October 25, 2022

How the European energy crisis could impact IT

European IT organizations face a long, cold winter as they struggle to cope with dwindling energy resources and rising prices.

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Europe is facing an energy crisis that has the potential to cripple a wide range of IT organizations in different countries in the coming months.

There are two main factors behind the current crisis, says Steve Hall, partner and president of the research and technology consulting firm ISG. "Clearly, the closure of the Nord Stream 1 pipeline due to the war in Ukraine has an impact on oil and natural gas flows around the world," he notes. OPEC's recent announcement that it will cut its oil production by two million barrels a day will exacerbate the impact, Hall adds.

There are many other factors at play as well, notes Sophia Jones, an investment analyst at PiggyBank, a Canadian personal investment advisory firm. To compensate for scarce and expensive imported resources, many European countries are turning to coal for energy production. As a result, more governments are now faced with the dilemma of generating alternative energy, but at the cost of more pollution. Compounding the problem is the fact that a number of nuclear power plants are gradually being withdrawn from operation due to limited safety and funding concerns. “This means that not enough electricity is being produced to meet demand in some countries,” says Jones.

Most at risk

IT organizations based in Germany are likely to be affected first, based on their dependence on energy from Russia, Hall says. "France will likely be less affected due to the country's dependence on nuclear energy for a significant percentage of its energy needs," he notes. The UK and Nordic nations will both see significant price increases, Hall predicts, based on overall market volatility in the oil sector, although they are unlikely to experience significant supply problems.

Companies with inefficient internal data centers will be the organizations hardest hit by the energy crisis. “Companies that have already bought or moved to the cloud will be less affected, although they won't escape some cost challenges,” says Hall. "Energy costs are rising across the board, so you can expect those costs to be passed on to customers through existing agreements."

With energy becoming increasingly scarce and expensive, many European companies are turning to hyper-scalers, an agile method of processing data via remote data centers with horizontally linked servers. Hall expects a greater push to cloud computing in the coming months, particularly towards major hyper-scaler vendors, including Amazon AWS, Microsoft Azure, Google GCP, Alibaba Cloud, IBM and Oracle, all of which tend to offer both lower costs and lower carbon emissions. “Given the complexity of the workload transition, however, we are concerned that customers will withdraw their technology spend for lower priority activities,” he says.

Impact mitigation

The European Union has already taken several steps to mitigate the impact of the crisis by urging member states to reduce their gas and electricity consumption. "France, for example, has encouraged citizens to use less electricity during peak hours by using household appliances, such as dishwashers and washing machines when electricity demand is low," says Jones of PiggyBank.

If we think, for example, that Germany is theoretically the country most impacted economically by the increase in the costs of energy resources, it is also true that the government has already allocated over 200 billion euros of funds that will be used to mitigate costs.

Meanwhile, many European IT organizations are shifting costs to cover rising energy prices. "They are also managing overall usage better to reduce consumption," Hall notes, adding that he expects "an extension of the work-anywhere policies implemented during the pandemic as a way to reduce the costs of facilities."

Resolution

The first step in resolving the crisis will be for each country to negotiate with Russia and come to an agreement that will allow them to continue buying gas, Jones says. "This may require some concessions from both sides, but it is something that must be done if we are to avoid bigger problems along the way."

To meet long-term needs, Jones believes Europe will need to diversify its energy sources by investing in renewable technologies and nuclear energy. "This will help them become less dependent on foreign imports of natural gas or any other form of fossil fuel."

Looking ahead, Hall believes data centers should strive to adopt clean power sources with workloads running in the public cloud. “It will take several years to achieve this, so we will likely see higher costs passed on to consumers as the costs of producing goods and services continue to rise,” he says. "This, of course, will add to the inflationary pressure currently being felt and will likely lead to continued wage pressure."

Hall is, however, generally optimistic. "It will probably be a long winter, but assuming the energy problems are resolved by mid-spring 2023, it shouldn't be disruptive for the IT industry in general."

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