Amazon Web Services: Greenhouse Gases in the Cloud

The Cloud: High Growth, High Energy Usage
When you stream video on Netflix or pin photos on Pinterest, you’re using infrastructure managed by Amazon Web Services (AWS), a suite of cloud computing services used by many of the biggest companies in the world.  While a minor contributor to Amazon’s total revenue (7%), AWS is Amazon’s fastest growing core business.[1] We can expect this growth to continue as more and more companies push data to the cloud.[2] But expanding of the cloud requires real, on-the-ground infrastructure – data centers that demand large amounts of electricity, making electricity a major cost consideration in AWS’ effort to provide its customers with low cost, reliable computing infrastructure. [3]

Regulatory and PR Context
There are two major drivers for AWS to plan strategically for sustainability: regulation that will drive up electricity prices and demand from their customers who want to see their cloud powered by renewable energy.
First, in the US, the electricity sector is the single largest source of carbon emissions (see chart).[4] ghge-sources-overviewFor this reason, the EPA created the Clean Power Plan, a rule that limits carbon emissions of power plants to reduce electric power sector emissions to 68% of 2005 levels by 2030.[5] The rule is currently held up in the courts but is widely expected to survive legal battles. The rule will increase electricity prices in the US anywhere from 3-10%, depending on the region.[6]
Second, Greenpeace has mounted a campaign to encourage data companies to publish statistics on their energy usage and to source energy from renewable sources. In its 2014 and 2015 Click Green reports, Greenpeace gave AWS a failing grade for their lack of transparency and failure to power their operations with renewables.[7] Following the release of Greenpeace’s 2015 report, fifteen AWS customers issued a public letter asking AWS to provide additional transparency about their plan to be powered by 100% renewable energy.[8]

Amazon’s Response
AWS identified three levers for reduced energy usage from their data centers:[9]
1. Reducing the number of servers running by optimizing utilization of each server: When companies use on-site servers, they build substantial excess capacity to ensure that they can meet peak demand. With cloud computing, the contingency needs of multiple companies can be aggregated and optimized, driving up utilization and driving down the total number of servers needed. An NRDC report backs up this claim, showing that the utilization for on-site servers is 12-16% compared to 10-50% utilization for cloud providers.[10] This benefit accrues to the customer and not to AWS, although AWS may be able to capture some of the energy savings in the price of their cloud services.
2. Reducing the amount of energy each server uses: This is achieved by improving the efficiency of lighting, heating, and cooling throughout the data center and reducing electrical losses. AWS should continue to look for innovative ways to drive up the energy efficiency of its data centers – this will both save them money and reduce their carbon emission.
3. Reducing the carbon intensity of the power sources used to power theses servers: In late 2014, AWS announced a goal to be 100% powered by renewable sources. Since then, they have purchased or signed long term power purchase agreements for 727 MW of wind and solar generation projects.[11] These five projects are expected to generate 25% of AWS’ energy needs.

My Take: Amazon is off to a good start, but now is the time to buy wind
I commend AWS’ decision to own wind and solar farms rather than to purchase renewable energy credits (RECs) like some of their competitors. It’s good for business – by owning or entering into long-term contracts, AWS gets low-cost clean power and reduced exposure to electricity pricing, helping them control data center costs. It also works for the environment – because of an oversupply of RECs in the US market, it is very difficult to argue that purchasing RECs actually incentivizes new renewable generation to be built, [12] but AWS’ approach undoubtedly adds additional wind generation that would not have been built otherwise.

AWS still has work to do. Using data on their website, I calculated that they will need to own another 2,200+ MW of wind to meet their renewables goal.[13] They should buy wind now, while it can still qualify for the Production Tax Credit (PTC) before the policy ramps down completely in 2019.[14] The PTC lowers the cost of wind by ~$20/MWh, almost half of the unsubsidized cost of wind. To qualify for the full value of the PTC, projects need to start construction by 2016, so I hope this year will be a big one for AWS in terms of wind purchases – it will help keep their energy costs low and will give their customers additional comfort that their cloud is clean. (797 Words)

