Power Purchase Agreement Definition

A power purchase agreement (PPA) refers to a contractual agreement between two parties, usually a power generator (seller) and a power purchaser (buyer), that outlines the terms of the sale of electricity. In this arrangement, the power generator agrees to supply electricity to the purchaser at a fixed price or at a price determined through a variable formula over an agreed-upon period.

The primary aim of a PPA is to provide a long-term, predictable revenue stream for the power generator, while also assisting in meeting the power needs of the purchasing organization. PPAs are highly beneficial for both parties involved as they help to mitigate the risks associated with power price volatility and provide a reliable source of income for the generator.

PPAs come in various forms, with some being more complex than others. In general, however, they are structured around three key components: the price of electricity, the length of the agreement, and the terms governing supply and demand.

The contract typically outlines the payment structure and the duration of the agreement, which may range from 10 to 30 years, depending on the type and location of the power project. The price of electricity may also be structured in a number of ways, with the most common options being a fixed rate or a floating rate indexed to a benchmark such as the consumer price index or wholesale electricity prices.

In addition to these key components, PPAs may also include other specific agreements that cover various details such as force majeure events, termination clauses, and dispute resolution mechanisms.

One of the most significant advantages of PPAs is that they provide a stable source of revenue for renewable energy producers such as wind or solar power project developers. They also offer a reliable way for commercial and industrial businesses to procure their electricity needs at a fixed or indexed price, which can help to hedge against price uncertainty and reduce their overall energy costs.

In summary, a power purchase agreement is a contractual agreement between a power generator and a purchaser that outlines the terms of the sale of electricity. PPAs provide a stable source of revenue for renewable energy producers and offer a way for commercial and industrial businesses to procure their electricity needs at a predictable price, reducing overall energy costs.

Scroll to Top