Why PPAs don’t make data centers more sustainable
PPAs (Power Purchase Contracts) are all the rage these days, especially for larger data center, cloud and colocation operators who have the credit ratings to be able to purchase PPAs. But there are some misconceptions on how PPAs work and why companies are purchasing them. The majority of companies buy them to reduce the cost of electricity for their business, essentially making a simple economic decision, and thereafter marketing that decision using a sustainability narrative.
What is a PPA?
Simply put, it is a power contract that buys the entire or partial output of a power plant, often from wind farms, solar parks, or other types of renewable energy generators. The power output is purchased virtually — meaning there is no physical cable directly between a data center facility and the power plant to transfer the electricity.
Simple PPAs have a fixed price over a long period of time (e.g. 10 or 15 years) and they are used to help finance the construction of a renewable energy system (e.g. Google buying the output of an entire wind farm for 15 years at a fixed price is enough to meet the Return on Investment (ROI) requirements of the asset).
Now of course if a price is fixed for 15 years, firstly, a business will receive a discount for its long commitment. Second, in a market in which everything is being electrified (e.g. electric cars), the demand for electricity is increasing, thus the price of electricity is likely going to increase — hence fixing the price is a good idea. Third, the price of generating wind power, for example, is much lower than coal or gas, due to the subsidies applied to it.
The result in this example is a very attractive power purchasing contract that provides a business with long-term price security, and a lower cost per kWh for the main commodity that a data center business requires: power.
Economically a good idea, but not fair
From an economic perspective this makes sense, however, it has a limitation — in order to purchase a 20 MWh Baseload PPA with a fixed price over 15 years at, say, 50 EUR per MWh, a business would need to have enough credit-capacity for 130M EUR worth of contract value. This limits the amount of data center facilities or cloud operators that have access to this kind of power contract.
Currently, that does not make the PPA market very accessible, however, it looks like there is policy in the making to address this challenge (EU).
It’s neither greener nor more sustainable
There is a lot of marketing around PPAs and how companies by purchasing them, are increasingly green and better than others. But technically, these power contracts are no different from existing green power contracts. The only difference is that these purchase agreements help finance new renewable energy, which is great, but only because there is an economic reward for doing so (lower power costs). It’s unlikely people would buy PPAs if the costs were 20-30% above the market price for electricity. Google says as much in a RE-Source 2021 panel session discussing future solutions for companies that want to maximize the impact of their renewable electricity purchases, referenced below.
RE-Source 2021 panel moderated by the author, Max Schulze. (56:00 Minutes)
Each renewable power generator produces two outputs: electricity and guarantees of origin (GoO, green certificates). This is no different from a household or traditional ‘green’ power contract. What’s different is that in the case of a PPA, a business can unbundle the GoO of the wind farm that generates the renewable power, and use it to ‘green’ the coal or gas-fired power purchased somewhere else.
Even if a business refrains from this practice, what is difficult with all the buzz around PPAs is that it creates the illusion that this somehow connects digital infrastructure and data centers with renewable energy, and thus makes them more environmentally sustainable. By purchasing larger portfolios of PPAs, a data center or cloud operators might even claim that they have ‘24/7’ green electricity, simply because there is always a wind or solar farm somewhere which is running and generating certificates to be used anywhere. There is no actual physical improvement.
The real challenges of integrating data center facilities with renewable energy remain
PPAs help the expansion and building of new renewable energy assets. The challenge of our time and of our electrical system is not in building more renewable power systems, but rather how to integrate their intermittent power generation and to adapt our consumption from ‘always on’ to ’on when available’. It’s a shift that needs to happen now, otherwise, all the green electricity generated doesn’t make it into the grid.
You can dive deeper into this by reading this report by the UK’s offshore wind industry council.
The real challenges from an electricity perspective remain untouched:
- Data center facilities are baseload consumers (see Capacity factors of power plants), requiring always available electricity. All baseload consumers should invest in demand-response capabilities to help the integration of more renewable energy
- Data centers are built near cities whereas the majority of large-scale renewable energy systems are near, or on the coastline (off-shore wind) or in the country-side (large-scale solar). Relocating data centers would lead to better physical integration with renewables and would help integrate more renewable capacity.
- Data centers could play a role in the urban environment by using their large grid connections to support the energy system, first through demand-response and second by producing other energy commodities that can be utilized in the urban environment — such as hydrogen or heat with electrolyzers and heat pumps.
To make the expansion of the digital infrastructure environmentally sustainable, the three topics highlighted above need to be addressed. In the SDIA Steering Group on Strategies for the integration of digital infrastructure & renewable energy we create the business cases for building energy hubs, near the grid connections of offshore wind parks or co-location data center campuses with hydropower, to building demand-response and hydrogen-capable urban data center campuses producing heat for nearby residents. Join us in the journey towards the meaningful integration of renewables in the digital infrastructure, above and beyond the use of certificates and discounted long-term financial contracts.