Data centres – here today, here tomorrow: France’s billion dollar bet on AI

Ruth:

Hello there and welcome to Ashurst podcast series on data centres, here today, here tomorrow. I'm Ruth Harris, a finance partner specialising in data centre financing, and I head up the global data centre group here at Ashurst. This is our sixth podcast in the series, and I'm delighted today to be joined by our learned partners from our Paris office to explore recent trends and news from the data centre sector in France. So if you are following the AI arms race, you'll be aware of the focus on AI at Macron's Choose France Summit earlier this year, and the boom in the French data centre sector, which already boasts more than 250 data centres, leveraging its low carbon electricity mix and strategic geographical position in Europe. Many view France as a key European hub for the development of AI, with announcements of investments from the likes of Prologis, DATA4, Digital Realty, and surprise announcements of Fluid Stack's one gigawatt supercomputer, I should say, contract.

So these are all impressive announcements. But much will depend on whether there is adequate supply of the materials, the labour, to deliver data centre infrastructure, not even to mention the availability of land and permits, and of course, the production of the vast amounts of power required by the ever evolving GPU stacks, which are used by these supercomputers. There's a pipeline of in the region of, well, I'm sure my Paris colleagues will put me right, but I think it's around 11 gigawatts of data centre capacity awaiting grid connection in France, and 20 submarine cables linking to global digital traffic routes. So I can feel the smugness of my French colleagues knowing that they're well-placed to deliver here. So let's introduce them. Before I do so, I'm delighted to say that today I'm joined by my digital economy partner, Rebecca Clark.

Rebecca:

Hi Ruth, glad to join podcast today. Together, we're going to delve into what is behind some of these French data centre announcements. And we're joined by our projects and energy transition partner, Mark Barges, Francois Hellot, head of our corporate transactions team in Paris, Nicolas Coy, a digital economy transactions partner, as well as David Noblinski, one of our real estate partners in Paris. Let's quiz them on what underlies the headline stories. We're hoping that they will be able to help us unveil how France is faring in the race to be an AI superpower, and what all this means for the construction and operation of data centres in France.

Ruth:

Welcome everyone, and thanks for joining us today. Now, Mark, I'm going to start with you. First of all, just want to say, let's see how long we can avoid the subject of power, and instead, let's start with Macron's aspirations. I have to say, I read Macron's announcement of more than 109 billion euros of investment in infrastructure in France and announced at the summit earlier this year, and I was a little bit envious about that commitment and that enthusiasm coming from Macron. He obviously wasn't deterred by Stargate's announcement early in the year and Deep Seek's cheaper version of ChatGPT. And instead, that's just fueled his ambition and determination. So how were those announcements received in France? What's the word on the ground?

Mark:

I think those announcements were obviously very well received, both from French investors and actors in the area, but also by international investors. In fact, if you look at the AI summit and the Choose France Summit, those were extremely well attended by a lot of international players, a lot of international governments looking to invest in France given they see it as a stable Market, stable country in which to invest. And given the number of advantages that France has, as you said, from a power perspective, but also from its economy, its geographical location, its connections with telecommunication hubs and the like, France is a very attractive country in which to invest and develop data centres.

Rebecca:

Thanks, Mark. That's really, really interesting. Could you give us an idea currently of the size of the data centre sector in France today, and the growth that's planned for say the next two to five years? What stage in the journey are you currently at?

Mark:

So I think France is still at a relatively early stage of this journey. There's still massive amounts of growth expected in France. I think in 2023 when the last published figures are, it estimated the size of the Market was about 10 billion euros, with about 4 million square feet of data centre space being operated. Back then, I think the ambition was to see between five to 6% growth. But given the recent government announcements and the real stimulus being pushed forward, I think the expected growth now is more in the 10 to 12% per year over the next five years or so to take us to 2030 to 2033. So there is massive growth which is anticipated. Whether that actually materialises is a different issue.

Ruth:

Mark, what's driving that demand? Is that growth driven by all the usual domestic Market pools, cloud adoption, AI led compute demand, FinTech, et cetera? Is there something special behind that demand in France?

