Power Is 40-60% of Operating Cost
Data centre power procurement is no longer a facilities management task delegated to an energy broker. At current scale — the US data centre fleet is projected to consume 35-40 GW by 2028, up from 21 GW in 2024 — procurement strategy is a board-level decision with direct impact on project viability and returns.
Operators paying $0.04/kWh versus $0.08/kWh on a 100 MW campus face a $35 million annual cost differential. That gap alone determines whether a project pencils.
Utility Tariff Structures
Most data centres begin with standard commercial or industrial utility tariffs. The structure varies by jurisdiction but typically includes:
**Demand charges ($8-25/kW/month):** Based on peak power draw during a billing period. Data centres with stable load profiles (85-95% utilisation) negotiate favourable demand ratchets.
**Energy charges ($0.03-0.15/kWh):** The per-kilowatt-hour consumption charge. Varies enormously by market: - Hydro-rich Pacific Northwest: $0.028-0.045/kWh - Texas (ERCOT deregulated): $0.045-0.065/kWh - Northern Virginia (Dominion Energy): $0.055-0.070/kWh - California (PG&E, SCE): $0.12-0.18/kWh - New York City (ConEd): $0.14-0.20/kWh
**Transmission and distribution (30-50% of total bill):** Often overlooked, T&D charges can equal or exceed energy charges in constrained markets. Operators with on-site generation avoid a substantial portion of these costs.
**Key negotiation points with utilities:** - Economic development tariffs (reduced rates for job creation and capital investment) - Interruptible service agreements (5-15% discount in exchange for curtailment rights) - High load factor discounts (rewarding consistent, predictable consumption) - Substation cost-sharing for new interconnections
Power Purchase Agreements (PPAs)
PPAs allow data centre operators to contract directly with renewable energy generators, bypassing the utility's generation charge.
**Physical PPAs:** The generator delivers power directly to the operator via the grid. Requires both parties to be in the same ISO/RTO. Typical terms: - Duration: 10-20 years - Price: $0.025-0.055/kWh (solar), $0.035-0.065/kWh (wind) - Structure: Fixed price, escalating (1-2%/year), or indexed to market - Volume: 50-500+ MW per agreement
**Virtual/Financial PPAs (VPPAs):** A contract for differences where the operator pays a fixed price and receives the market value of generation. No physical delivery. Used when operator and generator are in different markets.
**Corporate PPA market scale:** Technology companies signed 46 GW of PPAs in 2024-2025, representing 72% of all corporate renewable procurement. Microsoft alone has contracted 13.5 GW. Amazon holds 22+ GW of cumulative PPA commitments.
**Risks to model:** - Basis risk (difference between PPA delivery point and operator's node price) - Shape risk (solar generates midday, data centres run 24/7) - Curtailment risk (grid operator may curtail generation during oversupply) - Counterparty risk (developer insolvency during 15-year term)
Behind-the-Meter Generation
On-site power generation eliminates transmission losses, avoids T&D charges, and provides supply certainty. Three models are gaining traction:
**Natural gas turbines/reciprocating engines:** - Capital cost: $800-1,200/kW installed - Fuel cost: $0.025-0.040/kWh at current gas prices - Total levelised cost: $0.045-0.065/kWh - Permits: Air quality permits required; 6-18 month timeline - Operators: Lancium, Crusoe Energy, and multiple hyperscalers have deployed gas-powered campuses
**On-site solar + battery:** - Capital cost: $1.2-1.8M/MW (solar) + $300-500K/MWh (battery) - Capacity factor limitation: Solar delivers 20-30% of nameplate, so a 100 MW data centre needs 350-500 MW of solar panels - Land requirement: 5-7 acres per MW of solar - Best suited as supplemental generation, not primary supply
**Fuel cells:** - Bloom Energy and others have deployed solid oxide fuel cells at data centres - Capital cost: $3,000-5,000/kW - Operating cost: $0.08-0.12/kWh (natural gas fuel) - Advantage: Near-zero local emissions, small footprint, utility-grade reliability - Limitation: Higher total cost than grid power in most markets
Nuclear: The Next Frontier
Nuclear power has emerged as the most significant shift in data centre energy strategy since the PPA market developed a decade ago.
**Small Modular Reactors (SMRs):** - Capacity: 50-300 MW per unit (ideal data centre scale) - Projected cost: $0.05-0.08/kWh levelised - Timeline: First commercial deployments expected 2029-2032 - Key developers: NuScale (US NRC approved), Kairos Power (Google partnership), X-energy (Dow partnership) - Advantage: 24/7 carbon-free baseload, 60+ year operating life
**Existing nuclear PPAs:** - Microsoft's Constellation Energy deal restarted Three Mile Island Unit 1 (835 MW) at a reported $100/MWh ($0.10/kWh) PPA price - Amazon contracted 960 MW from Talen Energy's Susquehanna nuclear plant - Oracle is reportedly developing a 1 GW campus adjacent to existing nuclear generation
**Cost-benefit reality:** Nuclear PPAs today trade at a premium to wind and solar ($0.08-0.12/kWh versus $0.03-0.06/kWh) but provide 24/7 baseload carbon-free power without intermittency or storage costs. The all-in comparison narrows substantially when firming costs for renewables are included.
Procurement Strategy by Scale
**Under 5 MW:** Standard utility tariff. Negotiate economic development rate if available. Limited leverage.
**5-25 MW:** Utility tariff with negotiated demand charges. Supplement with VPPAs for sustainability commitments. Cross-connect economics matter — evaluate using our facility directory.
**25-100 MW:** Direct utility negotiation for bespoke tariff. Physical PPA for 50-80% of load. Behind-the-meter generation for peak shaving and redundancy.
**100+ MW:** Portfolio approach: utility contract for baseline, multiple PPAs across technologies, behind-the-meter for resilience, and potentially nuclear for long-term baseload. At this scale, operators often fund utility infrastructure upgrades in exchange for rate certainty.
Market Intelligence
Track power pricing across US markets using our market data tools. For bespoke procurement strategy analysis, contact our advisory team.