Power Purchase Agreement (PPA)

A power purchase agreement, or PPA, is a contract under which a generator and an offtaker agree on the commercial terms for electricity over a defined period. The agreement typically covers pricing structure, volume treatment, settlement basis, term length, delivery obligations, and allocation of key risks.

PPAs are central to renewable project finance because they can convert uncertain merchant exposure into a more predictable revenue framework. However, the real value of a PPA depends on details such as shape risk, basis risk, curtailment treatment, credit quality, and how closely the contract matches the plant's production profile.

Key Aspects of Power Purchase Agreements:

• Long-Term Revenue Framework: PPAs are often used to secure revenue certainty over many years, which supports financing and investment decisions. The exact tenor varies by market, counterparty, and project strategy.
• Several Contract Forms: PPAs may be physical, virtual, sleeved, on-site, or corporate. The commercial implications differ significantly depending on whether energy is physically delivered or settled financially.
• Risk Allocation Matters: Price risk, volume risk, imbalance risk, curtailment risk, and credit risk are distributed between the parties through contract design. Two PPAs with the same headline price can have very different economic value.
• Interaction with Market Revenues: Many PPAs do not eliminate exposure to market structure. Cannibalization, basis risk, negative price clauses, and merchant tails can still materially affect project outcomes.
• Strategic Tool Beyond Renewables: Although strongly associated with wind and solar, PPAs are also used for conventional generation, storage-linked products, and structured corporate procurement strategies. Their role is broader than project finance alone.