently, Poland is bound by numerous requirements stemming from EU law, including the NIS2 Directive, as well as regulations around ESG or the Regulation on a data centre assessment system, which play a key role in investments in digital data storage.

Location of data centres

Due to the nature of the investment, data centres require a specific location. The proximity to the network and communication infrastructure, including major roads, the permanent need for the property to have access to large electricity capacities and specialised staff, especially from the IT sector, implies their location around large cities. When choosing a location, investors must also consider the need to implement the numerous sustainability and ESG requirements that the industry will have to meet. Investors must also consider the limited capacity of electricity grids, which require modernisation and expansion to meet increasing energy demands.

With over 120 data centres already in operation in Poland, the most favourable locations appear to be Warsaw and its outskirts, where more than 45 data centres are currently located. Demand for data storage space is growing steadily, and this trend is set to continue for the foreseeable future.

The importance of energy sources, with a focus on renewables and, in the future, nuclear power, is also increasing. Consequently, such a property should be situated in an area of sufficient size with the possibility of development through, for example, a wind power plant or near it. This approach aligns seamlessly with the implementation of EU and national energy and climate policy requirements.

It is evident from experience that certain areas have witnessed the establishment of developments comprising multiple independent accessibility zones, each with one or more data centres. Such developments are colloquially referred to as data centre parks or campuses. In the event of technical issues or other faults in one of the sites, the functionality of the neighbouring data centre ensures the continuity of data and power. Additionally, the integration of these facilities with power sources such as wind turbines or photovoltaic farms provides access to green energy, making the investment more environmentally sustainable.

With the increasing number of 'data centre' facilities in an area, security requirements also have a bearing on the choice of location, including the level of certification of a particular facility, the so-called 'Tier'. The Tier level of a given facility is influenced by several factors, including its location, the impact of climatic and geological factors on its security, and risks associated with human activity (e.g. proximity to an airport or motorway).

Construction aspects

As of today, there are no specific provisions in national legislation governing the construction of data centre facilities. Consequently, when planning the construction of a data centre, the same issues need to be considered as for the construction of other facilities, i.e. planning and zoning, environmental issues, fire safety requirements, access to technical infrastructure, roads and utilities. 

When considering planning and site selection issues, it is therefore necessary to consider the neighbourhood and the impact of such a facility on the surrounding area, e.g. noise emissions associated with air-conditioning units that must meet exact standards, and the operation of power generators. It is worth noting that many readers may be interested to know whether the amendment to the planning and zoning regulations that took place in 2023 has made specific changes regarding the subject matter under discussion. The answer to this question is negative, and the issue may be, as has been mentioned on numerous occasions, the so-called general plans and the speed at which the relevant municipalities adopt them. In the absence of a development plan and a general plan, construction can only take place based on zoning conditions. The absence of a general plan excludes the possibility of issuing a zoning decision.

Additionally, the absence of detailed regulations raises concerns regarding the location of data centre facilities. This issue concerns the proper classification of such facilities. Typically, such facilities are in areas designated for production, service and warehouse development, unless the development plan explicitly excludes them. However, in the current local spatial development plans, which we have seen in practice, this is not the standard, and nominally the concept of a data centre is very rare.

Although there is a clear classification of data centre facilities in the context of the Act of 7 July 1994 Construction Law, in practice we can see that such facilities may be classified in category XVIII (industrial buildings and storage facilities) or XVII (service buildings). For these, a building permit will be required, followed by an occupancy permit. As with any construction project, the stage(s) of construction of the data centre facility itself is usually prepared in advance, establishing a schedule of individual works so that the construction of such a technologically complex facility proceeds properly. 

In this regard, it is essential to obtain the necessary permits and licenses for the connection of the investment to utilities, ensuring the parameters are in place for effective utilisation. The absence or delay in obtaining these permits and licenses can have a substantial impact on the project's schedule and budget. Municipal companies often have a negative financial result due to their inability to reconstruct the transmission infrastructure in the required timeframe to ensure access to media with the necessary parameters for data centre operations. This necessitates the negotiation of an agreement between the investor and the municipal company, outlining the terms of collaboration and the allocation of costs for developing the technical infrastructure (e.g. transmission).     

