Europe, with its fragmented markets, is often said to be operating in the shadow of the U.S. and China when it comes to scaling AI.
But the very factors that challenge its growth as a major player may yet give it an edge when it comes to future-proofing the critical warehouses that power the AI boom.
The world is racing to double, if not triple, the entiredatacentercapacitythat has been built overthe last forty years, PankajSachdeva told CNBC, McKinsey senior partner in technology, withMcKinsey estimating that build-out will cost up to$7 trillion by 2030.
He expects the U.S. to account for the lion’s share of activity, but Europe will “continue to build at a pretty meaningful rate” to nearly double its existing capacity.
“Europe is actually participating in this infrastructure build out, and is actually keeping pace, or we think that it will keep pace,”Sachdevaadded.
To get there, the bloc must overcome major chokeholds in access to power and regulation, experts told CNBC.
Winners and losers
Thedefiningbottleneckfor Europe is accessto electricity, with energy cost and availabilityshaping the flow of investment across the region. TheNordicsand Spain have seen increased appetite for data center builds giventheir surplus in energy thanks tohydropower andrenewables, while Germanyand the U.K. may be less attractive due toenergy supplyconstraints.
In terms of grid congestion,Italyis one such countryon the winning side. It has aconnection timeofuptothree yearscompared with the European average offour years,according toenergythink tank Ember.
On the losing side isagainGermany,theU.K.,Irelandand the Netherlands, “where, basically either we just don’t have the grid capacity right nowor we’ve got such a shortagein the system that there’s effectively a moratorium for the foreseeable future,” JagsWalia,head ofgloballistedinfrastructure at VanLanschotKempen told CNBC.
While differences between European countries are significant,it’s ultimately “going to be hard” tocatch up on theU.S.in the short-term—where deregulation andhuge investmentareenabling a much quicker build-out—Walia said.Most European countries have around 200 to 300 data centers,he added, but”the U.S.haslike 5,400.”
Constraints areresulting in some a diversification away from the traditional FLAP-D markets of Frankfurt, London, Amsterdam, Paris, and Dublin, and driving investment in data centers where resources are plentiful and stable.
Where Europe, from my perspective, stands out as quite interesting isit feelslikea much more safer investment case
SebDooley
SeniorFundManager atPrincipal Asset Management
There have also been some efforts to develop projects faster. For example, in the U.K., there have been instances of central government overruling local government to approve data centers that were previously denied. Last year the country designated data centers Critical National Infrastructure, highlighting their important in its economic agenda.
A powerfulbottleneck
Energy consumption from power-hungry data centers could more than double to 1,000 terawatt-hours (TWh) in 2026, up from 460 TWh in 2022andlargely drivenbyAI, per the International Energy Agency.
A data center’s largestcostcomponentis electricity,though newer,state-of-the-artfacilities could have a reduced burden, according toWalia.
This isaparticularly stickyproblemfor Europe, which saw its energy bills skyrocket when Russia invaded Ukraine.The U.K.has the highest energy costs in Europe, which arearound75% higher than beforethefull-scale attack.
While this can be a deterrentfor setting up shop in a particularlocation, operatorsaim tobalance it with grid congestion times.
Grid congestion has also instigated discussions about how toprocurepower in Europe, according to CBRE’sEuropean data center research leadKevinRestivo.
“You get a lot of speculators in the queue, and those speculators make it more difficult because they have no intention of building data centers. They just want the power, perhaps, to flip it somebody else,” Restivo told CNBC.
The U.K., for example,operatedon a first-come-first-served basis, meaning projectsignificance was not factored into the decision of who receives power first.
However, the system is currently being transitioned to a ‘first ready, first connected,’ process where finished projects will be able to jump ahead in the connection queue, which were designed in part to tackle speculation. The reforms show how energy and infrastructure builds are forcing old systems to evolve and sets the stage for further innovation.
At the same time, the steady pace of change allows developers to be more deliberate about what they build, where, and how — meaning Europe could put greater emphasis on state-of-the-art facilities.
The quickest way for Europe to get around these challenges is not to wait on new grid connectionbut to say’wheredo I currently have good grid connection to an industry in decline?’,Waliasaid, as such sites can be repurposed from industrialtotechhubs.
