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 entire data center capacity that has been built over the last forty years, Pankaj Sachdeva told CNBC, McKinsey senior partner in technology, with McKinsey 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," Sachdeva added. To get there, the bloc must overcome major chokeholds in access to power and regulation, experts told CNBC.
Winners and losers
The defining bottleneck for Europe is access to electricity, with energy cost and availability shaping the flow of investment across the region. The Nordics and Spain have seen increased appetite for data center builds given their surplus in energy thanks to hydropower and renewables, while Germany and the U.K. may be less attractive due to energy supply constraints. In terms of grid congestion, Italy is one such country on the winning side. It has a connection time of up to three years compared with the European average of four years, according to energy think tank Ember.
On the losing side is again Germany, the U.K., Ireland and the Netherlands, "where, basically either we just don't have the grid capacity right now or we've got such a shortage in the system that there's effectively a moratorium for the foreseeable future," Jags Walia, head of global listed infrastructure at Van Lanschot Kempen told CNBC. While differences between European countries are significant, it's ultimately "going to be hard" to catch up on the U.S. in the short-term — where deregulation and huge investment are enabling a much quicker build-out — Walia said. Most European countries have around 200 to 300 data centers, he added, but "the U.S. has like 5,400." Constraints are resulting 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 is it feels like a much more safer investment case Seb Dooley Senior Fund Manager at Principal 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 powerful bottleneck
Energy consumption from power-hungry data centers could more than double to 1,000 terawatt-hours (TWh) in 2026, up from 460 TWh in 2022 and largely driven by AI, per the International Energy Agency. A data center's largest cost component is electricity, though newer, state-of-the-art facilities could have a reduced burden, according to Walia. This is a particularly sticky problem for Europe, which saw its energy bills skyrocket when Russia invaded Ukraine. The U.K. has the highest energy costs in Europe, which are around 75% higher than before the full-scale attack. While this can be a deterrent for setting up shop in a particular location, operators aim to balance it with grid congestion times. Grid congestion has also instigated discussions about how to procure power in Europe, according to CBRE's European data center research lead Kevin Restivo. "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.
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The U.K., for example, operated on a first-come-first-served basis, meaning project significance 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 connection but to say 'where do I currently have good grid connection to an industry in decline?', Walia said, as such sites can be repurposed from industrial to tech hubs.
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