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Power Purchase Agreement

What is a Power Purchase Agreement (PPA)?

A Power Purchase Agreement, or PPA, is a long-term contract under which a business buys electricity directly from a generator rather than through a standard supply tariff. They are most associated with renewable projects such as wind and solar farms, and typically run for ten years or more at an agreed price. For the generator, a PPA provides the dependable income that makes a project financeable in the first place. For the business, it offers long-term price stability and a credible, traceable link to renewable generation, which is increasingly valuable when making a net zero claim.

PPAs occupy the serious end of energy procurement. They are larger, longer and more involved than an ordinary supply contract, and they connect a buyer to a specific generator rather than to a supplier’s general mix. The detail varies, but the core idea is a direct, long-term deal between the two.

What a PPA is

A Power Purchase Agreement is a direct contract between a generator of electricity and a buyer, setting out how much power is bought, at what price, and for how long. Unlike a normal supply contract, where you buy from a supplier drawing on the wholesale market, a PPA ties you to a named generating asset, very often a wind or solar farm.

The terms are long by energy standards, frequently ten to fifteen years, because that length is what underpins the whole arrangement for both sides.

Why PPAs exist

For the generator, a PPA is what makes a renewable project bankable. A lender will fund a wind or solar farm far more readily when a creditworthy buyer has committed to purchase the output for years ahead, because that turns uncertain market revenue into a predictable income stream.

For the buyer, the appeal is long-term price stability and a genuine connection to clean generation. Rather than buying from a general mix, the business can point to a specific project its demand helped support.

Physical, sleeved and virtual

PPAs come in a few shapes. A physical PPA delivers actual electricity, either on site or across the grid. A sleeved PPA uses a licensed supplier to sit in the middle, taking the output from the generator and delivering it to the buyer as a normal supply, which handles the practicalities of balancing and billing. A virtual, or financial, PPA does not move power at all; it settles the difference between the agreed price and the market price as a financial contract, while the buyer keeps buying electricity in the usual way.

Which shape fits depends on the buyer size, location and goals, and the practical complexity rises as you move from a simple physical deal toward the financial structures.

PPAs and renewable claims

A renewable PPA is one of the stronger ways to back a clean-energy claim, because it links your consumption to additional generation rather than just buying certificates after the fact. The renewable attributes are usually evidenced with REGOs, the same certificates that sit behind a green tariff, but a PPA carries more weight because it supports a specific project.

That makes PPAs increasingly relevant to net zero programmes, where buyers want a credible, traceable route to lower-carbon electricity rather than a paper exercise.

How pricing and terms work

A PPA price can be a fixed figure for the term, a price that moves with an agreed index, or a discount against the wholesale market, depending on what both sides want. A fixed PPA price gives the most certainty; an indexed or market-linked price shares more of the upside and downside.

Because the contract is long, small differences in the agreed price compound over many years, so the structure is negotiated carefully. It is a different exercise from comparing a one to three year supply unit rate.

The risks to weigh

The length that makes a PPA valuable also makes it a commitment. If wholesale prices fall well below your agreed PPA price for a sustained period, you are still bound to it, just as a generator is bound if prices rise. There is also volume risk, since a renewable project generates when the wind blows or the sun shines rather than to match your demand exactly, which is part of why sleeved and virtual structures exist.

None of this rules a PPA out, but it does mean the decision sits closer to a capital commitment than a routine energy contract.

Who PPAs are for

PPAs suit larger organisations with significant, steady electricity demand, the creditworthiness a generator needs, and a genuine reason to want long-term price certainty or a strong renewable story. Multi-site operators and energy-intensive businesses are the typical candidates.

For a smaller business, the scale and length are usually disproportionate, and a renewable-backed supply contract delivers much of the benefit with far less complexity. A flexible procurement approach can be a stepping stone for buyers not yet ready for a PPA.

PPA vs a standard tariff

A standard supply tariff is short, simple and bought from a general supply mix. A PPA is long, bespoke and tied to a specific generator. The tariff is the right tool for routine buying; the PPA is a strategic decision about price certainty and clean-energy credentials over a long horizon.

Most businesses will only consider a PPA once their scale and goals justify the commitment. For how everyday electricity buying works in the meantime, our business electricity page sets out the basics.

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