Mark:

I think it's the usual things which we're seeing in other developed economies. But beyond that, I think there is a really significant push by the French government, which has a habit in pushing certain types of industries and infrastructures in the similar vein to what you might see in China, and putting real priorities around certain sectors. And AI and data centres are seen as a priority area for France from a strategic perspective. And therefore, it's mobilising capital, it's mobilising land, it's mobilising various state entities like EDF, and its telecom sector, it's big equity arms to invest in these projects and push forward these projects. And it's streamlining the regulatory framework which will enable these projects. So it's putting a lot of things behind this to drive that sector beyond what the private sector is doing.

Rebecca:

So Mark, speaking about investment, are there any key hubs or developing hubs, or is the development mainly focused around the Paris area?

Mark:

So historically, the developments has really been focused, as you would expect, against certain key hubs, Paris being the dominant hub. The problem with Paris, as with all the other flat D hubs, is that they're starting to become saturated both from a space perspective but also from an energy connection perspective. And other hubs have developed. Probably the most other significant hub is Marseille, given its connectivity to succeed data cables as fibre optic cables. But beyond that, a number of sites have been identified. 30 sites have been identified and rebate for AI clusters. So EDF has also decided to make a number of sites available. These are x fossil fuel sites which are no longer used available for the operation of data centres. The advantage of that is they're already grid connected, they're already industrial sites. So their reconversion is easy, although there are environmental issues with their reconversion.

Rebecca:

So Mark, you just mentioned around streamlining regulation. In many jurisdictions, what is holding back the development of new data centres is the red tape. What is the red tape like in France? As you probably are aware of, in the UK, we are looking at reforming the planning system and streamlining the planning and delivery of these data centres. Could you talk us through a couple of the measures that you are seeing within France?

Mark:

Yes, of course. So if I were to describe the biggest impediment to data centres in France, it would be the permitting and consent process. It's a massive issue. The lead time at the moment for projects is in excess of 10 years, which is enormous, and there are vast array of authorizations and permits and consents which are required. There's a lot of regulation around not artificializing land around energy efficiency, around energy use, around planning consent, building permits, urbanisation consents. And the government is conscious that this is a real issue.

So it started that process and it's made a number of announcements in that, particularly around building permits and consents, which has been a particular hurdle where it's seeking to move that from the municipalities to the préfet, which is the head of the region, which is directly appointed by the French states in order to simplify and streamline that process. Unfortunately, we're right at the start of that streamlining process. And given the current instability with the government, it's not particularly clear how quickly various items of primary and secondary legislation will be passed so as to fully implement the aspirations of President Macron in terms of that streamlining. So yes, there is the ambition, but it hasn't quite materialised yet and it'll take some time for that to happen.

Ruth:

Thanks, Mark. Super interesting and you mentioned the re-purposing of fossil fuel sites by EDF and that just reminded me how investors in this space and in many cases are super focused on the ESG credentials of their investments. Now, France has a great record in relation to re-carbonized power, largely from nuclear with not an insignificant proportion of that nuclear coming from recycled nuclear fuel. Now I know Rebecca is going to come on and ask you about power in a bit. But, as we know the conversation doesn't just stop at the source of electricity but also focuses on water usage, circular economy, heat recycling, et cetera. What can investors expect from France in relation to these important areas.

Mark:

Yeah, so water consumption and heat has been the subject of heavy focus. The legislation has been updated in our area, historically heat, for example, and use of waste heat was the subject of a tax incentive scheme. But since April this year, the regulatory environment has evolved, and now, the ability to reuse and make use of that heat in some shape or form is now a legal requirement for projects above one megawatt. And so most of the big projects we're contemplating nowadays will have an obligation to make use of that waste heat. And given that the newer data centres, particularly AI centres are going to producing vastly more heat, that becomes all the more relevant, and the use of water is also critical. So the regulatory framework is slowly starting to adapt to what was just generic industrial processes to be more focused on data centre processes and AI centres. And that refinement has put more requirements in terms of the use of water efficiency of that use and the use of heat.

