Power purchase agreement

A power purchase agreement (PPA), or electricity power agreement, is a long-term contract between an electricity generator and a customer, usually a utility, government or company. PPAs may last anywhere between 5 and 20 years, during which time the power purchaser buys energy at a pre-negotiated price. Such agreements play a key role in the financing of independently owned (i.e. not owned by a utility) electricity generators, especially producers of renewable energy like solar farms or wind farms. PPAs 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. In either case, the price can be a fixed amount per kilowatt-hour or fluctuating market rates, depending on the specific terms of the contract. In the case of distributed generation (where the generator is located on a building site and energy is sold to the building occupant), commercial PPAs have evolved as a variant that enables businesses, schools, and governments to purchase electricity directly from the generator rather than from the utility. This approach facilitates the financing of distributed generation assets such as photovoltaic, micro-turbines, reciprocating engines, and fuel cells. More than 137 firms in 32 countries reported the signing of power purchase agreements in 2021. Under a PPA, the seller is the entity that owns the project. In most cases, the seller is organized as a special purpose entity whose main purpose is to facilitate non-recourse project financing. The buyer is typically a utility or a company that purchases the electricity to meet its customers' needs. In the case of distributed generation involving a commercial PPA variant, the buyer may be the occupant of the building—a business, school, or government for example. Electricity traders may also enter into PPA with the Seller. The sale of electricity under a PPA can occur at various physical points of the electrical grid. This is usually pre-defined by the contract.