Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary Google requires a substantial amount of power to support its cloud and artificial intelligence (AI) operations. That's leading the technology giant to secure electricity supplies from power providers. It recently signed a massive power purchase agreement (PPA) with Brookfield Renewable (NYSE: BEPC)(NYSE: BEP) for hydroelectric power in the U.S.

Here's how the deal will benefit both companies.

Plugging into a clean and reliable energy source

Technology companies like Alphabet's Google have distinct energy needs. Their data centers require a steady stream of power 24/7. Meanwhile, Google, like many other large tech companies, has pledged to operate solely on carbon-free energy. In Google's case, it aims to achieve that ambitious goal by 2030. Given the intermittency of renewable energy sources (the sun sets; the wind isn't constant), the company needs to ensure it has an adequate supply of reliable, carbon-free energy to achieve its goals.

That's leading the tech titan to turn to hydropower to help supply some of its power needs. The underrated electricity source can provide it with the baseload 24/7 power it needs from a carbon-free source.

Google inked a first-of-its-kind hydro framework agreement with Brookfield, which will provide up to 3 gigawatts of carbon-free hydroelectric capacity in the U.S. to the technology company. That's the world's largest corporate clean power deal for hydroelectricity. Under the agreement, Brookfield will initially provide Google with all the power from its Hollywood and Safe Harbor hydro facilities in Pennsylvania. The 20-year PPAs cover 670 megawatts of capacity, representing more than $3 billion of power.

Under the agreement, Google can secure up to 3 GW of carbon-free electricity from Brookfield as it becomes available in the future. The company can obtain this additional capacity as existing PPAs on Brookfield's hydro assets expire. Brookfield could also overhaul or upgrade its existing assets to provide more clean power to the grid, supported by Google's PPAs.

The deal is a crucial step in ensuring that Google has the clean and reliable power it needs to support its data center operations and environmental goals.

Supporting Brookfield's organic growth

The deal with Google is also significant for Brookfield, which is one of the world's largest hydroelectric power operators. The framework deal with Google does two things for the company. It increases its cash flow and provides the company with opportunities to unlock the value of its U.S. hydro assets.

Brookfield has a vast portfolio of legacy clean power generating assets secured by long-term PPAs. These agreements provide the company with stable and growing cash flows, as most of its PPAs index power rates to inflation. However, due to surging power demand, electricity prices are rising faster than inflation. That's providing Brookfield with the opportunity to lock in higher prices as legacy PPAs expire.

At its investor day last fall, Brookfield highlighted that it had about 3 GW of hydroelectric capacity on PPAs that expire over the next five years. It now has a likely buyer for all this power under its framework agreement with Google. The company estimated that securing new PPAs for its hydro generation capacity alone could add up to $100 million annually to its funds from operations (FFO), or about 2% per share each year. That's in addition to inflation-driven rate increases, which should add another 2% to 3% to its annual FFO per share.

The company noted that locking in higher pricing on future PPAs would increase the underlying value of its hydroelectric assets. That would enable Brookfield to layer in additional financing on those facilities, which it could use to fund new investments such as development projects and acquisitions. The company estimated that it could unlock over $3 billion in additional proceeds from financing its legacy U.S. hydro assets over the next five years as it recontacted those facilities. The Google deal puts it in a strong position to achieve this target.

Securing new financing and deploying the proceeds into new investments could further enhance Brookfield's FFO growth rate. This agreement helps support the company's outlook that it can deliver more than 10% annual FFO per-share growth over the next decade.

A win-win partnership

Google needs more clean power to support its cloud and AI businesses. It's turning to hydropower supplied by Brookfield to meet some of that need. That deal will also be a boon for Brookfield, enabling it to sell most of its available capacity to a strong customer for the next two decades. That will lock in earnings growth while also positioning the company to unlock the value of its hydro assets via refinancing. It can use those proceeds to support the continued expansion of its global clean power portfolio.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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