Data centres and PPAs –
strategic electricity procurement with substance

Rising power densities, growing energy demands and ever-increasing requirements for transparency, efficiency and sustainability are making power procurement in data centres a strategic issue. It affects not only ongoing operating costs, but also site selection, scalability and the expectations of customers and investors. These challenges have become a reality, and the pressure to act is mounting.

As the international market for renewable energy PPAs grew in importance, large data centres were among the first active buyers. And with good reason, as PPAs are versatile: they are a strategic procurement tool that allows price, volume and origin aspects to be structured over longer periods. With renewable electricity, they are also one of the most effective decarbonisation measures. Since then, the market has developed significantly and matured.

It is therefore worth taking another look at the link between data centres and PPAs and reassessing common reservations.

Are green PPAs for data centres merely a sustainability tool?

Due to their widespread use with renewable energy sources, PPAs are now generally regarded as green PPAs, particularly in Germany. The sustainability aspect is often emphasised. However, one aspect is sometimes overlooked: for many companies, PPAs are particularly attractive because they allow for long-term planning of part of their electricity procurement and can reduce dependence on short-term market fluctuations. Furthermore, they can contractually reflect the renewable characteristics of the electricity procured. In this way, PPAs combine sustainability goals with economic predictability and structural security of supply.

Typical benefits include:

• long-term security for a defined proportion of procurement
• greater predictability of electricity procurement costs – particularly in the long term
• protection against some of the short- and medium-term market price fluctuations
• smoothing out significant price differences between different forward years
• customisable, negotiable contract structures
• contractual assurance of renewable attributes
• reduced administrative burden through long-term procurement rather than continuous tendering

Today, a PPA stands above all for economically attractive, independent and predictable electricity procurement.

Do data centres need base load, whilst the supply from PPAs fluctuates?

This objection is understandable, but too sweeping. The fact is: a single wind or solar PPA does not, as a rule, fully replicate a constant 24/7 load profile. However, this does not mean that PPAs are unsuitable for data centres. In practice, they are rather a building block of a balanced procurement strategy. Any remaining volumes can still be covered via supply contracts, futures market products, spot procurement or structured curtailment and balancing energy solutions. With virtual PPAs, the physical supply of electricity generally remains with the existing supplier or trader anyway. In this case, the PPA primarily serves as a price hedging instrument and for the procurement of guarantees of origin (GoO).

The key issue, therefore, is not whether a PPA alone meets all the requirements, but rather what proportion of a company’s electricity requirements it wishes to structure sensibly in the long term using a PPA.

Are PPAs too inflexible?

By their very nature, long-term hedging arrangements involve sacrificing some short-term flexibility. Yet this is precisely their purpose: PPAs offer greater predictability and risk mitigation. At the same time, they are not rigid products, as price formulas, terms, volume logic, provisions for profile deviations, collateral and adjustment mechanisms can be tailored in the contract. The better the load profile, growth planning and risk-bearing capacity are reflected, the more precisely a PPA can be tailored to the procurement strategy.

The key is striking the right balance between long-term security and short-term optimisation. The decisive factor here is the company’s own sales or procurement situation: if, for example, there is a minimum load level secured for the long term, it may make sense to secure the pricing for part of the electricity procurement via PPAs on a long-term basis.

Is counterparty risk too high?

This concern must be taken seriously, but it does not fundamentally rule out PPAs. Counterparty risk is a real but manageable risk for both contracting parties. The key factors are, above all, the creditworthiness of the contracting parties, collateral mechanisms, guarantees, termination and replacement provisions, and the involvement of an experienced route-to-market partner. Appropriate credit protection schemes are already available for this purpose from the European Investment Bank, and similar measures are also planned at national level. A PPA is therefore not inherently riskier than other forms of long-term procurement – it depends on the overall package.

Choosing a financially strong and diversified generator or seller can also significantly minimise the default risk for the buyer.

Are ‘green’ PPAs just a nice-to-have?

For data centres in Germany, renewable electricity is no longer merely a matter of image. The requirements of the Energy Efficiency Act are decisive: data centres must cover 50 per cent of their electricity consumption with electricity from renewable sources from 1 January 2024, and 100 per cent from 1 January 2027. According to the Energy Efficiency Act and a statement by the Bitkom association, this requirement can be met through net metering; certificates and PPAs are also explicitly mentioned.^[1]

PPAs go beyond mere compliance: they can combine pricing structures, volume security and renewable attributes into a single procurement element, thereby facilitating investment in new generation capacity. In doing so, they make a direct contribution to the expansion of renewable energy.

Are PPAs difficult to value?

PPAs are not standardised exchange-traded products. Consequently, valuing them is more challenging than valuing a simple futures contract. However, it is by no means impossible: typical valuation factors include market prices along the yield curve, generation profiles, capture rates, residual electricity costs, profile risks, collateral requirements and contractual options. Precisely because PPAs offer scope for customisation, there is often considerable potential for optimisation in their structuring. A key factor is a sound economic valuation based on the customer’s actual load and risk profile.

Through partnership, PPAs can be structured in such a way that both parties contribute their respective strengths.

The market has also become much more professional: a greater number of players, specialist consultants and the emergence of industry standards are making the assessment and conclusion of deals considerably easier, without detracting from the strategic value. Further standardisation, such as valuation based on indices, is also becoming evident.

Conclusion

The PPA market has evolved significantly and is adapting to the requirements of market participants. Depending on their structure, PPAs secure physical or virtual rights to electricity generation and the associated environmental attributes of a project. Price structures can be fixed, indexed or subject to predefined adjustments. For electricity-intensive businesses, and data centres in particular, PPAs should therefore no longer be viewed as a niche solution, but as an integral part of a professional electricity procurement strategy. They do not replace every other form of procurement, but they can effectively combine regulatory requirements, economic predictability and credible decarbonisation. For companies with a predictable minimum load in particular, they offer the opportunity to secure part of their electricity supply in a long-term, structured and resilient manner.

Do you have any questions about PPAs for data centres? Please feel free to get in touch!

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^[1] § 11 Abs. 5 EnEfG und Bitkom e.V. https://www.bitkom.org/sites/main/files/2024-01/bitkom-leitfaden-energieeffizienzgesetz-fuer-rechenzentren.pdf.