Rebecca:

Thanks, Mark. I'm going to bring in Nicolas now if I may. Nicolas, where is France in relation to data sovereignty and cybersecurity in this too? For example, is there requirement that certain data must be housed in France, and has France yet fully implemented NIS2?

Nicholas:

Thanks, Rebecca. So the GDPR puts some restrictions on the transfer of personal data outside the EU, but it does not impose that data be hosted in the EU. However, because of the risk of being exposed to the Cloud Act, France has passed the SREN law, securing and regulating the digital space, which aims to ensure that strategic and sensitive data of French public administration and organisation can only be hosted and processed by cloud services, which offers high level of security and sovereignty, notably, through the SecNumCloud Certification. SecNumCloud Certification can be obtained from the ANSI, the French National Cyber Security Agency.

Second, you should bear in mind the data act, which is effective since three days, which is also called the GDPR for industrial data and covers both personal and non-personal data. So the data act contributes to the data sovereignty in the EU because it empowers users to access to their data, and reducing thereby the dependency on large non-EU technical provider. Finally, you should also bear in mind the NIS2 directive, which is the network and information security directive, which covers a broad range of sectors including data centre services provider if they qualify as essential entities or important entities. In France, we have a draught transposition low since March, and it provides for technical and operational measures. It provides as well for proper governance, and also for some notification obligations in relation to significant incidents. Sanctions will be high, up to 2% of the global annual turnover as administrator defined.

Rebecca:

Well, that sounds like France a little bit ahead of the curve in terms of Europe. I know there's been lots of delays in implementing NIS2.

Ruth:

So I'm going to move on a bit now on to how on earth we're going to deliver these data centres in France. So Mark, you mentioned 30 sites identified for data centre clusters and EDF involved in helping that delivery of the power there, but what kinds of construction delivery models are you seeing? Are you seeing hyperscalers self-perform? Are there collaborations in place? What kind of trends are you seeing for delivery models on the construction side?

Mark:

Thanks, Ruth. On the construction side, France is well-placed to deliver the construction of these data centres, given that it has some very large construction companies, Vinci, Eiffage, Bouygues, and that those construction companies are used to building projects beyond simple bricks and mortar, given that they have PPP concession arms, and they have energy and telecom services divisions. So for example, Bouygues is one of the biggest telecom operators in France, which obviously operates a number of data centres. And therefore, they have a lot of expertise in developing and constructing data centres. The same is true with Vinci, which has its energy and services decision, or Eiffage.

And as a result, they're combining these different skill sets in developing and delivering data centres. So if you look at a lot of the projects that have been announced in France, they very often involve one of these three French entities contractors who are helping them deliver on the construction side. The additional component to this is given their extensive expertise in building projects in France and their strong relationships with the French state, from a permitting and consent perspective, this is also helpful in helping international players develop projects, and navigate the permitting and consent minefield that exists in France.

Ruth:

That's a great example of collaboration, which we're going to come onto in a bit. I'm going to quiz Francois on that. But just before we do, David, once the data center's built, I'm just a bit interested now on the contracts, the customer contracts to let out the space to the offtakes, I suppose. So what are you typically seeing in France? Do tenants get anything by way of security of tenure once they're in a data centre?

David:

Yes, exactly. Thanks, Ruth, for this question. But in fact, in France, what we will see is that the operator will use the data centre through what we call a commercial lease. And the commercial lease under French law gives a lot of protection to the tenant, notably what we call the right of tenure, which will enable the tenant at the end of the lease to have a right of renewal, and will be also discussed at the beginning of the lease all the financial condition for a long-term duration of the lease. So it's true that thanks to this commercial lease regime, there will be a huge stability between the operator and the owner of the land, which helps the creation and the development of the data centre.

Ruth:

So it'd be interesting to see some of the terms of those leases, but it sounds on the face of it, from a security tenure point of view, there's no need for the SNDA to protect the hyperscalers as occupiers may well be need for other kinds of direct agreements to protect the lenders. But we can come onto that in a different podcast. For now, I'm going to leave that there on the security of tenure because I know Rebecca, probably, we should move on to power.

