Anyone taking a flight in the past year would know that rising oil prices can directly impact the price of services. While ticket prices charged for the flight to the destination, most airlines now impose a separate fuel tax on each passenger in order to pass on the extra costs.

In the past year alone, the price of oil has risen some 50%, culminating at a historic high of US$102.08/barrel on Tuesday. Meanwhile, the price of coal has experienced more or less the same trend, spurred by a general rise in demand from fast growing economies such as China and India, and impacted specifically by recent events such as the severe snow storms that wreck havoc on South China early this year. The price of thermal coal at Australia’s Newcastle port, an Asian price benchmark, closed at US$125 per metric ton in the week of February 11, up some 34% in less than a month and 143% year-over-year.

The situation is only going to get worse, according to most energy experts. The price of oil is predicted to go as high as US$200/barrel in the next 12-18 months, while coal is expected to double in the next year.

As a major consumer of energy to run networks and services, the telecoms industry is already feeling the effects of surging prices. Sources at one Asian operator revealed that power expenditure rose some 30% in the last fiscal year, pushing up the basic SG&A and impacting margins for some services.

“Electricity prices are linked to gas and oil prices. Both have increased substantially over the last few months,” says Allan Deacon, a member of British Telecom Group’s Procurement team. “In the UK approx 80% of the cost of electricity we pay is market related. This % varies slightly in each country but is always the significant factor.”

According to Deacon, energy is an important cost consideration for BT, but it isn’t one of the company’s biggest costs. “Our prices are not as sensitive as, say, an airline.”

EATING ENERGY:
Yet, telecoms networks do eat up a lot of electricity. NTT DoCoMo, for example, used 2,531 GWh of electricity last year, of which 2,279 GWh, or around 90% of the total, was spent running telecommunications facilities. Similarly, British Telecom spent 2,619 GWh on power last year, with 1,992 GWh going to run its networks. At one international operator, the annual energy bill from a handful of cable landing facilities is around US$2 million.

“We expect any increase in power prices to cause a rise in our basic costs given that we are a major power consumer in New Zealand (required to operate our network),” says Steve Kerr, environmental manager for Telecom New Zealand.

At the same time, these costs are now being passed down to purchasers of telecoms services.
“We have already seen price increases from our suppliers in terms of co-location facility provision and we expect to see similar increases in other areas over the next 12-18 months,” adds Ian Mackie, regional marketing manager for Vanco Asia Pacific, a virtual network operator that purchases bandwidth on third-party networks to connect its customers.

Any effect resulting from higher energy costs will be more acute in the data centre environment.

“There is little doubt that rising energy prices will force the IT and telecoms industries to review their data centre operations. We would also add incoming carbon imposts (Kyoto etc.) as a contributor to the increase in electricity prices on top of the increase in fuel prices and the associated investment in transmission and generation infrastructure,” states Malcolm Roe, group manager, business development for Leighton’s Metronode. “Our energy forecasts show power prices increasing by significant amounts (20%+ year on year) and at the same time total power required in data centres continues to increase (up to four or five times over the last 5 years).”

In some cases, fuel price fluctuations are passed down to customers. For example, most data centre operators today separate facility and energy prices so the risk of energy hikes really falls on their customers. On the other hand, there is a big energy component to the operations of the facility itself.

“For a typical Australian data centre user today (1,000m2 at 1,000W/m2) power charges represent almost 30% of their total data centre facility operating costs (facilities only excluding IT infrastructure but includes cooling and building services),” Roe says. “A doubling in today’s power price will increase that proportion to almost 45%. Doubled again and power will become the major portion (60%) of the facility’s operating cost.”

FORWARD BUYING:
For the most part, the respondents to Green Telecom’s research point to existing mechanisms that offer some type of protection against massive increases.

“We purchase a considerable part of our power from the spot market,” explains Kerr from TNZ. “Telecom works hard to mitigate the impact of such cost increases through its long term strategy of a low cost operating model. However, again the operation of the spot market in New Zealand is the key factor in the extent and nature of power price increases.”

A similar mechanism exists in the UK, where BT’s suppliers allow forward buying of electricity when market prices are favourable, says BT’s Deacon, adding that fixed electricity contracts remain unattractive due to higher mark ups. “Most ‘green’ energy is sold at a premium to the market prices. Any fixed price contract tends to be set at a high level to protect the supplier from price hikes. The flexible model we employ usually works better over the long term than the fixed price model, but many organisations lack the skill and resource set to do this.”

Yet, there are fuel-intensive activities that will impact a carrier’s bottom line, such as marine maintenance, which consists of cable ships out on the open sea for weeks at a time to repair damage subsea cables. Marine fuel is derived from oil and any price hike in that area will likely be passed on to the operators themselves. In fact, fuel is such an important part of the service that daily reports from the ships during any operation will consist of a separate item for the costs of fuel. The owner of the cable must absorb any volatility in fuel price as there is nothing like the airline’s “fuel tax” for telecommunications operator.

At the same time, mobile operators with sites in remote locations powered by diesel generators will now have to pay higher gasoline prices to get the fuel to the sites. Essentially, any activity that requires moving things from one place to another will be impacted.

CO-GENERATION OPTION:
For Metronode, the solution is to build its own generating facility along with traditional electricity providers – or a process called co-generation.

“Co-generation will provide energy savings and has the potential for providing energy pricing certainty (our initial studies show that electricity pricing (cents per kWh) could be fixed for a period of time rather the scenario of year on year increasing electricity prices),” Roe says. “Co-generation is a thermodynamically efficient use of fuel. In the normal production of electricity around half is wasted as excess heat but with high efficiency generators matched with absorption chillers this energy is utilised for cooling the data centre. This means that less fuel needs to be consumed to produce the same amount of useful energy.”

Further benefits from co-generation include a reduction in carbon emissions, which in turn can translate into carbon credits in markets that have an established carbon trading market.

MARKET OPPORTUNITY:
It’s not all bad news. As the pinch comes down from rising fuel prices, it represents opportunities for service providers to offer more efficient solutions.

“In line with this we will expect to see more and more global enterprises who are currently managing multiple providers in different regions re-assessing their network management costs and looking at outsourcing, unifying their communications with integrated solutions, network consolidation and more detailed audits of their existing infrastructure assets and expenditure,” Vanco’s Mackie says.” All of these elements are areas where Vanco, as an independent third party, can provide useful council and with our unparalleled access to the equipment providers around the world energy reduction and compressions technologies will be growth areas for us when installing global networks.”

Metronode’s Roe adds: “One of the market outcomes Metronode is already seeing is the consolidation of many small less reliable, capital and energy inefficient facilities, into a smaller number of large purpose-built facilities.”