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Inward Investment Guides
Ranked #9: Energy Availability & Costs
While ENERGY AVAILABILITY AND COSTS is not a critical site selection factor for some, it does have a significant impact on data center decisions.
Eric Stavriotis, Senior Vice President, CBRE, Inc. (Oct/Nov 07)
It's no surprise that the energy availability and costs factor is not very high on the list of office and industrial site selection criteria. Decision-makers know that electrical rates vary significantly from state to state, and some areas are more prone to power interruptions than others. But interruptions are rare in most places, and even expensive electricity is a minor component of occupancy cost, which is itself less important than the availability and cost of labor. In the war for talent, companies are not about to let the size of the electric bill affect office location decisions.

In fact, energy costs may be decreasing as often as they are increasing at owner-occupied office buildings. Although higher oil prices and other market forces could cause electric rates to rise, in many cases price hikes may be offset by reduced power usage. Motivated by environmental concerns as much as by cost considerations, companies are utilizing energy-efficient products and sensible practices to reduce electrical usage by 15 percent or more without affecting workers' productivity or comfort. As most new buildings are built to LEED or a similar sustainable design standard, energy cost may be even less of a factor in the selection of office locations, even as the cost and quality of employees takes on greater and greater importance.

Combined Ratings* of 2006 Factors
Site Selection Factors                   2006
1. Labor costs 95.0
2. Highway accessibility 90.9
3. Corporate tax rate 90.8
4. State and local incentives 88.6
5. Availability of telecommunication services 88.3
6. Tax exemptions 86.7
7. Occupancy or construction costs 85.5
8. Availability of skilled labor 85.1
9. Energy availability and costs 82.4
10. Availability of high-speed internet access 82.1
*All figures are percentages and are the total of "very important" and "important" ratings of the Area Development Corporate Survey and are rounded to the nearest tenth of a percent.
Critical Environments
Data centers and other critical environments, however, turn the normal cost equation on its head. Since it doesn't take many people to operate a large data center, labor issues have a diminished effect on the location decision. At the same time, data centers draw significant amounts of electricity, and even a brief power outage can endanger data and potentially disrupt worldwide business operations. So just as labor availability and cost are much less important, energy reliability and cost are much more important when it comes to critical environments.

For most data centers, power reliability is just as critical as cost. A company entrusts its data centers with information that is crucial to its operations, with system failures costing millions of dollars in lost business. The need to have data accessibility at all times is fueled by the rise of e-commerce, the emergence of a global economy, and the rise of Internet-based business operations. Site selection is largely a matter of risk avoidance, as companies quickly eliminate areas where natural disasters or even targets for acts of terrorism could compromise power and communications systems across a large area. Also avoided are areas where power failures are less devastating but more frequent, whether due to natural phenomenon or inadequacies in the system.

In areas with good power reliability and availability, energy cost is a significant consideration in the selection of a critical environment site. Other considerations are also important, but some of those are one-time issues such as construction costs or ease of permitting, whereas many companies will focus on ongoing operational costs. And since data centers can be located anywhere - including areas that might not be attractive for an office headquarters or industrial plant - it is easy to find economic development authorities willing to compete aggressively for these facilities.

Electric rates can very widely, from six cents per kilowatt-hour in some Southeast markets to as much as 11 cents in parts of the Northeast. A few cents difference may not seem like much, but at a 20-megawatt data center, a one-cent difference equates to $1 million or more in annual costs. As servers become more powerful and smaller, the power draw per square foot has increased so dramatically that data center users are seeing electric bills rise to more than five times as much as rent.

An Economic Boost
Economic development officers have become more interested in data centers in recent years as many started to realize the positive impact on the community. Despite the dearth of new jobs created, data centers can boost a local economy by providing construction work, adding to the tax base, and - significantly- adding to the revenue base of local electric companies.

An area that can offer low energy costs and strong power reliability as part of a program specifically to attract critical environments can become a magnet for these facilities. For example, after Microsoft announced plans to build a large data center in Quincy, Washington, in 2006, other data center users followed, including, Intuit, and Yahoo! Lowe's had already started work on a 100,000-square-foot facility in the Westover Hills area of San Antonio when Microsoft announced a 470,000-square-foot facility there in April 2007, leading to a string of announcements since then totaling more than 200,000 square feet, including facilities for Stream Realty, the National Security Agency, and Christus Health.

Evidence exists that some data center users simply locate in areas where there are already other data centers, on the idea that those companies probably did their homework; however, any company that follows a thorough site selection process will base its decision in part on the reliability and cost of energy.

Eric Stavriotis is vice president of Strategic Consulting at Jones Lang LaSalle and leads the firm's Economic Incentives practice. He can be reached at (312) 228-2682.

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