A Power Purchase Agreement (PPA) is a long-term contract where a power generator sells electricity to a buyer at a pre-agreed price. This mechanism is crucial for financing new renewable energy projects by providing developers with a stable revenue stream and buyers with predictable, green energy costs.
A Power Purchase Agreement, commonly known as a PPA, is a financial and legal contract between two parties: an energy generator (the seller) and a buyer, often a corporation or utility (referred to as the "off-taker"). This agreement establishes the commercial terms for the sale of electricity over an extended period, typically 10 to 25 years. PPAs are the financial backbone of the renewable energy sector, as they de-risk investments in large-scale projects like solar or wind farms, making them "bankable" and attractive to investors.
For corporations, signing a PPA is a primary strategy for achieving ambitious decarbonisation and Environmental, Social, and Governance (ESG) goals. It allows them to secure a long-term supply of green electricity, lock in energy prices to hedge against market volatility, and credibly claim their operations are powered by renewable sources.
How a PPA Works
The core function of a PPA is to provide long-term revenue and price certainty. While specific terms vary, the process generally follows these key steps and involves different structural types.
Key Components of a PPA:
- Price: The price per unit of electricity (e.g., per megawatt-hour, MWh) can be fixed, or it can escalate over time based on an agreed-upon index.
- Tenor (Duration): The length of the contract, usually aligning with the project's financing term.
- Volume: The amount of electricity the off-taker agrees to purchase.
- Delivery Point: The location on the electricity grid where the power is officially transferred.
- Renewable Energy Certificates (RECs): The agreement specifies who owns the "green attributes" or certificates associated with the generated power.
Main Types of PPAs:
- Physical PPA: In this structure, the electricity is physically delivered from the generator's facility to the buyer through the grid. The buyer takes legal title to the energy and uses it to power its operations.
- Virtual PPA (VPPA) or Financial PPA: This is a purely financial contract that functions as a price hedge. The generator sells its power into the local wholesale market, and the buyer continues to purchase its electricity from its utility. The PPA acts as a "Contract for Difference," where the parties settle the difference between the fixed PPA price and the floating market price. The buyer receives the RECs from the project, allowing them to make renewable energy claims without managing physical power delivery.
Concrete Use Cases
- Corporate Decarbonisation: A global technology company signs a 15-year VPPA with a new offshore wind farm. This allows the company to cover the electricity consumption of its European data centers with renewable energy, helping it meet its net-zero emissions target. The agreement provides the wind farm developer with the guaranteed revenue needed to secure financing for construction.
- Industrial Manufacturing: A large manufacturing plant with high and predictable energy needs signs a physical PPA with a nearby solar farm. This locks in their electricity cost for 20 years, protecting them from volatile energy market prices and ensuring their production remains cost-competitive while reducing their carbon footprint.