The opportunity in AI inference
It’sunlikely that Europe will lead in building facilities forAI hyperscalersor for the training of AI—that race is considered all but won—but the general consensus is that it could excel in smaller,cloud-focusedandconnectivity-style facilitiesthatrequirehuge amountsof fiber going in and out of them, as wellthose designed for AI inference.
Indeed, the continent has few foundational model developers, with France’s Mistral being the most well-known, butMcKinsey sees 70%of all AI demand coming from inference.
As such,the continentisn’tseeing “too many” massive data center sites being announcedrelating to AI, nor”the slightly overpriced nature” of them, according to SebDooley,seniorfundmanager atPrincipal Asset Management.
“So, actually, youare finding these areas, from our perspective, arewell protected from that potential oversupply bubble that could come through,” he added, as cloud is well established.
It is largely driven by AI, but non-AI workloads are also expected to tick upwards
Principal Asset ManagementexpectsAI inferenceto take placein the same facilities as cloud, which hasalreadyhappened at some of its U.S. cloud sites. Thisgives investors”quite a nice upside” without the speculative risk that comes with other AI investments,the fund manager said.
It’s also an opportunity for Europe. Inferencelikely willhave to exist within European borders,Dooleysaid,driven by the broaderpush forsovereign AI.However, it has different technical requirements; density tends to be higher than the 20 kilowatts a rack for traditional cloud, meaning data centers that want to do both must factor that in.Inferencealso requires different cooling systems.
“That just means that youhave todesign these facilities to besort of flexibleand robust so that you can change between the two different systems as requirements change,Dooley added.
The joy of a slower and more considered pace in Europe, therefore,is that there is time to think about such things.
The risk of stranded assets
The pace of AI development has led to widespread chatter of abubble, which would result in piles of stranded assets if it were to pop.IfAIkeeps itscadence, which many believeit will,there is still a riskthat data centers built todaywon’tbesuitablein thefutureas AI’stechnical needs will change.
To help, investorsare focusing onsecuring customers before ground is broken.Speculative-built data centers are “a relic of the past,for the most part,” said Restivo.Developer-operatorsoften lockcustomersinto10-to-15-yearterms,he added,which also couches obsolescence.
It’sa different case, however, if the tenant themselves is a startup or young company.Neo-cloudproviders, for example,carry “significant risk”andhave shorter terms of five-to-seven years,Restivosaid.
“These are companies that have not returned capitaltoshareholders, they have unproven business models, and they have a great need for capacity in a shorterperiod of time,” he said, adding that there is “a lot of skin in the game for developer-operators” working with neo-clouds. However, some debt financiers and developers are”increasingly comfortable” with these terms,Restivoadded.
There may beissueswith repurposing brownfield sites, however, is if data centers are replacing an industrial plantthat’sstill running–meaningjob losses.European policyrequiresdevelopers to report energy and water usage ofdata centers, as well as justification for the particular location.
Some member states go further. Walia pointed to proposed sustainability requirements in Spain, which would see data center developers report socio-economic impact. “Nobody asks about that in the U.S.,” he said.
ButDooleyexpects that tight regulations will work in Europe’s favor in the long-run, as data centers will be integrated into local communities”rather than just being a complete blight on everyone’s life that they can sometimes be,” he said,noting that sustainability is one area where the bloc has been”very good at innovating.”
“Where Europe, from my perspective, stands out as quite interesting isit feelslikea much more safer investment case if we’re looking more from the capital market side compared to the U.S.,”Dooleysaid.
“A lot of that comes from the fact thatit’sdifficult to build in Europe. We’vegot a lot of constraints, but, actually, themore difficult something is to replicate, the more long-term value whatyou’vegot has, the more likely people are to reuse, tocomeup withcreative solutions to repurpose assets,” he added.
Ultimately,investors anddevelopers may have no choice in the matterbut to back Europe thanks to sovereign AI — an “underestimated” driver of the data center build,JimWright, manager of the Premier Miton Global Infrastructure Income Fund, told CNBC.
In all, Europe has the opportunity to innovate and create long-term value for both investors and citizens. Scarcity increases profitability and resilience for the former, while regulation encourages sustainable and constructive build outs for the latter.
However, there is not going to be a one-size-fits-all approach to building data centers in Europe.”The industry is still very muchin’figuring out what exactlyitneeds’phaseat the moment,”Dooley added.
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