power purchase agreement (PPA)

advancedwidespread

A long-term agreement in which a buyer – an electricity supplier, trader, or large consumer, such as a data center – purchases electricity directly from a power plant producer at a pre-agreed price or pricing formula, locked in for years.

In plain terms

Imagine not buying vegetables weekly at the market, but agreeing with a farmer for ten years: you take all their harvest at a pre-set price. Your expenses become predictable, their revenue is secured, so they dare to buy new land. A power purchase agreement is the same, but with electricity and a power plant.

In the AI era, it has made headlines because data centers serving large language models and agents consume enormous amounts of electricity. Tech companies are therefore locking in production from solar, wind, and nuclear power plants with 10–20 year contracts, often before the power plant is even built.

A standard electricity supply contract does not reveal which power plant generates the electricity, and its price is valid for a shorter period: market contracts last a few years, while household rates can change via regulatory decisions. A Power Purchase Agreement (PPA) is tied to a specific power plant and locks in conditions for a long term. Many new power plants secure bank loans only because such an agreement backs them.

How it works

The buyer (for example, a company operating a data center) and the producer (for example, a solar power plant developer) agree on quantity, price, and duration, which is typically 10–20 years.
In the case of a new power plant, the producer takes out a loan with the contract in hand because the bank sees that the generated electricity has a guaranteed buyer.
In a physical PPA, the buyer actually purchases the power plant's electricity, which it receives via the public grid. In the rarer variant, a direct line connects the power plant to the consumer.
In a virtual (financial) Power Purchase Agreement (PPA), no electricity changes hands between the parties: the producer sells electricity on the market, and the buyer purchases from their usual provider. The parties only settle the difference between the fixed price and the current market price, and the buyer receives certificates proving the green origin.
Based on the certificates, the buyer can account for its consumption as covered by renewable or carbon-free sources.

An everyday example

You read in the news that a tech company has locked in, for twenty years, the entire output of a nuclear power plant that is to be restarted, for its AI data centers. This is a power purchase agreement: the company gets reliable electricity, and the plant's owner gets reliable revenue.

Who is affected

entrepreneur, executiveAs a high-power-consumption company, you can make energy costs predictable with a PPA and validate your green commitments.

bank customer, investorThe value of energy and data center investments largely depends on the long-term power purchase agreements behind them. → Money

industrial worker, engineerThe planning, scheduling, and grid connection of new power plants and data centers are often defined by these contracts. → Industry

everyoneThe power appetite of AI data centers affects grid load and, in the longer term, electricity prices.

A common misconception

MythIf a company has signed a green PPA, its data center runs on clean power at all times.

In realityOn the grid, electricity is mixed, and solar plants do not produce at night. Most companies compare purchased green electricity with consumption on an annual basis, not hour by hour.

Limits and risks

A long commitment is also a risk: if the market price stays below the fixed price for a long time, the buyer pays more for electricity for years.
A virtual PPA is only a financial settlement and does not guarantee on its own that the local grid can handle the new data center.
The claim of '100% renewable' often refers to an annual average, so it is worth checking whether it concerns hourly matching or just certificates.
If a company locks in existing power plant production, it does not add more clean power to the system; it only changes who receives it.

Similar, but not the same

provenance guarantee – This is merely a certificate that one unit of green electricity was produced somewhere, without a long-term power purchase agreement tied to a power plant.
universal service contract – A residential electricity contract is made with the provider, not a specific power plant, and does not lock in conditions for decades.
own power plant – In a PPA, the power plant remains the producer's asset and risk, while the buyer only purchases the generated electricity.

Related concepts

Broader

AI infrastructure, energiapiac, data center power supply

Narrower

virtual power purchase agreement, physical power purchase agreement, corporate power purchase agreement

On the edge

data center, hyperscaler, provenance guarantee, small modular reactor, Network connection

A brief history

The genre spread in the United States after a 1978 law (PURPA) required utilities to purchase power from independent producers, thereby opening the way for long-term contracts. The corporate version took off in the 2010s, when technology companies began contracting directly with wind and solar farms. From 2024, due to AI data centers, technology companies are also signing such agreements with nuclear power plants.

Where things stand

By the end of 2026, the PPA is a standard tool for major data center operators, who are among the largest corporate buyers of clean power. In addition to renewables, an increasing number of contracts cover nuclear energy and hourly-precise, carbon-free supply.

Status: 2026 November

Also known as

PPA · power purchase agreement · power purchase agreement · long-term power purchase agreement · corporate PPA · corporate PPA · virtual PPA (VPPA) · green PPA

Sources

Wikipedia: Power purchase agreement

This entry was machine-edited and has undergone machine expert review; the “In the news” section updates automatically from Agent Age stories.