Digital Trade: New Zealand data centres for UK data? 

March, 2022 - Shoosmiths LLP

Energy efficiency is an important element for the location of data centres. A trade agreement with New Zealand could lead to a growth of demand from UK data holders for data centres in New Zealand.


Background

The data centre market is affected by numerous complex elements. Some support growth in the United Kingdom, such as the need to ensure United Kingdom data is in UK facilities if data privacy measures cannot be put in place for storage of data abroad.  Others raise costs and can lead to a drive to find lower cost locations. Two such drivers, which are interrelated, are the cost of energy and whether the energy used is from renewable resources.


United Kingdom and New Zealand

On 28 February 2022 the United Kingdom and New Zealand governments signed a Free Trade Agreement, which will come into effect when ratified pursuant to the countries’ respective procedures. The subject of Chapter 15 is digital trade and includes provisions on the cross-border transfer of information by electronic means, the location of computing facilities and personal information.


Cross-Border Trade and Privacy

The UK data centre market is generally regarded as one of the largest in Western Europe. Post-Brexit there was a concern about the ability of data to be transferred to and from the United Kingdom and the European Union. However since 28 June 2021 the United Kingdom is the subject of two adequacy decisions by the European Union, meaning that the European Union found the UK’s data protection regime provides an equivalent level of protection to the EU’s GDPR and Law Enforcement Directive.  Personal data thus can flow freely from the European Union to the United Kingdom and vice-versa where it benefits from an essentially equivalent level of protection. The adequacy decisions also facilitate the correct implementation of the EU-UK Trade and Cooperation Agreement, which foresees the exchange of personal information.


New Zealand is also the beneficiary of an EU adequacy decision.  Consequently, data can flow freely to and from the European Union and New Zealand. The adequacy decisions and trade agreements addressing digital trade facilitate the cross-border transfers of data and so affect where data centres can be located.


Data Centres, Energy and Climate Change

Data centres in the United Kingdom need to address climate change risks. As an infrastructure sector, data centres must report every five years on the preparations they are making to address climate change risks.1 More specifically, there is the UK’s Climate Change Agreement (CCA) for Data Centres that sets energy use reduction targets, which if met give entitlement to a tax discount (namely, a discount on the climate change levy, which is a tax added to electricity and fuel bills to encourage operators to reduce the amount of carbon dioxide they emit).1


New Zealand and its Energy Situation

Approximately 40% of energy supply in New Zealand is from renewable or from green sources, compared to approximately 16% in the United Kingdom.   This identifies it is easier for data centres in New Zealand to benefit from recognition of low-carbon credentials in their power purchasing decisions. This fact will be of interest not only to data centre owners but their customers who, particularly the large data users, themselves have made commitments to net zero emissions and expect their suppliers also to do so.


Indeed, in general information and communications technology (ICT) companies invest considerable sums in renewable energy to protect themselves from power price volatility, reduce their environmental impact and improve their brand reputation. ICT companies accounted for about half of global corporate renewable energy procurement in the past five years.


These pressures combined with an ability to transfer UK data to and store it in data centres located in New Zealand may be a stimulus for growth in data centres in New Zealand, as identified by a leading UK trade association:


‘Trade policy can play an important role in facilitating the growth of energy efficient data centres, by enabling the cross-border flow of data and banning localisation requirements, enabling organizations to use the most energy efficient facilities available.’


United Kingdom v. New Zealand

It does not follow that the trade agreement will create negative impacts on the UK data centre market given the competition offered by data centres located in New Zealand.  It is too early to say whether, in the round, the comparative advantage in relation to data centres will be with New Zealand, balanced or with the United Kingdom. What is clear is that, as intended, the trade agreement with New Zealand should stimulate business. In the same spirit, it should be noted the United Kingdom signed on 25 February 2022 a Digital Economy Agreement with Singapore  and the expressed intention of the United Kingdom government is to include a digital trade chapter in all future trade agreements. Discussions for a trade agreement have formally commenced with India.


 


1 The reporting obligation is pursuant to obligations to report in the Climate change Act 2008.


2 See the Climate Change Agreements (Administration Facilities) Regulations 2012 for the legislative background, and the Umbrella Climate Change Agreement for the Data Centres Sector, 18 December 202, accessible here.


 



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