Akshat Kasliwal, Jesse Gilbert, and Anirudh Mathur are renewable energy asset valuation experts at PA Consulting.
One of the year’s flashiest developments in the power sector is Constellation Energy’s plan to restart Unit 1 at its infamous Three Mile Island nuclear facility by 2028 in order to provide 24/7 carbon-free energy to fuel Microsoft’s growing data center fleet across the Mid-Atlantic. For many industry observers, however, this news did not come as a surprise.
The ravenous electricity demands of hyperscale data centers needed for artificial intelligence, coupled with the deep pockets and aggressive sustainability goals of Big Tech companies like Microsoft, Google, Amazon and Meta, have led them not only to become the leading buyers of renewable power — accounting for more than 50% of deals nationwide — but also to disrupt the renewable energy landscape in ways that are simultaneously encouraging and disconcerting.
After two decades of flat electricity demand, the proliferation of AI has fueled unprecedented load growth expectations across much of the country. The Electric Reliability Council of Texas, the power region for most of Texas, expects a staggering 60% increase in demand from data centers within five years. PJM Interconnection earlier this year tripled its forecast for electricity demand, with the highest load increase expected to come in Virginia, home to the world’s largest data center market. Booming demand translates to higher prices for power generators, particularly in regions that are flush with new data centers, like West Texas, which has historically been known for cheap and abundant electricity. Capacity prices across PJM spiked nearly ten-fold in the most recent auction.
Given Big Tech’s ambitious decarbonization goals — by 2030, Microsoft intends to be carbon negative and Google plans for carbon-free energy usage — there is soaring demand for clean energy, a great boost for renewable project developers. Brookfield, a major renewable power generator, recently announced the largest-ever renewable energy deal, agreeing to sell over 10.5 gigawatts of clean power to Microsoft between 2026 and 2030; nearly three times New York State’s current solar and wind capacity.
Another advantage of Big Tech’s thirst for energy is the growing trend of data centers locating adjacent to contracted renewables or nuclear facilities, often referred to as a “behind-the-meter” arrangement. These setups allow data centers to receive physical delivery of green power that might otherwise be curtailed, improving the utilization of renewable capacity.
Finally, Big Tech companies are leveraging their financial strength to invest in innovative power generators and storage systems, such as nuclear fusion and enhanced geothermal. Google and Microsoft, for example, have formed a coalition to accelerate the adoption of novel clean technologies, aiming for around-the-clock carbon-free energy.
Yet, these opportunities are intertwined with significant challenges. Big Tech has leveraged its market influence and sophisticated analytical abilities to morph renewable power purchase agreements from simple contracts into complex structures that shift considerable risks onto renewable developers. These novel contracts expose renewable projects to increased spot market exposure, countering the original intent of power purchase agreements, which were designed to limit market exposure and offer revenue certainty.
Under Big Tech’s renewables purchasing dominance, contract terms have become increasingly intricate and tailored to the complex and varied needs of these offtakers. By extension, the embedded risks have also become far more challenging to assess.
Empirically, some of these contractual considerations have already become commonplace across the spectrum of sophisticated offtake counterparties. These can include:
- extremely short contract terms and potential “re-contracting” risk due to uncertain data center demand, chip-set efficiency and forward-thinking offtakers demanding new electricity sources;
- curtailment risk where project aren’t compensated when forced to limit output;
- price floors that limit negative market price protection for projects; and
- non-settlement provisions (exposing projects to negative market prices during high output).
Some other provisions are markedly quixotic:
- multiple settlement points, which complicate the cost basis for a renewable energy project;
- forced day-ahead settlements opening the project up to price and generation risk between anticipated and real-time outcomes;
- variable offtaker demand causing volatility in a project’s revenues; and
- indexation of a portion of a project’s earnings to the profitability of an on-site, back-up gas generator serving the offtaker’s demand during tight conditions.
Ultimately, these newer contract structures expose renewable project owners to greater risk, which runs counter to the original intent of purchase power agreements of offering revenue certainty to — and lowering volatility for — projects. At the same time, wholesale and retail power market outcomes are becoming more volatile and challenging to forecast, partly driven by the potential for correlated risk.
Under these novel offtake agreements, projects face greater exposure to the whims of the wholesale market — which itself is increasingly influenced by data center dynamics. Given that there are still myriad questions about the extent to which data center demand will materialize, it creates significant uncertainty in wholesale market outcomes. If data center growth projections do not materialize as anticipated, it would adversely impact the profits of energy companies. Google has warned that forecasts for data center growth in certain U.S. power regions could be double-counting demand. As Big Tech dominates energy procurement, the fortunes of renewable project owners are increasingly tied to those of the data center industry.
This concentration of risk could have far-reaching implications for both the energy market and the environment. Google recently reported material increases in its greenhouse gas emissions relative to 2019, as did Microsoft, relative to 2020, primarily due to the supply of renewables not keeping pace with growth in their data center operations. Moreover, the costs associated with upgrading the transmission and distribution system to reliably serve data centers — alongside the elevated wholesale power prices they can induce — are borne, in part, by “regular” ratepayers.
A generational transformation is underway in the renewable energy sector. The days of simply executing a power purchase agreement — to either finance a project or offset carbon emissions — are over. Today, Big Tech’s demands for specific project development plans and contractual provisions can create — or destroy — millions of dollars in value for renewable companies, a daunting prospect for a sector whose health is imperative for combating climate change.