Dealing with sharp increases in energy costs and price adjustments

Background to our cost structure

With today's article, we want to transparently explain how we have dealt with the topic in recent months and what news has emerged in recent days. After there was initially no sign of an easing on the energy markets, we started to address the issue. To understand the impact on our company, you need to know how our energy costs are made up.

Last year, as some have certainly followed on social media, to ensure our growth in our maincubes FRA01 data center (instead of individual racks as before), we rented our own larger area, which is being expanded with racks according to our needs. In the end, these are two rows of racks with their own cold aisle with a door in the middle, which we can extend until we reach the opposite wall. It includes our own cable routes, which we can use to connect our racks at will. This setup creates space for the next few years and enables us to implement virtually all connectivity needs ourselves — whether for customer racks or our own. Through a long contract period, we have ensured that we can achieve good conditions for fixed costs over a long period of time.

What is quite common in the (larger) data center business also applies to us: Our total costs consist primarily of the so-called (fixed) provision of services and a variable kWh price. The power supply is measured in kW and simply means that we can use a certain peak power (for example 100 kW) and are also guaranteed that this load can also be cooled 24/7, i.e. the waste heat from our infrastructure can be removed. Since the data center must ensure that it can provide this power and cooling capacity at any time, it is common for you to pay for your peak consumption and not the average consumption. As a result, you usually have to pay a little more for the provision of services than you consume on average.

In terms of actual electricity consumption, our price consists, in simple terms, of the current annual purchase price of the data center and the so-called PUE (Power Usage Effectiveness). The PUE value is calculated from the secondary consumers of the data center in relation to the productive load; i.e. primarily air conditioning, uninterruptible power supply (UPS) and other building technology.

Procedure so far

On the one hand, we tried to find out the electricity price for 2023 as a basis for calculation as soon as possible and, on the other hand, we “preventively” increased the price for new orders of some of our products by 11-14%. Frankly speaking, the hope was to be able to absorb the approximately expected additional costs in 2023 as a result of the actual increase and the additional income in the last months of this year to a sufficient extent. We specifically wanted to avoid making lump sum price increases for all products without knowledge of the final electricity price. Although many competitors have drastically revised their prices upwards in recent months, we wanted to wait and see what electricity price we would ultimately have to calculate — knowing full well that the time window that we have until the start of the new year after the electricity price announcement is getting smaller by the day.

From 2021 to 2022, we had already received an increase in electricity prices of around 40%, but we were able to cushion this back then through forward-looking planning and the previously fairly low kWh price without having to touch existing contracts. First and foremost, we adapted dedicated servers when they were canceled and therefore re-leased. This enabled us to offset some of the additional costs.

The price of electricity in figures

On the afternoon of 30.11.2022, the time had come — we received a letter regarding the electricity price for 2023. The increase is more than 80% compared to 2022 And in doing so, it must be said quite frankly, exceeded our fears and thus shattered the hope of being able to cross-finance them purely from new orders.

Since it is the easiest to implement for them and represents the most important cost factor, we communicated their new electricity price to all customers who purchase their own racks from us on the evening of 30.11.2022. This is valid from 01.01.2023 and cannot be intercepted by us in any way, as the colocation margin is low and the electricity costs are passed through by us. That is why we design our colocation contracts in such a way that the electricity price is adjusted in accordance with our purchase costs — in the other direction as costs fall, of course.

A new approach

Anyone who has already guessed while reading that we too will now have to make price increases for existing customers is right. However, we do not want to go down the path of the current “standard market” lump sum increase in all products by a certain percentage. Since we separate our racks by product, we were able to determine relatively quickly which of our products would generate which additional costs. We have done this over the last few days.

Ultimately, with this knowledge, we are now tackling the problem from various perspectives:

• Adaptation to cheaper products: Thanks to a high level of customer loyalty, we still have active contracts dating back to 2014. Back then, for example, we were still able to obtain IP addresses free of charge and, although not often, we rented out vServers for 2.00 €/month and cheaper. With current IP and energy prices, this is no longer a good idea and must be corrected at all points where, from today's point of view, a price maintained over many years is no longer profitable. This applies in particular to additional IPv4 addresses and IPv4 networks, but will also affect some newer products if they are simply no longer profitable in relation to the current calculation.
• Replacing old systems: For many old contracts, we still operate servers with old processors that are no longer energy efficient enough. We will replace these with more modern CPUs next year and thus upgrade products that we need to raise the price a bit at the same time.
• Other energy-saving measures: Admittedly — there is not much more to be done because we have been paying attention to energy efficiency for a long time, but from next week we are working on further reducing the costs of cooling our servers by optimising their ventilation without increasing the actual supply air temperature of our cold aisle, so that our customers are not disadvantaged. Depending on the result, there will be a blog post about this.

Wherever possible, we will not only upgrade older products in terms of CPU performance, but also raise traffic and bandwidth to a modern level in order to be able to add at least a certain amount of added value.

Price adjustment details

We will write to all affected customers in the next few days and communicate the respective increase. In terms of our transparent communication policy, it is important to know how we proceed in this regard. We will not make a hard adjustment on an exact cut-off date, but on the next regular due date, which is after that deadline. The following example should illustrate this:

A product currently costs €10.00 per month and will be increased to €11.50 per month from 01.01.2023. However, the next due date of the product is 31.12.2022, i.e. before the cut-off date. For this reason, the product is billed again on this day for a full billing period at the old price — even if this is always paid one year in advance. In particular, we want to reward customers who have placed their trust in us with an individually selected larger billing period and still allow those with a shorter billing period a certain amount of predictability, as every statement due before the reporting date will always be made at the old price; even if the period then billed goes well into the next year.

With these measures, we intend to offset around half of the additional costs. What about the other half?

outlook

Politicians are currently discussing an electricity price brake. Many details are unclear; but above all, of course, where exactly the effective electricity price for next year will level off for us. Of course, we do not expect the electricity price brake to completely solve the cost problem, but it should provide some relief.

In addition, many industry experts expect prices to ease from 2024. Our idea is therefore to swallow the remaining additional costs in parts for a year and to be able to buy an electricity price again from 2024, which, in combination with the necessary price adjustments, brings the profitability of our products back to the previous level. We think this is more customer-friendly than making a lump sum, larger increase now and promising later price reductions that no one can really estimate correctly.

It is annoying that we only received the new electricity price so late, as our own communication was and is directly dependent on it, and we are aware that the resulting late communication will also be met with displeasure. Nevertheless, we hope that we have explained well why we did the same and not otherwise. The next year will bring some challenges for the hosting industry; not just in Germany. We are grateful to have loyal and understanding customers by our side and are therefore confident that we can make the best of the situation.

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