2021-056 Tenaska Data Center ResponsesAugust 13, 2021 Report No. 2020-056
INFORMAL STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT:
Data Center Project – Additional Requested Information by City Council
DISCUSSION:
In response to questions posed by Council Members relative to the proposed data center proposal
that will be considered by Council on August 17, DME offers the following answers and
comments. Staff requested specific information needed to fully inform Council in preparation of
a decision regarding the potential data center project. The following items were requested by
Council during the work session on September 3, 2021 and in subsequent emails.
Council Member Armintor Requested Information
Q1. The fact that the proposed project is subject to a Non-Disclosure Agreement (NDA) make
me uncomfortable.
Staff Response: Potential transactions of the nature of the proposed type are typically pursued by
private companies under NDAs or Confidentiality Agreements in order to protect the sites under
consideration from competitors and to keep the specifics out of the market to avoid equipment
suppliers to run the price up on needed equipment that may be in short supply. Broadcasting the
name of the customer to the market, has the real potential to erode their competitive position and
consequently cancelation or a decision to pursue the project in another location. Council
Members and City employees are bound by the terms of the NDA which can have adverse
financial impacts to the City if violated. Council delegated authority to the City Manager to enter
into NDAs deemed commercially prudent in the last two years with the condition that all such
NDAs must be periodically reported to Council. Council Members may obtain specific
information on the identity of the potential owners and operators of the proposed data center but
must comply with the terms and conditions of the NDA. Nevertheless, staff universally
investigates the financial integrity of the customer to ensure their ability to perform as the level
of staff time required to complete complex transactions of this type can be significant. Staff is
always thoughtful of spending customer/owner expense dollars on projects that have high
potential to close and that will be profitable to the City. The name of the company will be
disclosed in conjunction with the agenda posting for August 17.
Q2. It would help in debating the value of this deal if I understood more of the differences
between traditional data centers and the proposed cryptocurrency mining operation proposed.
Staff Response: Data centers are classified in Tiers with a Tier 4 data center being the most
reliable and Tier 0 the most flexible and designed to be interrupted for a variety of reasons.
While not wildly different from a reliability perspective, Tiers 1 through 4 perform vastly
August 13, 2021 Report No. 2020-056
different operations. Classification of rated operational reliability of these classes of data centers
are as follows:
• Tier 0 - No availability Guarantee
• Tier 1 – 99.671% Guaranteed availability
• Tier 2 – 99.741% Guaranteed availability
• Tier 3 – 99.982% Guaranteed availability
• Tier 4 – 99.995% Guaranteed availability
Tiers 1-4 are considered “fault tolerant” as they are performing operations consistently such as
mission critical servers. Tier 4 is considered an enterprise-level service. Tier 4 has approximately
twice the site infrastructure of a Tier 3 location.
Tier 4 data centers ensure the safety of data processing regardless of any mechanical failures.
They have backup systems for cooling, power, data storage, and network links. Data Center
Security is compartmentalized with biometric access controls. Full fault tolerance keeps any
problems from ever slowing down data processing. This tier also ensures optimized efficiency
drastically extending the life of hardware.
Tier 3 has most of the features of a Tier 4 infrastructure without some of the elite protections.
Tiers 1 and 2 step down from these higher level of reliability by reduced levels of redundancies.
Typically, these facilities host servers used by start-up companies and those that do not require
maximum reliability.
The proposed “Tier 0” facility proposed for the property at the Denton Energy Center (DEC) is
fully interruptible and does not include any redundant or back-up power supply. Cooling of
computing equipment is performed by fans rather than with mechanical air conditioning
equipment. Consequently, the footprint of the facility per teraflop of data processing capacity is
less than 50% of a Tier 1 facility and less than 25% of a Tier 4 facility. The Tier 0 facility will
not include any on-site natural gas or diesel back-up generating and virtually no regulated
chemicals of storage such as ammonia for R13 coolant. As previously discussed with Council,
the proposed Tier 0 facility will provide much needed ancillary service products to the ERCOT
grid that will improve reliability of the grid. Alternatively, Tier 1 through 4 data centers consume
ancillary services and have no capacity to curtail or interrupt their operations during power
supply scarcity episodes.
Q3. The representation that a 3% electric rate increase is a condition to the approval of the
transaction seems like an ultimatum.
