September 3, 2015 / 6:14 PM / in 2 years

With abundant energy, Iceland woos power-hungry data centers

COPENHAGEN (Reuters) - As it emerges from financial isolation, Iceland is trying to make a name for itself again, this time in the business of data centers -- warehouses that consume enormous amounts of energy to store the information of 3.2 billion internet users.

The island has long been associated with hi-tech trends such as the 'Eve' video game, the genome deCode project or singer Bjork's use of software as well as its links to filesharing site Pirate Bay, the Silk Road online black market and Wikileaks.

Now it wants to capitalize on the rapidly growing data storage business: data creation has accelerated with 90 percent of stored data created in the two previous years according to Scandinavian research group Sintef, and data centers consume 2 percent of global electricity to keep humming servers cool.

Iceland's authorities are in the process of lifting capital controls imposed in 2008 after a spectacular financial meltdown when its three main banks, with assets worth ten times its gross domestic product, went bankrupt.

Its massive energy generating capacity thanks to hydro and geothermal power cannot be exported due to the island's remoteness so it produces five times more electricity than its 320,000-strong population needs and all of it is renewable.

It is hoping its cool climate and cheap reliable power can entice data center operators, offering them dramatically lower costs and a recently passed tax incentive.

Although the country has not yet attracted big Silicon Valley names, smaller data operations have already arrived.

It has five data centers including one at a dismantled NATO base operated by Verne Global, whose top publicly named client is carmaker BMW, and the government is campaigning to attract more.

"When BMW said they paid 83 percent less for operating their data center on Iceland than in Germany, it (interest) really picked up," said Einar Hansen Tomasson, who works to woo data clients through a government-backed program, Invest in Iceland.

A study by consulting firm BroadGroup in 2013 showed the island is cheaper than Germany, Britain and the United States when looking at costs over a 10-year span. (For more data on Iceland's capacity, see)

FIVE QUINTILLION BYTES

These days, anything anyone does on a computer generates reams of data, or to be precise 5 quintillion - add 18 zeros - bytes globally per day with little stored on a PC or laptop.

But the storage of someone's emails from 2003 requires a very different service than retrieving NASA's processing of New Horizons's data from near Pluto some 4.7 billion miles away.

Processing on this scale is called high performance computing, the most power-hungry kind. It is this kind of data storage that Iceland is best suited for, analysts said.

"It's a big problem for a lot of commercial customers and some universities who run high performance computer environments in Europe because the advanced computers are becoming so big and so energy hungry," said Giorgio Nebuloni, associate research director at U.S. advisory firm International Data Corporation.

BMW requires huge amount of power for processing data: the smallest change to a wing mirror will change the aerodynamics of an entire car so "they don't care if it takes the data hours to come back to Germany", Nebuloni told Reuters.

But that is one of Iceland's drawbacks -- its remoteness means some types of data operations are ill-suited for the island such as high frequency trading, famous for such speed that data centers need to be located within a block of operations.

And Iceland has yet to attract Apple, which has centers in Denmark and Ireland, Google, which opted for Finland, or Facebook, whose centers are in Sweden.

None wished to comment on the location of future data centers, citing privacy and security reasons, while data center operators are equally secretive about their clients. Microsoft says its deliberations on center locations include 35 weighted criteria.

INCENTIVES

While analysts suggest remoteness as well as a small workforce could be behind Iceland's failure to attract big names for now, Invest in Iceland's Tomasson has a different theory.

"I think this is a game of incentives. Many countries are giving incentives to companies who decide to locate in the area," he said.

Danish finance paper Borsen, for example, reported earlier this year how the Danish tax authorities and foreign ministry highlighted tax incentives and how to use them to Apple before its decision to place a center in Viborg in Denmark.

Microsoft meanwhile said it would build a $250 million data center in Finland, a promise which the government said would reflect good corporate responsibility after the tech giant cut thousands of jobs from Nokia's former mobile phone business.

In June the Icelandic parliament agreed to offer investors in the country incentives that include a profit tax cut to 15 percent from 20 percent, a 50 percent real estate tax relief and to let companies depreciate assets completely.

"I think these new incentives are going to absolutely help us," Tomasson said.

For its part, Denmark plans to lower its corporate tax rate to 22 percent by 2016, and offer expat workers a reduced income tax of 26 percent for up to five years.

Data privacy is also becoming increasingly important to businesses, as underscored by the theft and release of details, including sexual fantasies, of people signed up to the Ashley Madison website which facilitates marital affairs.

In Iceland, privacy protection and transparency about how data is used has become a big issue since the grass-roots Pirate Party, with links to Wikileaks, became a top political force.

"Countries with restrictive data privacy regimes, such as Iceland, may be initially challenging to operate in from a regulatory point of view, but the data protection measures offered are highly attractive to customers who wish to maintain control over who has access to their data," Christopher Sherman, analyst with research firm Forrester, told Reuters.

Analysts say building data centers is a big decision and it is commonplace for options to be deliberated for 5 years, so Iceland has a good chance of becoming the go-to place.

"I think there is certainly an opportunity (for Iceland) – especially for workloads such as technical computing, high performance computing and lightweight consumer Web applications," International Data Corporation's Nebuloni said.

Additional reporting by Ragnhildur Sigurdardottir in Reykjavik; Editing by Sabina Zawadzki and Philippa Fletcher

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