Record electricity prices: Supply contracts, cost pass-on mitigate impact for Singapore data centre operators

[SINGAPORE] A 17 per cent spike in electricity tariffs is threatening to squeeze operating margins for Singapore’s heavy data centre users.

While the recent 17 per cent quarter-on-quarter tariff jump for Q3 has sent shockwaves through the broader commercial sector, real estate investment trusts (Reits) say they are currently insulated by pass-through leases and fixed procurement.

But industry observers warn that lock-in supply contracts and cost pass-throughs may merely delay the inevitable for end-users.

A ticking clock on fixed contracts

Power accounts for a hefty 50 to 60 per cent of total operating expenses (Opex) for data centre operators, and the full weight of the record-high electricity prices has yet to register.

“Most operators won’t feel the full impact immediately, as many have power procurement contracts that are fixed for around six to 24 months,” said Darren Chan, research manager at Phillip Securities Research.

Depending on the duration of their hedges, some operators will feel the pinch as early as this quarter, while others may only experience the full structural impact over the course of 2027, he said.

Diversified landlords such as CapitaLand Ascendas Reit (Clar), where Singapore properties make up 67 per cent of total portfolio assets under management, are sheltered through these fixed rates.

William Tay, executive director and CEO of the Reit manager, stated that electricity rates for its Singapore properties have been locked in until June 2027, yielding no material impact on overall Opex.

“For our overseas properties, energy costs are typically recoverable from tenants through pass-through provisions in our lease agreements,” Tay added, in response to questions from The Business Times.

Vijay Natarajan, vice-president at RHB Singapore, agreed that the bottom-line impact on Reits is well manageable.

He noted that Clar has also secured a new pricing formula based on bulk purchasing that provides favourable rates for FY2027 and FY2028.

Similarly, Natarajan pointed out that Keppel DC Reit for example has power procurement contracts in place through the end of 2026, keeping immediate spikes at bay.

“We do not expect higher utility costs to have an adverse impact on the Reits sector in general, as most are well-hedged and costs remain largely passed-through,” he said.

Tenants in the crosshairs

When fixed hedges eventually run out, structural lease agreements dictate who foots the bill. For Reits, the massive power Opex ratio does not apply to their own balance sheets.

Phillip’s Chan noted that for example, Keppel DC Reit has structured its leases to ensure over 90 per cent pass-through on co-location assets in Singapore and Ireland, while its master-lease clients contract power directly.

This leaves the Reit’s net electricity costs at less than 3 per cent of Opex.

“The record 17 per cent Q3 2026 tariff jump largely bypasses the Reit’s profit and loss and lands on tenant Opex instead,” Chan said.

However, passing the buck carries indirect risks.

“Net-net, the direct margin/DPU (distribution per unit) it should be modest; the real transmission channels are indirect: 1) tenant credit stress if shorter-lease co-location clients can’t absorb higher pass-through bills, 2) drag on rental reversions or occupancy if Singapore becomes less power-cost-competitive regionally,” Chan said.

Flight risk or future shift?

With structural electricity rates climbing, questions have emerged over whether heavy consumers will rethink their physical footprints once their long-term JTC land rentals or facility leases expire.

Experts argue an outright exodus from Singapore remains highly unlikely.

Between a structural rethink of their Singapore footprint once leases expire and passing cost to end-users, Chan believes the decision will be “weighted towards pass through rather than exit”.

RHB’s Natarajan noted that fixed JTC land rentals are designed to give authorities urban flexibility, and operators are expected to simply pass any future land renewal costs down to end-users.

Chan noted that land is incredibly scarce and tightly rationed under Singapore’s Data Centre Call for Application regime.

Operators holding precious long-term allocations – such as Keppel’s Genting Lane site, which was recently extended to 2050 – are far more likely to renew than relocate.

“The tariff spike alone is not enough to force that trade-off since power costs are usually passed down to end users,” he said.

When asked if the structural upward trend in Singapore’s power prices will prompt management to rethink its physical footprint or expansion plans here, Clar’s Tay said the city-state remains one of the Reit’s core markets.

“While energy costs are one of the considerations in operating our assets, our investment decisions are based on a holistic assessment of factors, including tenant demand, asset quality, material environmental, social and governance considerations, as well as long-term growth prospects,” he said.

Instead of pushing existing players out, the tariff spike may fundamentally reshape where new capital is deployed, analysts say.

“The better framing is not whether they leave Singapore, but whether the next wave of growth happens here or across the border,” Chan explained.

Moving forward, operators are increasingly anchoring Singapore as their premium, low-latency core, while routing new spillover compute capacity into Johor and Batam, where land and power are significantly cheaper.