Rebecca:

Yes. I know everybody's chomping at the bit to tell us about France's success story in terms of a decarbonized grid. So this is a really big factor in driving speed to Market. Can you tell us a bit more about the power situation within France?

Mark:

Yes, of course. Thanks, Rebecca. So France is uniquely placed in Europe, and pretty much in the world, given its energy mix. As you may know, about 70 to 75% of France's electricity is produced by nuclear, and as a result, is low carbon electricity production. In addition to that, about 10% is hydro, and the remaining 10% is renewables, which means that about 90 to 95% of its electricity mix is decarbonized. This is pretty much unique in developed economies, and puts France in a really strong position.

In addition to that, there is a legal requirement here in France for data centres to source their electricity from renewable energy production through corporate PPAs, which means that in addition to the fact that its energy mix is already low carbon, there is a requirement to push that even further in order and to ensure it's renewable. But it does mean that stand backup power doesn't really have to rely on generators and can potentially rely on the grid and still be relatively low carbon. That's not to say that in the long term there aren't challenges in from a grid perspective in France, particularly with the renewal of the nuclear energy park in France. But that's something which is more 10 to 20 years from now.

Ruth:

Thanks, Mark. Were you referring there to the actual grid and transmission of power from where it's produced to the actual data centres? Is that a success story as well, or were you saying that's more in the pipeline?

Mark:

So no, I was referring to the fact that a lots of nuclear power is old in France and therefore needs to be renewed. And France has announced 16 new nuclear power plants over the next few decades. And those will take time to come to fruition.

Ruth:

I see. Well, maybe the next question then is how do you get that power to where you need it to be? How's the grid to the system in France?

Mark:

France's grid is similar to that a lot of European jurisdictions. It's a very centralised grid, which is in the process of being updated to reflect a more diffuse energy production linked to renewable power. France is probably more behind the curve in that respect than other European countries, given it has had a slower track record in developing renewable energy, simply because its grid is already decarbonized. And as a result, there is quite a bit of work to be done on from a grid perspective to accommodate both renewable power and are a lot of data centres. What France has done though is made some regulatory tweaks to enable RTE to mutualize grid connections for a number of clusters, and to anticipate future needs for those clusters, and therefore build on the basis of future needs as opposed to actual current demand, which is enabling the future-proof grid connections for AI clusters and data centre clusters, which is probably an efficient way of developing the grid infrastructure.

Rebecca:

And of course, France is one of the European leaders for fibre, with high availability supporting the deployment of data centres. It also serves as a crucial link for transatlantic cables, Mediterranean routes, and also connection to Asia via the Red Sea, or bringing international data traffic, which is driving up the demand for data centres.

Mark:

Yeah, that's right, Rebecca. I think France started its journey on the deployment of fibre optic cables in 2008, 2009, and that deployment is about 80% complete in terms of connecting all buildings, both individuals and businesses. And within the next two to three years, that's expected to be complete. In addition to that, Marseille is the sixth-largest data hub in terms of connectivity to international fibre optic cables. And those are connected to Africa, the Middle East and Asia, which puts Marseille to a really strategic position in terms of data centre development connected to these fibre optic cables.

Rebecca:

Sounds like you're ahead of the 2030 targets set by the European Commission if we're looking to get full coverage before 2030?

Mark:

Yes, I think very much so. And again, it shows the very French approach in terms of developing large infrastructure projects. When there is a political will to do so, things tend to happen more effectively. It's true of high-speed rail links. It's true with nuclear in the seventies and eighties. And the same is true with fibre optic cables.

Ruth:

That political will is so important, isn't it? But I don't think the state can bring all the elements to the fore that are needed to enable the data centres to be brought to Market at the speed that they need to be brought to Market. And we've talked about some of the regulatory hurdles there and streamlining of regulation. The other thing we have spoken about in other podcasts is this need for collaboration amongst other players in the Market, so whether that's the landowners, the developers, the sales utility companies all coming together to bring the offering together. So Francois, maybe a question for you on what kinds of collaboration are you seeing in the Market to bring data centres to Market and the speed that they needed to be bought?

