What is a PPA?
A power purchase agreement (PPA) is a long-term contract between an electricity producer and an energy buyer. Under a PPA, the buyer agrees to purchase electricity over a defined period, with terms covering pricing, volume, delivery profile and contract duration.
What is a PPA and why is it important?
A power purchase agreement (PPA) is a long-term contract between an electricity producer and an energy buyer. Under a PPA, the parties agree on how electricity will be purchased over a defined period, including key commercial terms such as pricing, volume and contract duration.
PPAs are widely used by industrial companies, data centres and other large electricity consumers looking to manage energy costs and secure access to renewable or low-carbon electricity. Depending on the agreement structure, a PPA may also include guarantees of origin (GOs), which verify the source of the electricity.
How does a PPA work?
In a power purchase agreement, an electricity producer and an energy buyer agree on the terms for purchasing electricity over a specified period.
The agreement typically defines:
- The volume of electricity covered by the contract
- The pricing mechanism
- The contract duration
- The delivery profile
- The source of electricity
- Any associated Guarantees of Origin
By agreeing these terms in advance, both parties gain greater certainty compared to relying solely on short-term market prices.
Why do companies use PPAs?
Electricity is a significant cost factor for many businesses, particularly in energy-intensive industries. At the same time, electricity markets can experience substantial price fluctuations.
Companies use PPAs for several reasons:
- To improve visibility into future electricity costs
- To manage exposure to market volatility
- To support sustainability and decarbonisation targets
- To secure access to renewable or low-carbon electricity
- To strengthen long-term energy procurement planning
The value of a PPA depends on the contract structure, market conditions and the specific objectives of the buyer.
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Energy-intensive industries, like the metals and minerals sector, need a lot of stable power for their operations. Nuclear power offers a stable, low-carbon power generation option at a competitive price for continuous energy needs.
PPAs and the energy transition
For many new power generation projects, securing long-term demand is an important prerequisite for investment. This is one reason why PPAs have become increasingly common across energy markets.
Renewable energy projects such as wind, solar and hydropower often require long-term revenue visibility before financing decisions can be made. By connecting electricity producers with committed buyers, PPAs can help create the conditions needed for new investments.
As companies seek to reduce emissions from their operations and electricity consumption, PPAs have become an established part of many corporate energy strategies.
Depending on market conditions and customer requirements, PPAs may be linked to renewable electricity generation as well as other low-carbon power sources.
What are PPAs key components?
Different types of PPAs
PPAs can be structured in different ways depending on the requirements of the buyer and producer.
Physical PPA
In a physical PPA, electricity is delivered through the power system according to the agreed contractual terms.
Physical PPAs are commonly used by industrial and commercial customers with significant electricity demand.
Baseload PPA
A baseload PPA is designed to provide a stable supply profile over time. This can be particularly relevant for industries that require continuous electricity consumption throughout the day and year.
Pay-as-produced PPA
Under a pay-as-produced structure, the buyer purchases electricity based on the actual output of a specific generation asset. This model is often used in connection with renewable energy projects where production varies over time.
If you wish to discuss your company’s clean energy solutions further, don’t hesitate to contact us
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Power purchase agreements
Frequently asked questions about PPAs
The pricing structure is agreed between the buyer and the producer. Depending on the contract, pricing may be fixed, linked to market prices or based on a combination of both.
PPAs are typically used by organisations with significant electricity consumption, such as industrial companies, manufacturers, data centres and large commercial businesses.
Many PPAs include guarantees of origin, which can help companies verify the source of their electricity and support sustainability reporting requirements.
No. While PPAs are often associated with renewable energy generation, they can also be linked to other low-carbon electricity sources depending on market conditions and customer needs.
A PPA can improve visibility into future electricity costs by establishing agreed commercial terms over a longer period.