[1] Amazon, 2015 Annual Report, p. 24, http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual, accessed November 2016.
[2] Frank, BH 2016, ‘Salesforce picks AWS as preferred public cloud provider’, Cio (13284045), p. 9, Business Source Complete, EBSCOhost, viewed 4 November 2016.
[3] Amazon Web Services. 2016. Cloud Products. Available at: https://aws.amazon.com/products/?nc2=h_ql_ny_livestream_blu. [Accessed 4 November 2016].
[4] Environmental Protection Agency. 2016. Sources of Greenhouse Gas Emissions. Available at: https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions. [Accessed 4 November 2016].
[5] US Environmental Protection Agency. 2016. Overview of the Clean Power Plan. Available at: https://www.epa.gov/cleanpowerplan/fact-sheet-overview-clean-power-plan. [Accessed 4 November 2016].
[6] Energy Information Agency. 2016. Analysis of the Impacts of the Clean Power Plan. Available at: https://www.eia.gov/analysis/requests/powerplants/cleanplan. [Accessed 4 November 2016].
[7] Greenpeace. 2015. Building a Green Internet: 2015 Click Green Report. Available at: http://www.greenpeace.org/usa/global-warming/click-clean/. [Accessed 4 November 2016].
[8] ‘AWS customers want more information on its renewable energy plans’ 2015, FRPT- Energy Snapshot, pp. 32-33, Business Source Complete, EBSCOhost, viewed 4 November 2016.
[9] Barr, Jeff. Amazon. 2016. Cloud Computing, Server Utilization, & the Environment. Available at: https://aws.amazon.com/blogs/aws/cloud-computing-server-utilization-the-environment/. [Accessed 4 November 2016].
[10] National Resource Defense Council. 2014. Scaling Up Energy Efficiency Across the Data Center Industry: Evaluating Key Drivers and Barriers. Available at: https://www.nrdc.org/sites/default/files/data-center-efficiency-assessment-IP.pdf. [Accessed 4 November 2016].
[11] Amazon. 2016. AWS & Sustainability. Available at: https://aws.amazon.com/about-aws/sustainability/. [Accessed 4 November 2016].
[12] Roberts, David. 2015. Vox: RECs, which put the “green” in green electricity, explained. Available at: http://www.vox.com/2015/11/9/9696820/renewable-energy-certificates. [Accessed 4 November 2016].
[13] Based on data from AWS’s website, their five existing renewables project are expected to produce 2.2 million MWh of clean energy annually, representing 25% of their total energy usage. This implies that in order to get to their goal of 100% renewables, they need 8.8 million MWh I calculated that their average wind capacity factor is 34%, so based on that and the 6.6 million MWh gap, they will need to build another 2,204 MW (=6.6 million/(8760*34%)) of wind to meet their goals, assuming no growth in the amount of energy they need. I think this is a very low estimate considering that as their business grows, their energy demand will also grow.
[14] Department of Energy. 2016. RENEWABLE ELECTRICITY PRODUCTION TAX CREDIT (PTC). [ONLINE] Available at: http://energy.gov/savings/renewable-electricity-production-tax-credit-ptc. [Accessed 4 November 2016].
Featured image is from the cited Greenpeace Click Green report.

 

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15 thoughts on “Amazon Web Services: Greenhouse Gases in the Cloud

  1. This is great! I’m a big fan of AWS and most engineering teams I know today use their services because they are inexpensive, reliable, and flexible. As you mentioned in your post, the growth potential for this part of Amazon’s business is huge. However, because their price point is such a large part of their value proposition, I would be really curious to see how Amazon thinks about the impact of using 100% renewable energy on the pricing of their products or on their margins. Thanks for sharing!

  2. Great analysis of AWS’ business model and its strategy to control its carbon footprint. AWS has single-handedly transformed the way companies manage their technology infrastructure. In response to concerns over cyber security, several governments have mandated that company data be stored locally. Therefore, it will be interesting to see how AWS is able to balance its growth trajectory as it looks to build its global client roster by adding new data centers across geographic locations with its goal of 100% renewable energy.

  3. Very interesting analysis, first of all to shed light on a business like the web service business that could wrongly be considered “clean by definition”, and secondly to understand which actions such an impactful industry is undertaking to face the customer demand for sustainability.

    I was personally shocked to learn that in the US the electricity sector is the single largest source of carbon emissions and would be curious to know if and how other players in the electricity sector are considering reducing their carbon emissions. I agree with you that ASW levers are a good start and I do hope that these levers will represent an example to be followed by other players in the industry.