In the context of data centre construction, it is important to address the practical issues related to the commissioning of such facilities. For instance, a common challenge we have observed is the technological start-up of the facility or the installation of equipment not explicitly covered in the building permit. This process, due to the complexity of technological processes and the lack of detailed legislation, should be well thought out and prepared.

Therefore, when considering the construction of a data centre, it is important to choose the right advisors with the right experience. When planning an investment in data centres, investors should give due consideration to environmental regulations. This is not only important in terms of optimising resources, but also in terms of obtaining the appropriate permits concerning, for example, noise emissions (e.g. from air-handling units), as well as dust and gas emissions associated with the need to install high-powered generators.

Energy aspects

Despite the concentration of data centres in a relatively small area, they consume huge amounts of electrical power, comparable to that consumed by a medium-sized town. This trend is expected to continue over time. It is therefore essential for developers to ensure that their properties have continuous, uninterrupted and reliable access to high levels of electrical power. This can be facilitated by proximity to large cities, access to energy sources, including energy storage, and the provision of reliable technological and organisational facilities.

At the investment planning stage, developers should be aware that the process of connecting to the energy infrastructure can take two to three years. The process of obtaining the necessary conditions for connection to the power grid can take several months or even more than a year, depending on the power capacity applied for. Investors should also be aware of the potential for shortages in sufficient electricity capacity, which may arise from the need to upgrade or extend the grid.

 

ESG and energy efficiency

In the context of building and operating data centres, it is imperative for stakeholders to consider sustainability requirements and to implement responsible environmental, social, and organisational management practices. From a construction perspective, the overarching goal should be to achieve climate neutrality, reduce greenhouse gas emissions, implement green solutions, and use environmentally friendly technologies. Investors should therefore take data centre complexity into account at the outset of the investment and construction process, employing responsible and ethical practices.

A key concern for entrepreneurs investing in data centres is the recently adopted Commission Delegated Regulation (EU) 2024/1364 on the first phase of the establishment of a common EU data centre assessment scheme (the 'Regulation'), which came into effect on 6 June 2024. The Regulation imposes a number of obligations on data centre operators and owners by setting out a mechanism for reporting on the efficiency and sustainability of facilities. The initial deadline for reporting directly to the EU database (as no national reporting system was established) was 15 September 2024. The subsequent deadlines will be 15 May 2025, followed by 15 May of each subsequent year.

Scope of information reported

Traders are required to report basic information identifying the entity and general information about the operation of the centre. In addition, the Regulation imposes detailed reporting obligations on traders to report on:

1. key performance indicators, among which are:
   1. energy and sustainability indicators, such as. The electricity demand of the installed IT infrastructure, the total floor area of the centre, the floor area of the computer rooms, the total energy consumption, the total energy consumption of the IT equipment, the functions of the electrical network, the average capacity of the batteries, the total water supply and the potable water supply, the reused waste heat. the average temperature of the waste heat, the types of refrigerants used in the cooling and air-conditioning equipment in the floor area of the computer rooms, the cooling degree days, the total consumption of renewable energy and renewable energy from the guarantee of origin, the total consumption of renewable energy obtained through power purchase agreements.
   2. ICT capacity indicators for servers and data storage devices;
   3. data flow indicators in terms of bandwidth of incoming and outgoing traffic and inbound and outbound data flow;
2. data centre sustainability indicators, which are calculated based on the above-mentioned information and key performance indicators for energy consumption, water consumption, energy reuse rates and renewable energy.

In summary, at an early planning stage, investors need to prepare such a strategy so that the project meets sustainability and energy efficiency targets.

 

Risks of negative impact on the environment and their elimination

The operation and construction phases of data centres present a risk of a negative impact on the climate, the local environment and the public's perception of the investment, which in turn significantly hinders its development. This is further compounded using conventional energy sources such as coal, the continuous consumption of water for cooling ICT equipment, and the absence of adequate solutions for equipment disposal.

