Power Purchase Agreement
Definition
A power purchase agreement, or PPA, is a contract to buy electricity under specified pricing, volume, delivery, term, and credit conditions. AI data centers use PPAs and related power contracts to secure energy supply, reduce price volatility, support sustainability claims, and make high-density compute facilities financeable.
Why it matters
Power is often the binding constraint in AI infrastructure. GPUs can be purchased faster than substations, transmission upgrades, and firm power can be delivered. A favorable PPA can protect compute margins and support project financing; a weak or mismatched PPA can expose a data center to price spikes, curtailment, congestion, renewable intermittency, or stranded capacity. For AI infrastructure investors, power is not a utility footnote. It is a core underwriting variable.
Common misconceptions
- •A PPA secures economic terms, but interconnection and transmission constraints can still limit deliverability.
- •Fixed-price power reduces price volatility but may create above-market costs if power prices fall.
- •Renewable PPAs may not physically match 24/7 compute load without storage or grid purchases.
- •A low headline power price can be misleading if congestion, basis risk, demand charges, or curtailment rights shift costs back to the buyer.
- •Owning renewable attributes is not the same as having firm, around-the-clock electricity for a high-density AI cluster.
Technical details
Major PPA Types
Physical PPA: The buyer contracts for physical delivery of power at a specified delivery point. The value depends on transmission, interconnection, congestion, and actual deliverability to the load.
Virtual PPA: A financial contract for differences tied to a generation asset and market price. It can hedge or support renewable claims but does not by itself deliver physical electricity to the data center.
Retail supply agreement: The data center buys power through a utility or retail provider, often with fixed, indexed, or blended pricing.
Behind-the-meter or co-located power: Generation is located near the load. This can reduce grid exposure but introduces development, permitting, fuel, maintenance, and reliability risks.
Numerical Example
Assume a 50 MW AI data center runs at an average 85% load factor. Annual consumption is roughly 50 MW x 85% x 8,760 hours = 372,300 MWh.
At $45/MWh, annual power cost is about $16.8 million. At $75/MWh, it is about $27.9 million. That $11.1 million difference flows directly into compute gross margin unless passed through to customers.
If the facility was financed on a margin model assuming $45/MWh power, merchant-price exposure can become a credit issue, not just an operating variance.
Basis, Congestion, and Deliverability
A PPA may reference a generation node, trading hub, or delivery point that does not perfectly match the data center's load location. The difference is basis risk.
Transmission congestion can make power cheap where it is generated and expensive where it is consumed. A buyer can be economically hedged on paper while still paying high delivered power costs.
Interconnection queues, substation upgrades, transformer availability, and utility approvals can delay energization even when the PPA is signed.
Renewable Claims and 24/7 Load
AI workloads often require continuous power, while solar and wind output vary by weather and time of day. A renewable PPA can offset annual consumption but may not match hourly load without storage, firming, or grid purchases.
Investors should separate energy cost, renewable energy certificates, carbon claims, and physical reliability. They are related but not interchangeable.
Diligence Questions
Is the PPA physical, virtual, retail, or behind-the-meter?
What is the delivered cost after congestion, demand charges, losses, and ancillary charges?
Who bears curtailment, outage, and basis risk?
Does the contract provide firm capacity or only energy?
Does the tenor match the customer contracts and debt amortization?
What credit support, collateral, and termination rights exist on both sides?