Why Your First Data Center PPA Could Cost You Millions (If You Miss This One Detail)
First-time data center investors who rush into long-term energy deals might be walking straight into risks they don’t see coming.
Welcome to Global Data Center Hub. Join 1700+ investors, operators, and innovators reading to stay ahead of the latest trends in the data center sector in developed and emerging markets globally.
What you’ll learn in this post:
If you’re new to data center energy procurement, this guide will walk you through the key concepts and common mistakes first-time operators make:
What is a PPA and why does it matter to your project?
The lifecycle of solar, wind, and storage
Case studies of rookie mistakes and how to avoid them
How energy procurement impacts your data center IRR
Beginner-friendly questions to ask before signing your first PPA
Everyone’s talking about data center power.
Where to get it. How much it costs. When it’s available.
But if you’re a new investor or operator signing your first Power Purchase Agreement (PPA), there’s a different question you should be asking:
What happens if the power you paid for doesn’t show up or doesn’t perform?
Welcome to the hidden risk that’s burning first-time data center deals.
The One Detail Most New Investors Miss
Let’s start at the beginning.
A Power Purchase Agreement (PPA) is a long-term contract to buy electricity (usually renewable) from a specific project.
For data centers, it locks in cost, green credentials, and capacity. But unlike a typical utility bill, a PPA ties you to the performance of a physical asset for 10 to 25 years. If that asset underperforms, or the market changes, you’re still on the hook.
Most PPAs look simple on the surface.
They’re marketed as fixed-price, long-term contracts for clean, renewable energy. But behind the headline rate is an entire world of assumptions (technology performance, asset degradation, grid behavior, etc) that often don’t hold up under real-world conditions.
Understanding Lifecycle Degradation
Clean energy assets don’t operate at 100% forever. Each has its own decline curve:
Solar panels degrade gradually, typically 0.8–1.0% per year. By year 10, you’re producing ~90% of what you were in year 1.
Wind turbines can perform consistently for years, but have concentrated risk in years 6–12 when major components like gearboxes and blades often fail.
Battery storage (especially lithium-ion) degrades fastest. If heavily cycled, capacity can fall 20–30% within 7–10 years.
If your PPA is built on assumptions that ignore this, you're locking in underperformance from day one.
Beyond asset degradation, grid dynamics introduce another layer of risk.
Projects can be delayed years due to interconnection bottlenecks. Curtailment is rising in markets like California and Chile, where up to 18% of renewable energy is sometimes curtailed. Even regulatory surprises, like AWS’s rejected PPA with Talen Energy, can upend the economics of a “bankable” deal.
Case Study: When the Power Didn’t Perform
A mid-sized data center developer signed a 20-year fixed-price solar PPA.
The contract was modeled on a 0.5% annual degradation curve, but actual performance declined at twice that rate.
By year five, the site’s energy delivery was 7% below plan. The developer was forced to purchase additional backup power at market rates and couldn’t renegotiate the PPA.
The result?
Over $3 million in unexpected costs, a delayed refinance, and 160 basis points shaved off the project’s IRR.
The cause wasn’t a black swan event. It was an overconfident model based on assumptions that should have been challenged.
What’s Behind the Paywall?
Paid subscribers get access to the next three sections, including:
3 Red Flags to Watch Before Signing Your First PPA
What Smart First-Time Operators Are Doing
Why Your First PPA Sets the Tone for Everything
Beginner PPA Checklist
Upgrade now to unlock practical frameworks, field-tested strategies, and contract structuring lessons from real operators.
3 Red Flags to Watch Before Signing Your First PPA
Unrealistic Performance Expectations
Many financial models use optimistic degradation and curtailment assumptions. If your model assumes zero curtailment and flawless asset performance, you’re underwriting fantasy, not infrastructure.
Rigid Contract Structures
Long-term, fixed-price PPAs may look safe, but they often lock you into expensive energy even if project performance drops or market prices fall. If your contract doesn’t include escalation, exit options, or production guarantees, you’re exposed.
Mismatch Between Contract and Business Model
New developers often sign 15–20 year energy contracts while hosting tenants on 3–5 year leases. That creates stranded risk if tenant churn or slow ramp-up leaves you overexposed to unused contracted energy.
What Smart First-Time Operators Are Doing
Savvy operators are structuring flexibility into their PPAs from the start. Rather than committing to 20-year volumes upfront, they’re negotiating staged contracts that scale with load. Shorter tenors, typically 5–10 years, offer more optionality.
They’re also applying more realistic assumptions in their models, like 1.0% annual degradation for solar, 3.5% for storage, and up to 15% curtailment in saturated grids. Instead of relying on asset warranties, they insist on contractual performance guarantees tied to actual system output.
Some are layering in protection through credit support tools: letters of credit, surety bonds, or step-in rights in the event of developer failure. Others are diversifying their procurement across multiple contracts, geographies, and technologies to hedge volatility.
Your First PPA Sets the Tone for Everything
Your first Power Purchase Agreement isn’t just a contract, it’s the foundation of your entire energy strategy.
From IRR to tenant trust to long-term viability, it sets the tone for how your project performs under pressure.
Get it right, and you lock in stability, signal operational maturity, and unlock access to ESG-aligned capital and enterprise tenants. You build a platform that scales.
Get it wrong, and you're stuck with underperforming assets, misaligned contract terms, and sunk costs you can’t renegotiate. Many new operators don’t realize their PPA is a 15–20 year financial risk position until it’s too late.
In the AI infrastructure era, where speed is glorified, precision is what protects.
Before you sign anything, pressure-test your assumptions with these five questions:
Beginner PPA Questions Checklist:
What happens if the asset underperforms?
Are realistic degradation and curtailment rates modeled?
What rights do I have if tenants leave or load ramps slowly?
Is the contract flexible or locked for 20 years with no exit?
Who carries the performance risk and what protections are in place?
Getting your first PPA right isn’t just good governance. It’s your edge.