    You mentioned that AWS announced a goal to be 100% powered by renewable sources, but I would be curious to know which is the time frame they gave to themselves to reach this goal. This is related to one of my main concern about their strategy that is how fast it will be. I agree with your analysis that owning wind and solar farms reduces AWS exposure to electricity pricing but I wonder how long it will take to AWS to build the infrastructure and capabilities to be 100% powered by renewable sources if they aim to own their own sources. Shouldn’t they consider to complement their strategy by acquiring wind and solar power by third party providers while developing their own plants?

  4. This is a great post! AWS is so widely used, and even when you think about Netflix content alone, that means many, many servers to support just one client. As content continues to move online, I agree with you that AWS is at a key point where it really has to think about sustainability and ensure that it is doing its part to address broader climate change issues. Content and data storage on the cloud will only grow, especially if you think about the types of content that is growing (videos, movies, pictures, all resource intensive compared to say a word document), there is likely going to be significant future investment for physical servers. What would be interesting to see is if AWS sets the tone on creating a sustainable physical infrastructure for its business, and what other cloud based storage businesses will follow. Is this something that Dropbox will start thinking about? What about startups in this space that are resource constraint but looking to disrupt this industry. Is sustainability now a new expectation?

    Really thought provoking piece!

  5. Super interesting post, Alex. AWS is indeed a huge part of Amazon’s growth story going forward, and it’s also the main driver for the surge in AMZN’s stock price over the past few quarters. Great to see that Amazon is addressing its climate change implications upfront today.

    Frankly, I was very surprised to read that 15 customers actually went back to Amazon and demanded changes following the Greenpeace report. I wonder if this is because those customers have internal controls and sustainability standards that are now forcing them to pressure suppliers, including Amazon.

    What I find most interesting for their datacenter strategy going forward is the geographic location of these datacenters over time. Like you mentioned, they use an incredible amount of energy to maintain cool temperatures, and I find it very telling that Amazon’s newest regions for planned datacenters seem to be progressively moving farther north…to naturally cooler climates where less power is needed? 🙂
    https://aws.amazon.com/about-aws/global-infrastructure/
    See the green circles at the site above.

  6. So if AWS is purchasing wind power are they actually consuming that power in the data centers or are they selling that back to the grid and claiming they own wind? It would seem that wind energy is physically located in places that amazon doesn’t have data centers making it difficult for them to actually use the power they’ve purchased. If in fact they are selling that back to the grid, are they actually offsetting the power they use because of the huge transmission losses to get wind power to markets where it can be used? If this is the case it would be interesting to see how many MW equivalents of wind they need to purchase to offset their MW usage.

  7. Alex,

    Very interesting piece, I enjoyed reading it. I have two questions that came to mind:

    1/ A large part of the energy consumption is for server cooling. Are Amazon’s servers located near Northern cities where the heat could be used to heat buildings?

    2/ What makes you believe that Amazon can operate wind mill farms more efficient than companies that only operate wind mill farms? Wouldn’t it be better to go into a long term purchasing agreement with a company that has already experience in this field?

    BTW: I love the fact that you use SI units (MW, kWh) and not foot-pounds 😉

  8. This is really interesting! The sustainable AWS can really attract more customers who are more environment-conscious. And AWS, as the global leader in cloud computing can also demonstrate to other cloud comuputing players that being Green can also be efficient. Curretly there are more and more smaller player entering cloud computing; however, the Infrastructure as a service require scale economy to become more efficient. AWS can also acquire smaller cloud computing players to increase the scale economy and efficiencies. Thank you for your sharing!

  9. Interesting post Alex! I thought your “my take” was right on. The extension of PTC & ITC at the end of last year was huge for adding to the pipeline of renewable projects in the US. I also would like to see AWS continue to add renewables to their energy portfolio leading up to the phase out of the PTC. I am however, very hopeful that the extension will help give the major onshore OEMs (Vestas, GE, Siemens, etc.) the extra time and certainty they need to make improvements in their technologies and supply chains to deliver future renewable energy at a levelized cost equivalent to that of traditional alternatives.

  10. Great post Alex. I completely agree with your analysis. As SaaS, PaaS, and IaaS become more and more prevalent in business operations, the energy consumed by server farms increasingly becomes a global warming concern. Coming from Kansas, I am a huge fan of wind as a renewable energy source, but I had a questions around distribution. Since you can’t co-locate all your server farms with windmill farms, my understanding is that Amazon is essentially generating equivalent green energy, but they are not necessarily consuming that clean. In essence they are doing a swap. In order to truly have a zero-impact footprint, would it better to focus on solar, that would increase their capability to consume the clean energy they produce. Or is there a reason wind is better?

