What is a power purchase agreement (PPA)?

A power purchase agreement (PPA) is a long-term contract between an electricity generator and a customer, usually a utility, government or company.

The PPA defines the conditions of the agreement, such as the amount of electricity to be supplied, negotiated prices, accounting, and penalties for non-compliance.

PPAs may last anywhere between 5 and 20 years, during which time the power purchaser buys energy at a pre-negotiated price.

Key Points

• PPAs are bilateral contracts that can be customized to meet specific needs of buyers and sellers
• These agreements play a critical role in financing renewable energy projects like solar and wind farms
• PPAs can involve physical delivery of electricity or operate as purely financial arrangements
• Contract durations typically range from 5 to 25 years, with pricing structures that can be fixed or variable
• Corporate buyers increasingly use PPAs to meet sustainability goals and hedge against energy price volatility

Understanding Power Purchase Agreements

PPAs play a key role in the financing of independently owned electricity generators, especially producers of renewable energy like solar farms or wind farms.

As government subsidies have declined, PPAs have become essential to renewable energy financing.

By demonstrating that a renewable asset has already found a long-term buyer at a fixed price, PPAs offer the revenue certainty lenders need to secure their investment.

Since it is a bilateral agreement, a PPA can take many forms and is usually tailored to the specific application. The parties involved typically include the electricity generator (seller), who develops, owns, and operates the power generation facility, and the buyer (often called the "offtaker"), who purchases the electricity. The customer is therefore also known as the offtaker, or the purchaser of power.

The contract contains the commercial terms of the electricity sale: length, delivery point/date, volume and price.

There is a wide variety of pricing structures, including fixed prices and discounts pegged to wholesale prices.

PPA contracts can either be for a pre-defined amount of electricity or for a pre-defined portion of whatever quantity of electricity the seller generates.

How It Works

The mechanics of a PPA depend on whether it's structured as a physical or virtual agreement:

1. Physical PPAs: Physical PPAs involve the actual delivery of electricity from a specific generator to the buyer, nearly always through the grid, by an intermediary supplier.

In a physical PPA, the offtaker pays a predetermined fixed price for the physical energy generated by a project and the associated RECs. The buyer receives both the electricity and renewable energy certificates (RECs), which can be used to demonstrate renewable energy consumption for sustainability reporting.

2. Virtual PPAs (VPPAs): A virtual PPA, or financial PPA, is a purely financial agreement; it is a fixed-for-floating contract-for-differences.

Virtual PPAs, also known as financial or synthetic PPAs, do not involve physical electricity delivery.

In the negotiation of the financial PPA, the buyer and seller agree on a fixed rate known as a 'strike price'. For the agreed upon price, the buyer receives the RECs and is payed (or charged) the difference between the market rate and the annual strike price.

3. Contract Execution: The contract is usually agreed upon and signed before the project begins.

The developer and its investors own the equipment for the duration of the PPA. The developer typically provides initial project coordination services such as bridge financing, design, and permitting with little-to-no cost to the customer.

Why It Matters

PPAs have become increasingly important in the energy transition for several reasons. PPAs can be used to reduce market price risks, which is why they are frequently implemented by large electricity consumers to help reduce investment costs associated with planning or operating renewable energy plants. For buyers, PPAs provide price certainty and protection against volatile electricity markets. For investors, entering into long-term PPA contracts is a way to manage the volatility risk. This will guarantee a return on investment in the future, with minimum risk regarding expected revenues.

The corporate PPA market has grown substantially in recent years. During the past decade, the corporate PPA market has grown substantially, with corporate buyers now using these contracts to fulfill sustainability goals. According to data from Bloomberg New Energy Finance, corporate PPAs have led to 108 gigawatts of installed capacity, representing 68 percent of PPAs signed from 2016-2025.

Corporate buyers use renewable PPAs as a means to increase cost visibility, reduce electricity costs and meet sustainability goals.

Related Terms

• Offtaker: The buyer in a PPA who purchases the electricity generated by the power producer, typically a corporation, utility, or government entity.

• Renewable Energy Certificates (RECs): Certificates that buyers can use to claim that they have met a fraction of their consumption using purchased electricity that was generated using carbon-free energy sources. This certificate is called a Renewable Energy Certificate (REC) in the U.S. and Guarantees of Origin (GO) in Europe.

• Strike Price: In a financial PPA, the fixed rate agreed upon by the buyer and seller. This price determines the financial settlement between parties based on market price fluctuations.

• Sleeving Arrangement: A process often referred to as a "sleeving arrangement," or "intermediary" or "BRP" arrangement. This involves a third-party intermediary managing the transfer of electricity from generator to consumer in physical PPAs.

Frequently Asked Questions

What's the typical duration of a PPA?

New project deals are typically long-term (10+ years) PPAs, but short-term PPAs or PPAs for existing assets can have a tenor of less than a year.

PPAs typically range from 10 to 25 years and the developer remains responsible for the operation and maintenance of the system for the duration of the agreement. The length often depends on whether the PPA is financing a new project or purchasing from an existing facility.

Who uses PPAs?

PPAs are used by a wide range of entities. Utilities have historically been major buyers, but corporate purchasers have become increasingly prominent. Large technology companies, retailers, manufacturers, and institutions use PPAs to secure renewable energy and meet sustainability targets. The buyer can be any entity with significant electricity consumption seeking price stability or renewable energy attributes.

What happens if the generator doesn't produce the agreed amount of electricity?

The buyer will typically require the seller to guarantee that the project will meet certain performance standards. If the electricity output fails to meet that specified by the PPA, the seller is responsible for retributing such costs. Performance guarantees and penalties for non-compliance are standard provisions in PPA contracts to protect buyers from underperformance.

Can a company use a PPA if the renewable project isn't near their facilities?

Yes, through virtual PPAs. This restriction does not limit virtual PPAs; the renewable energy generator can be installed anywhere. This opens up the potential for cross-border PPAs and gives a company more freedom to buy different types of renewable energy or even larger amounts. This flexibility makes VPPAs particularly attractive for companies with geographically dispersed operations.

Last updated: June 16, 2026. For the latest energy news and analysis, visit stakeandpaper.com.