Effective resource planning in Azure often comes down to two options: Azure Capacity Reservations and Azure Reserved Instances (RI). At SCHNEIDER IT MANAGEMENT, many of our customers ask about the difference between these two and whether they should use one or both. In this article, we explain each option and show how using both can help you ensure you have the cloud capacity you need while optimizing costs.
What is an Azure Capacity Reservation?
Azure Capacity Reservations let you reserve cloud compute capacity in advance for a specific Virtual Machine (VM) size in a chosen region or availability zone. In simple terms, it’s like booking a server ahead of time so that when you need to deploy or scale up a VM, the capacity is guaranteed to be there. This is crucial for mission-critical workloads where you cannot afford to hit “no available VM” errors during peak usage or emergencies.
- Always available capacity: With a capacity reservation, Azure holds aside the number of VM instances you specify. Even if other customers are scrambling for resources, your reserved VMs are ready for you. For example, if you expect a big spike in traffic for an event (like Black Friday or a product launch), you can pre-reserve the exact VM types you will need during that period.
- Pay even if unused: Think of this as an insurance policy for availability. You pay for the reserved capacity as long as you keep the reservation active, even if those VMs are not running. This cost reflects Azure guaranteeing those resources for you. This is not a discount program, but purely to ensure capacity. If a reserved VM stays idle, you still pay for it because Azure cannot offer that capacity to anyone else while it’s held for you.
- Pricing considerations: Azure does not charge a separate fee for the reservation itself. Azure Capacity Reservations are charged at PAYG rates starting from the moment the reservation is active. This means timing matters: if you reserve capacity two months before you actually need it, you’ll pay for those two months even if the VM isn’t running. To avoid unnecessary costs, it’s best to activate the reservation shortly before the workload begins – ideally a few days ahead to ensure availability. Reserved Instances (RI) can be purchased separately and applied to the same VM to reduce costs when the VM is actively running.
In short, a Capacity Reservation is about guaranteeing resources. By reserving what matters ahead of time, you remove the risk of capacity shortages for critical applications.
What is an Azure Reserved Instance (RI)?
An Azure Reserved Instance (RI), on the other hand, is all about saving money on compute costs in exchange for a commitment. When you purchase a Reserved Instance, you commit to using a certain VM (or other Azure service) for one or three years, and Azure rewards that commitment with significantly lower pricing compared to pay-as-you-go rates.
Key points about Reserved Instances:
- Cost savings for steady use: RIs are ideal when you have VMs that run continuously or predictably long-term (for example, a database server that is online 24/7). By committing to a 1-year or 3-year term for that VM, you can save up to 30% or more compared to hourly rates. This can be used as part of your cloud cost optimization strategy.
- Flexible payment, fixed term: You can pay upfront or monthly for an RI, but either way you are obliged to the full term once purchased.
- Some cancellation flexibility: Azure does provide some flexibility to modify RIs if your needs change: you can exchange an RI for a different one or cancel an RI before term-end and get a pro-rated refund (with some limits). Currently, there’s no cancellation fee, but you’re limited to refunding $50k worth of RIs per year. It is not intended for routine short-term use like “reserve for one month then cancel,” although technically one could cancel after an event, it requires manual action, and Azure could introduce fees in the future. The simplest approach for brief needs is to avoid the complexity altogether.
- No capacity guarantee: Importantly, buying an RI does not reserve any hardware. It is purely a billing advantage. If you try to start a VM and Azure has no capacity available at that moment, the RI won’t help: You would still have to wait until capacity frees up.
In summary, a Reserved Instance is a discount program for consistent usage. It is the tool to use when you want to reduce costs for workloads that run regularly. However, it assumes capacity is available when you need it. It does not hold or guarantee any resources by itself.
When to Combine both Reservation Types?
Combining both Azure Capacity Reservations and Reserved Instances is beneficial when you have workloads that must always be available (so you need to guarantee capacity) and that also run most of the time (so you want to save money on those hours).
Here’s when it makes sense:
- You have a mission-critical application that must run 24/7, and you cannot risk Azure running out of capacity in your chosen region or zone.
- You want to lock in a lower price for that workload because it will be running nearly all the time.
- By using a Capacity Reservation, you guarantee that the VM resources are always available for you.
- By purchasing a Reserved Instance for the same VM size and region, you get the discounted rate for every hour the VM is running.
This combination is especially valuable for production systems with strict uptime requirements, such as databases, core business applications, or regulated workloads.
More Information
- Documentation on Capacity Reservations: https://learn.microsoft.com/en-us/azure/virtual-machines/capacity-reservation-overview.
- Documentation on Reserved Instances (RI): https://learn.microsoft.com/en-us/azure/cost-management-billing/reservations/save-compute-costs-reservations.
Conclusion
Azure Capacity Reservations secure resource availability, while Azure Reserved Instances lower cost per hour compared to PAYG, if you plan on using the VM most of the time.
We recommend evaluating both options as part of your cloud strategy. Often, the best approach is a combination of reservations and PAYG tailored to your needs. If you have questions about how to implement capacity reservations or reserved instances for your organization, we are here to help. Feel free to reach out to our team for personalized guidance.