August 13, 2021 Report No. 2020-056
Staff Response: Staff’s presentation was not intended to be viewed as an ultimatum. Rather the
3% increase was provided to Council to demonstrate the magnitude of what a rate increase
would have to be to fully recover the annual debt cost associated with winter storm Uri. All rate
decisions are the purview of the City Council. The nexus between the potential incremental net
income that could be provided by the proposed data center to DME and its potential to provide
the incremental revenues to offset what would otherwise be a 3% increase in residential rates to
cover DME’s revenue requirements is the reason for its inclusion in the presentation. Staff has
been clear in its intent to not discuss electric rate impacts until November/December of 2021
once summer revenues have been realized and further information is available on pending
transmission cost of service rate case that is currently under development. Also, Council’s
decision on whether to approve the proposed data center will be decided and a more detailed
forecast of electric revenues from the project will be fully developed.
Q4. The use of Renewable Energy Credits (RECs) to “green” the proposed data center is suspect.
Staff Response: All Texas load serving entities and companies with renewable energy targets or
mandates use RECs to measure compliance because it is the only way to universally verify
renewable energy generation. The market protocols in place require ERCOT to award RECs to
renewable generators based upon actual metered output from qualified renewable energy
resources. Awarded RECs are deposited into the renewable resource’s REC account. Power
Purchase Agreements (PPAs) between renewable resource and load serving entities like DME
require the transfer of such RECS from the renewable resource account to DME’s account.
RECs are only awarded by ERCOT if a MW of renewable energy is generated. Each REC is
serialized to denote the year, month and renewable resources from which it was generated. Thus,
RECs provided by the data center to DME will use the same verification process as those DME
receives from its renewable PPAs. Because of the short-term nature of the proposed PPA with
the data center, renewable energy resource owners and developers will not enter into a traditional
PPA and thus the need to rely on RECs for demonstrating compliance with Denton’s requirement
for 100% renewable energy. Since all RECs represent a MWh of energy that was generated by a
renewable resource and the award of the REC is by ERCOT who administrates the REC
accounts of all market participants, all RECs are of the same quality and represent a MWh of
carbon free energy that was injected into the market.
Council Member Beck Questions
The following email thread was provided to Council Members.
From: Beck, Brian <Brian.Beck@cityofdenton.com>
Sent: Tuesday, August 10, 2021 12:39 PM
August 13, 2021 Report No. 2020-056
To: Naulty, Terry <Terrance.Naulty@cityofdenton.com>
Cc: Puente, Antonio <Antonio.Puente@cityofdenton.com>; CMO Group
<CMOGroup@cityofdenton.com>
Subject: Re: Spot market relationship with Data center question
Terry:
I encourage you to present these answers today or perhaps in an ISR/Friday-Report to council,
though many have already found their way into your presentation for today.
I keep hearing similar questions out in the community. Particularly the expected source of the
RECs and the quality of the RECs that Stephen presented.
Also, you’ve shown us these before, but could you please have the current and projected MW
values ready to go please? e.g. (min/mean/max) of Denton, Datacenter, Denton +
Datacenter, %increase. (you may be able to cut-n-paste, but I couldn’t find them all when I
searched through previous documents)
Staff Response: The volume of energy and the size of the phased development is restricted
pursuant to the non-disclosure agreement between the City and the customer. This information
can be provided to Council in a Legal Status Report or during a closed session discussion.
If there’s not enough time today, I understand, but could you then add that to an
ISR/Friday/(LSR as required) response instead?
Thanks!
-Brian
Brian W. Beck, Ph.D
| Councilor for Denton – District 2 | Denton, TX, USA, 76201| V:940-293-7611 | Facebook:
@BrianBeckforDenton | Twitter: @beckfordenton | brian.beck@cityofdenton.com |
www.cityofdenton.com
From: "Naulty, Terry" <Terrance.Naulty@cityofdenton.com>
Date: Thursday, August 5, 2021 at 3:29 PM
To: Brian Beck <Brian.Beck@cityofdenton.com>
Cc: CMO Group <CMOGroup@cityofdenton.com>, Antonio Puente
<Antonio.Puente@cityofdenton.com>
Subject: RE: Spot market relationship with Data center question
My answers to your question below. Happy to expand upon them if need be.
