PPAs (Power Purchase Agreements) are currently very popular, especially among larger data center, cloud, and colocation operators who have the creditworthiness to enter into PPAs. However, there are some misconceptions about how PPAs work and why companies enter into them. Most companies buy them to reduce electricity costs for their business — it is essentially a straightforward economic decision that is then marketed with a sustainability narrative.

What is a PPA?

Simply put, it is an electricity contract that purchases all or part of the output of a power plant, often from wind farms, solar parks, or other renewable energy generators. The electricity output is acquired virtually — meaning there is no physical cable directly connecting a data center to the power plant through which the electricity is transmitted.

Simple PPAs have a fixed price over a long period (e.g., 10 or 15 years) and are used to finance the construction of a renewable energy facility (e.g., Google can meet the return expectations of a wind farm asset by purchasing its entire output at a fixed price for 15 years).

When a price is locked in for 15 years, a company not only receives a discount for its long-term commitment but also benefits because in a market where everything is becoming electrified (e.g., electric cars), the demand for electricity, and thus the price, is expected to increase — making price fixing sensible. Additionally, the cost of wind power generation, for example, is significantly lower than coal or gas, also due to subsidies.

The result in this example is a very attractive power purchase agreement that offers a company long-term price security and lower costs per kWh for the most important commodity in a data center business: electricity.

Economically viable, but not fair

From an economic perspective, it makes sense, but there is a caveat: To conclude a 20 MWh base load PPA with a fixed price over 15 years at, say, 50 EUR per MWh, a company needs sufficient credit capacity for a contract value of 130 million EUR. This significantly limits the number of data center operators or cloud providers who have access to this type of electricity contract.

This currently makes the PPA market less accessible, but there seem to be regulations being worked on at the EU level to address this challenge.

Neither greener nor more sustainable

There is a lot of marketing around PPAs and how companies become increasingly green and better than others by purchasing them. However, technically speaking, these electricity contracts are no different from existing green energy contracts. The only difference is that these purchase agreements help finance the construction of new renewable energy facilities — which is welcome, but only because there is an economic incentive for it (lower electricity costs). It is unlikely that companies would buy PPAs if the costs were 20–30% above market price for electricity.

Every renewable energy producer generates two outputs: electricity and Guarantees of Origin (GoO — green certificates). The difference with a PPA is that a company can separate the Guarantees of Origin of the wind farm generating the renewable electricity from the physical electricity and use them to "green" the coal or gas electricity purchased elsewhere.

Even if a company refrains from this practice — the problem with the entire hype around PPAs is that it creates the illusion that digital infrastructure and data centers are somehow connected to renewable energy and thus more ecologically sustainable. By purchasing larger PPA portfolios, a data center or cloud operator can even claim to have "24/7 green electricity" — simply because a wind or solar farm is always running somewhere and generating certificates that can be used anywhere. There is no actual physical improvement.

The real challenges of integrating data centers and renewable energy remain

PPAs aid the expansion and construction of new renewable energy facilities. However, the challenge of our time and our electricity system is not in building more renewable power plants but in integrating their intermittent electricity generation and shifting our consumption from "always on" to "on when available." This shift needs to happen now — otherwise, the generated green electricity will not make it into the grid.

The real challenges from an electricity perspective remain unsolved:

• Data centers are base load consumers and require constantly available electricity. All base load consumers should invest in demand response capabilities to support the integration of renewable energies.

• Data centers are built near cities, while most large renewable energy facilities are located offshore (wind) or in rural areas (large solar). Relocating data centers would lead to better physical integration with renewable energies and help incorporate more renewable capacity.

• In urban environments, data centers could play an active role by using their large grid connections to support the energy system — first, through demand response and second, by generating other energy carriers that can be used in urban environments, like hydrogen or heat using electrolyzers and heat pumps.

To make the expansion of digital infrastructure ecologically sustainable, the three issues mentioned above must be addressed. In the SDIA working group on strategies for integrating digital infrastructure and renewable energies, we are developing business models — from building energy hubs near the grid connections of offshore wind farms to co-locating data centers with hydropower to building demand-response and hydrogen-capable urban data centers that generate heat for surrounding residential areas. Join us in the journey to meaningful integration of renewable energies into digital infrastructure — beyond mere use of certificates and discounted long-term financial contracts.