The AI Data Center Boom: Strategies for Sustainable Growth and Risk Management

Rapid growth in data center construction, spurred by AI advancements and cloud demand, creates interconnected risks for developers. However, with effective risk management solutions, navigating this dynamic market while prioritizing sustainability is possible.

Introduction

Generative artificial intelligence (GenAI) services, such as ChatGPT, are driving significant growth in cloud infrastructure, increasing the demand for data centers worldwide. Cloud providers, especially hyperscalers like major tech and IT companies, are investing heavily in data center expansion to support this demand. Key industries, including entertainment, finance, healthcare, and e-commerce, are also contributing to the rise in data center construction. However, challenges like land and power limitations, construction delays, and the need for sustainability commitments are complicating development. To navigate these complexities, early involvement of risk advisory partners is essential for managing risks and ensuring cost-effective solutions throughout the project life cycle

The Promise of AI: Opportunities and Challenges

To meet the growing energy demands of data centres, efforts are being made to enhance grid efficiency and incorporate renewable energy solutions. AI advancements are driving innovations in this area, such as the development of specialized hardware like accelerators and 3D chips, as well as new cooling technologies and optimized sites for energy use. Data centre operators are also exploring alternative energy sources, including hydrogen and nuclear power, with Meta Platforms seeking proposals for nuclear capacity to support AI operations. Additionally, investments in carbon removal technologies are being pursued to reduce CO2 emissions. However, challenges remain due to the pressure on power and land availability, as well as the complexity of managing construction and project timelines.

Key Risks in Design, Development and Construction

The design and construction of data centres are facing significant challenges, particularly around securing reliable power sources and land. As demand for cloud services and AI grows, operators are focusing on regions with abundant renewable energy, although traditional sources remain necessary. Land acquisition is becoming harder, especially in urban areas with strict zoning regulations. Developers must also address sustainability concerns by using low-carbon materials and exploring alternative cooling techniques. Additionally, fire risks from equipment breakdowns pose financial and project delays, prompting evolving regulations to improve fire prevention and safety measures.

Climate change and extreme weather conditions are increasingly impacting data centre projects, from site selection to decommissioning. Heat events can drive up energy consumption and cause equipment failure, while prolonged droughts reduce water for cooling, highlighting the need for climate projections in design. The political and regulatory landscape is also shifting, with stricter energy efficiency regulations and community opposition to data centres due to their high power and water demands. This has led to restrictions in places like Singapore and Beijing. The rising demand for data centers is putting strain on local power networks, as seen in the UK, where data centers are contributing to energy shortages. International bodies are developing guidelines to promote energy efficiency and sustainability in the industry.

“ Climate-related exposures can be addressed through alternative risk solutions, such as parametric insurance. This creates complementary capacity not covered by traditional insurance and is another source of risk transfer for data center clients to help manage growing volatility from risks like extreme heat.”

6 Strategies to Manage Data Center Risks Effectively

Managing risks in data centres is crucial for ensuring smooth operation and sustainability. Here are key recommendations that can help mitigate potential risks and enhance the overall resilience of data center projects.

Start early. Engage your insurance risk advisor early in project development to get assistance in risk identification and mitigation strategies with the help of available data while mapping estimated cost projections.
Conduct pre-loss preparations. Nominating strong loss adjusting partners to ensure that the right experts are on board for construction projects is particularly important for data centers. Using loss simulations through the project cycle also helps to improve the level of preparedness of the project team when an incident, such as a fire, occurs.
Use a holistic approach. Work with a broker that has the team, knowledge, technology, global presence and market relationships necessary to take a total project life cycle approach to data center risk management, rather than breaking the project into three separate work streams — from construction to operations and decommissioning.
Understand stakeholder risks. Risk and insurance advisors can engage in contract negotiations with architects, contractors and lenders to allocate and address risks properly. They can also provide guidance around the business challenges of power and utility producers and independent power producers involved in projects. Because partnerships on these projects are complex and diverse, the division of risk needs to be clearly understood.
Look to non-traditional insurance solutions. In light of a changing climate, alternative risk transfer products like captives and parametric insurance are effective solutions for data center developers and owners to use and supplement traditional insurance coverages, particularly if the data center is in an area prone to weather perils.
Use climate risk analysis. This review will help developers access an informed view of how the changing climate will affect natural catastrophe-related risks that the data center is exposed to over the next 10 to 15 years.

Moustapha Fathi

Senior Broker Property | Commercial Risk Solutions @ Aon Belgium