A Power Purchase Agreement (PPA) is a long-term contract between an electricity generator and a buyer that fixes the price, volume and delivery terms for electrical energy over a defined period. PPAs underpin the financing of generation assets, particularly renewable plants, by guaranteeing a stable revenue stream that de-risks capital investment. They allocate market, volume and curtailment risk between producer and offtaker and may be physical or virtual (financial).
Overview
- A PPA defines price, term, delivered volume and settlement mechanics between a generator and an offtaker.
- Physical PPAs deliver actual electrons to the buyer; virtual (synthetic) PPAs settle the difference against a market reference price.
- Corporate PPAs let large energy consumers procure renewable power directly, often to meet decarbonisation targets.
- The contract’s bankability allows developers to secure non-recourse project finance against guaranteed cash flows.
Key aspects
- Contract tenor: typically 10-25 years to match asset depreciation and debt amortisation.
- Pricing structures: fixed, escalating, indexed or floor-and-collar arrangements.
- Risk allocation: covers volume, curtailment, balancing and credit risk between the parties.
- Settlement: pay-as-produced, baseload or shaped delivery profiles.
- Additionality and renewable energy certificates that evidence environmental attributes.
Applications
- Financing utility-scale solar and wind farms through guaranteed offtake.
- Corporate renewable procurement to satisfy net-zero and ESG commitments.
- Hedging wholesale electricity price exposure for both producers and consumers.
- Enabling merchant generation to reach financial close in liberalised markets.