  11. Alex, thank you for the thoughtful analysis. I would never have thought about the impact that AWS might have on the environment. As companies continue to move to the cloud, AWS electricity consumption will continue to balloon. I agree that the time is now – Amazon should front load its investments in alternative sources of energy. The investment will not only have a positive impact on the environment, but will also prove to be a good economic decision in the future, as companies continue to switch to alternative sources of energy. Do you think it is possible for Amazon to move all of its data centers onto a sustainable energy platform?

  12. It is really surprising that AWS’s drivers for pursuing sustainability are both their external regulations and their consumers’ perspectives/desire for transparency, yet AWS themselves benefit very little financially from the sustainability if they do not increase their own prices — it certainly paints a picture that the burden is moreso on them.

    On the note of electricity being the largest contributor to greenhouse gas emission, I think your recommendation for AWS to increase their share of wind purchases is an excellent one. Kaiser Permanent, a hospital system in California, is pursuing a similar strategy of purchasing wind and solar energy. I wonder if investments in these energy sources are influenced by geography, and if there might be a better way to understand when and why certain energy purchases are made. This may help other corporations co-invest with each other in these energy purchases or even help them pursue such energy saving strategies themselves.

  13. Alex, this is a very well written and elaborate post on AWS. Among the big technology companies, cloud computing is the main bone of contention – each player (Microsoft, VMware, Google etc.) looking to grab the maximum market share from businesses worldwide given that many are constantly shifting to cloud computing to reduce server costs and risk of data loss. AWS here has the first mover advantage, being amongst the first companies to launch cloud computing and capturing a major portion of the market. In order to maintain and expand its market share, a huge opportunity for AWS here is to reduce the amount of energy its servers use. A sustainable way of doing this is to build its server data centers in cold regions where temperatures are always sub 0. In doing so, AWS can use naturally available cold air to cool its servers and data centers thus eliminating the need for air conditioning and massively reducing carbon emissions. As mentioned in your post, AWS has also enhanced server utilization in the last few years, however, as they increase their market share and data centre, it is increasingly becoming difficult to be more efficient at server utilization.

  14. Alex – awesome deep dive into one of my favorite companies! I knew that Amazon had invested heavily in wind but I was unaware that the company was buying their own wind farms – I had assumed they were purchasing renewable energy credits. I’m curious about your thoughts on AWS as a segment in contrast to the environmental impact of the company as a whole. Is it enough if Amazon invests in renewable energy for its data centers while still directly or indirectly contributing to massive environmental impact from its other core business (i.e. deliveries, building fulfillment centers, cardboard boxes, etc.). In addition, given the scale of ambition of the company, do you think it’s ok to launch new products and processes (like AWS) and only retroactively think about the environmental implications? What can a company like Amazon do to ensure that environmental output is a core consideration in the initiation or scaling up of new businesses?

  15. Awesome post, Alex– I thought this was really clearly laid out, from the context to their operations to your opinion. Further, I never knew that electricity was the biggest source of carbon emissions — I totally would have guessed transportation or industry first. Finally, on the compliment front, I’m really impressed by how much you clearly know about the industry and the analysis you did in the last paragraph. RECs haven’t been brought up much in our blog posts but it is clearly a relevant and top-of-mind marketplace.

    Building wind and solar farms is a pretty impressive move on AWS’ part– I just wonder how ready they are to manage this exposure to brand new economies within the construct of their business model. Hopefully, they succeed and can instigate other companies to do the same.

    Finally, I wonder if many consumers of cloud computing, especially major companies (a lot of investment banks now use it), are aware of how much electricity goes into the infrastructure and thus, how it might have an impact on their costs were AWS forced to raise prices as a result of the factors you discuss. It would be very impactful for AWS to publicly discuss this impending issue, as I think a number of individuals and corporations would be incentivized to get involved in clean energy, if just from a monetary protection perspective. In the meantime, I hope the government keeps incentivizing major capital investments in these clean energy farms through programs like the PTC but I also hope that they and maybe conscientious investors also think to incentivize this behavior through upfront cash injections that help companies who are more capital-constrained than AWS.

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