To mitigate or reduce the environmental impact of data centres, developers must implement measures that align with climate objectives. These include: sourcing energy from renewable sources, particularly local ones; designing infrastructure to promote energy efficiency; using energy-efficient infrastructure; and adopting technological solutions. Additionally, developers should properly develop the site of the data centre and adopt a closed-loop economy by reusing and recycling equipment.

It is worth noting that the data centre industry is increasingly seeking to obtain the internationally respected BREEAM (Building Research Establishment Environmental Assessment Method) certification. This certification is a testament to the adherence to ecological principles in the design, construction and operation of the facility, making it an asset for investment purposes. Beyond mere energy efficiency, it encompasses a comprehensive set of responsibilities aligned with ESG principles, including materials, waste, land use, pollution, innovation, management, health, welfare, transport, water and energy.

NIS2 Directive

The European Parliament and Council (EU) has issued Directive 2016/1148 (4), also known as the 'NIS2' (Network and Information Security Directive), in response to the growing demand for digital data storage services. This directive will come into effect on 18 October 2024 and will replace the 2016 NIS Directive.  It establishes regulations on cyber security and the mitigation of threats to networks and information systems, in addition to ensuring the uninterrupted availability of such services.NIS2 imposes several obligations on investors, including the assessment of risks, the reporting on the status of cyber security, the implementation of technical and organisational measures to manage cyber security risks, the execution of specific actions in the event of incidents, and the protection of critical infrastructure. There are also rules on the liability of board members and owners of data centres for failing to comply with security obligations and sanctions for non-compliance.

The Directive applies to public entities and certain private entities that qualify as large, medium or small, as well as to entities of a critical nature regardless of their size. It also applies to entities where services are provided by providers of public electronic communications networks and services where the disruption of the service could have a significant impact on public order, public security, and public health or lead to serious systemic risk. Member States may decide to apply the Directive to local public administrations and educational institutions.

Responsible investors should therefore prepare in advance for the need to comply with the obligations imposed on them in NIS2 and to report the information indicated therein. The outcome will be influenced by the solutions previously adopted by entrepreneurs in the fields of construction, technology, and strategy.

 

The operational processes of data centre facilities.

There are various formulas for data centre operators on the market. The most common is the traditional model, in which a provider of broadly defined IT services acquires the legal title to the land on which it builds a data centre for its own use, to provide further services related to its core business. 

In addition to this, the market has seen the emergence of entities specialising in the construction of data centre-type facilities, which often carry out investments on behalf of IT operators and according to their requirements. Finally, entities are carrying out such investments and earning money by making the constructed facilities available under various forms of so-called 'colocation agreement', while at the same time ensuring a certain level of colocation services are provided.

A key challenge with these 'colocation agreements' relates to their legal classification. The Polish legal system does not currently have regulations in place for this type of agreement. These agreements function as mixed agreements, combining elements of service contracts and lease agreements. This means that issues related to proper data security, security of installed equipment and limits of liability between the facility developer and the entity using the facility space are additionally intertwined. When entering into a collocation agreement, it is essential to consider the Service Level Agreement (SLA), which outlines the level of services provided, the speed of response, the liability of the service provider/developer in the event of failure, and the scope of redundancy of the services provided. Another issue we encounter when concluding collocation agreements with specialised entities is sometimes the willingness to subject such agreements, or at least some of the issues covered by them, to the legal systems of other countries. This is typically related to a more lenient liability framework, insurance considerations, or tax-related issues. Consequently, security and the ability to effectively enforce the terms agreed in the collocation agreement are paramount.

Summary

The key issues for investors in data centres are as follows: ensuring security during the planning, construction and operation of facilities; environmental impact; sustainability; cyber security of stored data; and keeping up with new developments that favour investment and environmental and climate goals.These issues are of relevance to investors seeking new business development opportunities, especially if they already possess warehouses or office buildings in their portfolio. As digitalisation progresses, interest in investing in data centres is expected to increase significantly. To meet market demand, it is important to consider the opportunities that data centres present for businesses today.