Francois:

Thank you, Ruth. Now, it's true that this Market is really not driven anymore by single asset deal, and is now more oriented to investment into existing platform and building up these platforms. Typically, the setup for this platform type deal is cooperation, as you say, between existing developers and investors, investors which are either infrastructure, private equity, but more and more also private equity investors that are very much interested by the quality of the development team instead of the assets only. And on the top of that, also very much attracted by a pan-European approach to this development platform strategy. This is also what we call the core plus strategy among those investors that are looking at acquiring stage in existing data centres platforms. And obviously as we said before, the strategy is consistent with the high barriers to entry that we see in the Market. And that is limiting the development of new assets, even the administrative impediments and the permits, and the duration for permits of tension.

Mark:

Yeah, and one current example, which is probably one of the largest scale projects, is the AI-MGX project, which is a collaboration between the French state, which involves Bibi, France, the United Arab Emirates, Mistral, which is the big European French AI entity, and Nvidia, who are looking to create an AI campus in France. And that involves a 1.4 gigawatt project by 2030, which also involves various partners like Bouygues on the construction side, EDF on the energy supply, and École Polytechnique, which is the leading engineering university in Paris, all combining to develop this project. And that's where this whole ecosystem of different core skills is coming together to help develop such a massive project.

Rebecca:

So Francois, from an M&A perspective, what sort of activities are you seeing in France, and what does the future hold?

Francois:

What is really interesting is to see more and more traditional P-investors coming into that Market. In particular, when this platform strategy grows and we see more and more of large pan-European platforms, it attracts more interest from traditional investors that are competing with the motor infrastructure investors. So it's a Market that is really changing into the players and the different competitors. The landscape is really moving right now.

Ruth:

Very interesting. And Mark, we were chatting earlier, weren't we, about the strong political influence and the reputation of the French state pushing infrastructure and taking equity stakes in these projects. I think that all helps stimulate that M&A activity, would you say?

Mark:

Yes, completely. The French state is active at various levels. So on the four small start-up projects, there's a lot of ground funding which is being made available. And then you have as concessionary type loans for larger entities as they tend to ground become more robust. And there's also these equity stakes taken by CDC or Bibi France, which again is helping, which is pushing this French ambition of developing the sector in France.

Ruth:

That's super interesting, and quite different to what we're seeing in the UK. And what about foreign direct investment? Anything specific to mention there? Any barriers for foreign investment?

Francois:

Actually naturally, because as Mark said, there is such a strong push from the French state and the public authorities in favour of investment into the infrastructure space, that we don't expect and we haven't seen any restriction or any stringent position from the Ministry of Economy regarding the foreign investment into that space.

Ruth:

 That's really great to hear. Well, I think we're running out of time for this podcast. It's been really interesting to chat to you all. There's certainly a lot going on in the space in France. And it's great to have a podcast where we don't just talk about power, connectivity and land. My key takeaways are, whilst you are saying that there's a heavy administrative burden, a bit of red tape there, there's definitely an impetus to break through that, some very ambitious announcements, and the state support that's available is actually very impressive and very conducive to do investments. So I can see how France is actually well positioned within Europe to make quite a Mark in the data centre sector. Thank you, Mark, Francois, Nicolas, David, for your interesting insights into data centre investment activity in France. The great thing about these data centre projects and this sector is that it's such a full service sector, lots of room for collaboration from corporate projects, energy financing.

We haven't talked about financing much, but watch this space for a separate podcast on financing of data centres. And of course, you need to be all over regulatory and the real estate elements. So thank you very much for covering quite a lot of those areas, and thank you to our listeners for joining. If you'd like to know more about Ashurst data centre experience across our global networks, do get in touch, or visit our data centre hub on our website www.ashurst.com, where you can find a whole host of information including jargon busters and much more. Also, watch out for our next episode data centres here today, here tomorrow, which will be from our Frankfurt office, where I'll be joined by Dirk Opitz, Stefan Bruder, Martin Aimo, and a number of other colleagues to bring us up to date with what is happening in the data centre sector in Germany. I'm looking forward to connecting again with you all then. But for now, goodbye.