Every euro invested in a data center generates nine in the economy

Despite some market analyses estimating that Croatia has about twenty megawatts of data center capacity, an analysis by the Croatian Data Center Association (HRDCA) shows that the total installed capacities reach only 10 megawatts.

In the next few years, according to HRDCA data on projects in realization, growth to approximately 25 megawatts is expected. At the same time, only in Frankfurt, the company Digital Realty, which is also present in Croatia, has about 300 megawatts of operational capacity and an additional 200 under construction.

However, in Croatia’s exit from the digital periphery of Europe lies an opportunity as the possibility arises for Zagreb to become a regional data hub for Southeast Europe, as current estimates already indicate that Croatian capacities will grow twice as fast as the regional average.

Is it realistic for Croatia to become a data hub for the region, can network modernization help, where to find capital, and what are the specifics of this business? We spoke with Goran Đoreski, president of HRDCA and director of Digital Realty, which has a data center in Trešnjevka, Zagreb, and is building another one in Jankomir.

How far behind Europe are we in megawatt capacities?

– We are significantly behind, primarily because the structure of our market is fundamentally different compared to more developed European countries. Digital Realty, for example, has about 300 megawatts of operational capacity in Frankfurt alone, with an additional 200 under construction. This means that Digital Realty’s capacities in Croatia account for only about 0.5 percent of its capacities in Germany.

At the same time, a large part of the digital services consumed in Croatia and Southeast Europe, such as Office 365, gaming services, and streaming services, is delivered from those large Western European hubs, not locally. Croatia and the region currently do not serve their own market, and therein lies the foundation for future development. In the long term, it is always more efficient and cost-effective to invest closer to end users rather than relying on distant locations. If we can enable these services for Croatia and Southeast Europe to be delivered from Zagreb, it can make a substantial difference.

What are Croatia’s geographical advantages compared to the rest of Southeast Europe?

– Southeast Europe is a meaningful and economically justified market for a global data center. It is a region of about 60 million inhabitants, comparable to Italy, with an area about 25 percent larger than France and a total GDP slightly larger than Switzerland’s. However, it is a heterogeneous market: some countries are EU members, some are not, and the legislative frameworks and levels of legal security vary significantly. Croatia, Hungary, Bulgaria, Romania, and Greece are peripheral but strategically very important locations from which the entire region can be served.

The region is well connected by optical infrastructure, and within Southeast Europe, it is possible to operate with latencies of about five milliseconds. The main competitive cities for serving this market are Zagreb, Sofia, and Athens. Zagreb’s advantages are that it guarantees legal security to investors and users, free flow of equipment without customs duties, and a stable regulatory framework. The strategic goal should be to gradually relocate key digital services: video streaming, gaming, and office applications for Southeast Europe from Frankfurt or Amsterdam to Zagreb.

Are there price differences compared to Europe?

– There are differences, both positive and negative. The price of electricity in Croatia is still somewhat lower than in Germany, but it is about twice as high as in the Nordic countries. On the other hand, construction work in Croatia is more expensive than in any other European country. Labor costs are still lower than in Western Europe, and industrial land in Zagreb and its surroundings costs about ten percent of the price of comparable land in Frankfurt or Zurich.

However, the key is the combination of prices, proximity to the market, latency, and available resources. In many large European cities, the biggest problem is no longer the price of land or construction, but the availability of electrical connections. For new connections of 100 or 200 megawatts, it is often necessary to build kilometers of new infrastructure, which is a serious infrastructure undertaking that takes five to ten years. Hypothetically, in this sense, Croatia currently has a comparative advantage.

Are AI locations a competition for colocation data centers?

– Colocation data centers gather a very diverse structure of users – from hyperscale users to enterprise clients and commercial clients to telecommunications operators. In a way, they function like a shopping center, where synergy and market attractiveness are created precisely by the joint presence of different users.

A key prerequisite for such centers is a strong and redundant optical infrastructure, which is why they are almost invariably located in large urban centers in Europe. AI data centers have fundamentally different requirements. They do not depend on optical density and user ecosystem in the same way; rather, a large and stable electrical connection is crucial for them. Therefore, locations outside urban centers are more suitable for them.

In Western Europe, the key problem is no longer the availability of energy as such, but the available megawatts in the transmission and distribution network. In Dublin, for example, a five-year moratorium on the construction of new data centers has been introduced precisely due to the underdeveloped distribution network.

How ready is our network for increased acceptance of data centers?

– According to HOPS data, the maximum load of the electrical grid in Croatia on the hottest day is about three gigawatts, and the total transmission capacity is about 12. These values are not equal across the entire territory of the country, but if we talk about northern Croatia, there are currently no serious network obstacles. In other words, in the component that is currently the most critical in a large part of Europe, Croatia does not have structural problems at this time.

Regarding electricity production, Croatia does not produce quantities that fully cover domestic consumption. However, Digital Realty, like other large consumers, has the freedom to purchase electricity on the market – and we do. The key challenge is not energy production, but the network, and the availability of network capacities in Croatia, depending on the microlocation, is not currently a limiting factor.

Is the modernization of the transmission and distribution network crucial for further development?

– Absolutely. The modernization of the transmission and distribution network is beneficial for everyone – not just for data centers or electricity producers. This creates prerequisites for faster and simpler connections for new investments.

The distribution network is crucial for unlocking this market, and this is precisely where one of our comparative advantages lies. In connection procedures, we need to be faster and more flexible – from submitting requests to realizing connections, significantly less time must pass. Our biggest obstacles are not in the legislative framework but in implementation.

Could it be a problem that, ultimately, increased demand for electricity at some point will raise energy prices?