August 13, 2021 Report No. 2020-056
Terry
From: Beck, Brian <Brian.Beck@cityofdenton.com>
Sent: Thursday, August 5, 2021 10:53 AM
To: Naulty, Terry <Terrance.Naulty@cityofdenton.com>
Cc: CMO Group <CMOGroup@cityofdenton.com>; Puente, Antonio
<Antonio.Puente@cityofdenton.com>
Subject: Spot market relationship with Data center question
Terry:
Can you flesh out:
• the two-way interactions between ancillary services credits to the data center during high
load and peak load events? Ancillary services (AS) markets clear on a day-ahead basis
and thus must be committed by the project by 10 AM the day prior to delivery. The
project will be assessing the relative economics of selling ancillaries versus producing
their product and me making those decisions based upon weather, renewable production
forecast, natural gas prices, projected demands, et., just like DME does every day. The
amount of project offered ancillary services project that clears the market on a day-ahead
basis will determine the range of electric demand the can put onto the grid in real-time. If
the project offers Reg UP and Red Down at 50 MWs and it is offered with increasing
offer prices with increasing volumes, only a portion of the ancillary services offered will
clear. For example, if they offer 10 MWs of AS at $40/MWh, 10 at $50/MWh, 10 MW at
$60/MWh, etc and the market price clears at $52/MWh, they will be committed to
provide 20 MW of AS for those hours because volumes above 20 MWs were offered at
price above the clearing price of $52/MWh. That will leave 30 MW out of the 50 MW
offered available to consume energy to produce their product. In the spot market (real
time) they will determine a threshold value of energy above which they will shut down or
reduce load. Directly to you question, during high load/peak load events, they will know
based upon the cleared volume of AS what the range of AS and energy demand will be
and will operate the project accordingly. As you can see, this range of operating options
lends itself well to artificial intelligence applications that use algorithms to optimize the
value proposition to the Project. The owner of the project is adroit in this valuation
methodology and has developed several patented products to optimize this AS to energy
to product mix.
• which entity (ERCOT, DME, Tenaska, other) is supplying those credits to the compute
client end-user? The contract requires the end user to provide the RECS by a date certain
each year, after which any shortfall will be purchased by DME with full reimbursement
of such costs by the end user (owner of the project).
August 13, 2021 Report No. 2020-056
• does DME receive fees/revenue during both power use and power credit events or are
power credit events expenses to DME? DME’s compensation is based upon net energy
consumed by the project. Ancillary Service revenues from the market will be netted from
power purchase costs and the resulting net bill will be assessed the Franchise Fees, ROI,
sales taxes, etc.
• Will this data center plus others around the state, even if stabilizing the grid by idling,
create competition demand such that the spot market prices increase? This is a great
question and one that is almost counter intuitive. During low demand periods – nights
and weekends – when renewable of abundant and spot prices are low, these demands
should increase the spot price. While that may not sound like a good thing, it actually is
favorable to Denton. Because we are long renewables at a fixed price during these low
price periods, any increase in the spot price will reduce the loss that we take on selling
our renewable position into the wholesale market. For example, if we are buying
renewable at $20/MWh under of long-term PPA, and spot prices are $15/MWh the net
cost to DME is $20/MWh + ($20/MWh - $15/MWh) = $25/MWh. If as a result of these
new demands during the low price periods the price rises to $$25/MWh, DME’s
economics are improved: 20/MWh + ($20/MWh - $25/MWh) = $15/MWh.
o If we move into a peak demand situation such that the data center idles, but we
still have housing/industrial load here in Denton that is beyond our negotiated
block pricing such that we need to buy off the spot market to top us off, would
data center competition spot market pricing increases actually impact our own
purchasing power from the spot market. (i.e. are we chasing our tail and if so how
much?) No because we will not be managing the data center supply on a forward
basis like we do the DME load. We will continue to manage the DME load
independent of the data center load because DME will have no price risk from the
data center since the cost of energy for the data center will always be the spot
wholesale market price. Said another way, the data center is always a price taker
while DME will be actively managing the price risk for serving our load.
o Similarly, would the ancillary services power surplus to the grid from idling the
data center reduce or increase the likelihood of the DEC firing up to hedge
financially? The sales of Ancillary Services from the data center should reduce
the cost of AS across the whole ERCOT market. As a required service that DME
must buy from ERCOT, this will lower the cost of AS that we must buy from the
market. DEC dispatches could be marginally less because the procurement of
this AS from the project by ERCOT provides additional reserves that could
depress prices. However, remember that the DEC revenues only offset load
purchase expenses. Thus, higher or lower costs are effectively awash.
August 13, 2021 Report No. 2020-056
What these questions are trying to address is : We don’t want the data center to be causing us to
pay more on the spot market just from its presence and we don’t want the DEC to fire up more
just from its presence. I don’t think these are deal breakers a priori, but it important to me and
citizens to better understand the dynamics of the transactions
Can you add these questions to the ones I sent you earlier, please?
-Brian
Brian W. Beck, Ph.D
| Councilor for Denton – District 2 | Denton, TX, USA, 76201| V:940-293-7611 | Facebook:
@BrianBeckforDenton | Twitter: @beckfordenton | brian.beck@cityofdenton.com |
www.cityofdenton.com
STAFF CONTACT:
Terry Naulty, Asst. General Manager DME
Terry.naulty@cityofdenton.com
(812) 972-1457 mobile
REQUESTOR: Council Members Armintor and Beck
PARTICIPATING DEPARTMENTS: DME
STAFF TIME TO COMPLETE REPORT: 8 Hours