– If Zagreb were to overnight become Frankfurt, data centers alone would consume about 750 megawatts of electricity. This, of course, will not happen. If at some point the network were to be seriously overloaded, it certainly would not be due to data centers, and it is hard to imagine other individual consumers who could cause that. It is difficult to predict with certainty what the future energy mix will look like.

However, the consumption curve of a data center is extremely stable – it is almost a straight line throughout the day. Digital Realty’s strategy is to purchase green energy in all countries where possible, and this currently includes Europe and the United States. Our total electricity consumption is covered by guarantees of origin, i.e., green certificates. Nevertheless, data centers require stable base energy because their consumption is continuous and predictable.

Does HRDCA advocate for certain legislative changes that would help the desired development of data centers in Croatia?

– As an association, the quality of suppliers is extremely important to us. We want to raise the standards of the entire chain – from design and technical equipment to construction contractors – because we need partners who can consistently meet the high safety and operational standards that the industry requires.

It is equally important to raise public awareness about the role of data centers. Without them, payroll payments, emergency services, mountain rescue services, the financial system, and telecommunications do not function. Data centers are critical civil infrastructure. On the other hand, there are numerous regulatory absurdities. Construction regulations do not recognize data centers as a separate type of facility, so, for example, at a location where there will never be more than twenty vehicles, the construction of 180 or more parking spaces is required.

In such cases, it would be more rational to invest in green spaces. Perhaps the most important thing is that projects become more fluid and are realized faster. It is understandable that foreign investors expect the system to function as formally prescribed, but the fact that we currently rely on ‘local improvisation’ does not mean that the system is good.

Are there still bizarre obligations like disproportionate parking that you have to fulfill?

– One of the most sensitive issues is fire protection. All modern data centers have automated extinguishing systems that are activated at the push of a button. However, in Croatia, it has happened that due to a malfunction or activation of that system, firefighters have to physically break into the facility to extinguish the fire, even though it could be extinguished in a few seconds by the automated system.

In Germany, data centers are recognized as critical state infrastructure, so fuel suppliers are obliged to supply them with diesel for backup systems, just like hospitals. In Switzerland, anti-terrorist units conduct exercises in data centers once a year because their security is crucial for the financial and telecommunications system. In Croatia, such an institutional approach does not yet exist.

Why is diesel important to you?

– Data centers are powered by electricity from the power grid, but they must also have a completely self-sufficient power source for emergencies. These are diesel generators. Digital Realty must have fuel for at least 72 hours of continuous operation at all times, along with additional contracts with two independent companies that guarantee fuel delivery within four hours. Redundancy ensures continuity of operation and resilience of the system in crisis situations. Additionally, the system includes redundant pumps that ensure the flow of fuel from the tank to the generator.

How does the presence of Vertiv facilitate investment in data centers?

– Vertiv is an extremely important partner and global supplier for us. For example, our data center in Nigeria was entirely assembled at Vertiv’s factory in Rugvica and then delivered to Africa in containers. Vertiv, like Schneider Electric, ABB, and Legrand, operates according to the standards that we as data center operators expect, without the need for additional explanations. The goal of HRDCA and Digital Realty is for other suppliers in Croatia to gradually reach this level of standardization – from technical equipment to the construction sector.

Vertiv is also one of the founders of the association and a kind of role model for other suppliers. We are trying to increase interest and presence of similar companies in Croatia because local service support, availability of spare parts, and quick response are crucial for us. Demand now exists, but compared to markets like Vienna or Zurich, it is still relatively small. Only large international companies can act as a catalyst for this development.

How much space is left for data centers that companies in Croatian ownership are investing in or considering investing in?

– Digital Realty cannot and must not be the only relevant player in the market. Healthy competition is necessary for market development. Users need redundant data centers for data security, and the market can only develop quickly and stably if there are reliable local operators and suppliers who can meet international standards.

Do domestic financiers understand the specifics of investing in data centers?

– Digital Realty has access to its own central financing and a global investment framework. The situation in the domestic market is diverse. There are financiers and investors who recognize the potential but do not fully understand the specifics of the industry, as well as those who turn to the association to better understand the principles of profitability. It is good that interested parties turn to the association because we will help every investor avoid making mistakes in their steps.

Data centers are not classic construction projects. Twenty to twenty-five years ago, even three-quarters of data centers in Europe were not successful, and that is an experience that should not be repeated. Among the largest investors in data centers in the world are pension funds because they are stable investments with an average return of about 10 percent per year.

Moreover, if you look at the composition of investors in Digital Realty on the New York Stock Exchange (NYSE: DLR), you will see many pension funds among the top ten investors. This is a long-term business model that, in the initial phase, while a significant part of the capacity is not filled, creates operational losses, and only later becomes highly profitable. Larger centers are more profitable in the long run but require a longer filling phase and strong liquidity.

Do you have estimates of how one euro invested in a data center impacts the entire economy?

– In Croatia, such an analysis has not yet been conducted. However, a study by Digital Realty from Spain a few years ago showed that one euro invested in a data center generates as much as nine euros in the local economy. The reason for this is not always obvious at first glance. At one location, we can have, for example, about twenty highly educated employees as currently in Zagreb, but there are also numerous related sectors: mechanical and electrical components, energy, cooling, cabling, maintenance, cleaning, legal and marketing services.

Just at this location in Zagreb, we have more than 50 connectivity service providers, whether it is wholesale internet capacity, content (CDN), or optical connectivity in the metropolitan area. And all of them have their clusters of subcontractors and suppliers of their products and services. Thus, about twenty permanently employed people engage several hundred people from various suppliers and many other business resources, making the data center a significant lever for the local economy.