What is a PPA (Power Purchase Agreement) ? A Power Purchase Agreement (PPA) often refers to a long-term electricity supply agreement between two parties, usually between a power producer and a customer (an electricity consumer or trader). The PPA defines the conditions of the agreement, such as the amount of electricity to be supplied, negotiated prices, accounting, and penalties for non-compliance. Since it is a bilateral agreement, a PPA can take many forms and is usually tailored to the specific application. Electricity can be supplied physically or on a balancing sheet. PPAs can be used to reduce market price risks, which is why they are frequently implemented by large electricity consumers to help reduce investment costs associated with planning or operating renewable energy plants.

1. PPA
Power Purchase Agreement
What is a PPA ?

2. What is a PPA (Power Purchase Agreement) ?
A Power Purchase Agreement (PPA) often refers to a long-term
electricity supply agreement between two parties, usually between a
power producer and a customer (an electricity consumer or trader). The
PPA defines the conditions of the agreement, such as the amount of
electricity to be supplied, negotiated prices, accounting, and penalties
for non-compliance.
Since it is a bilateral agreement, a PPA can take many forms and is
usually tailored to the specific application. Electricity can be
supplied physically or on a balancing sheet. PPAs can be used to
reduce market price risks, which is why they are frequently
implemented by large electricity consumers to help reduce investment
costs associated with planning or operating renewable energy plants.

3. Why PPAs ?
Depending on regulation and the market environment, different situations
can arise in which PPAs are an advantageous form of financing or a
stabilizing factor in long-term power delivery.
How do PPAs and renewable energy financing work together?
In some countries, Power Purchase Agreements are already being used to
finance construction (investment costs) and operation (operating costs) of
renewable energy plants. Countries in which utilities are required or would
like to cover parts of their electricity supply with renewables are
particularly drawn to PPAs. The agreements represent an alternative
opportunity for expanding renewables to areas where politicians are
hesitant to push forward with renewable energy expansion (and
subsidization).

4. What happens to PPAs after the subsidy period expires?
If a statutory subsidy expires on an existing power plant, PPAs are a way of
ensuring follow-up financing for the plant’s operation. This could include
operating costs such as maintenance and leasing.
Who concludes PPAs?
Power producers conclude PPAs either bilaterally with a consuming
company ("Corporate PPA"), or with an electricity trader who purchases the
electricity produced ("Merchant PPA"). The electricity trader may continue
to supply power to a specific electricity consumer (turning the contract back
into a "Corporate PPA"), or may opt to trade the power on an electricity
exchange. Many international corporations already purchase shares of their electricity
consumption via PPAs or have stated their intention to do so more frequently (see
http://there100.org/re100). They use PPAs to obtain stable and calculable electricity
prices.

5. PPAs are an effective way to reduce electricity price risk, especially for
operators of plants with high investment and low operating costs (such as
PV and wind turbines). With payment for the electricity already secured to
a certain extent, plant operators and financing banks can feel more
confident that proceeds from
electricity sales will indeed cover
investment costs.
This makes the
project more profitable in the long
run.

6. What are the different types of Power Purchase Agreements?
It is difficult to fully define the different types of PPAs due to the wide
range of possible and practiced contractual arrangements.
In addition, different PPA characteristics cannot be clearly defined in a
single system. All the same, we’ll attempt to provide an overview:
Physical PPAs
There are three types of physical PPAs, with some overlap among them.
Common to all three is a fixed quantity of electricity that is sold and
supplied in the PPA.
The only difference is how the electricity is supplied.

7. On Site PPA
•An on-site Power Purchase Agreement is a direct physical supply of electricity,
necessitating physical proximity of plant and consumer. An on-site PPA means that
the generation plant is located behind the metering point of the consumer, and may
even be at the same location (on-site at a company, for instance).The consumption
profile of the consumer usually dictates the specific installation and also the
parameters of the PPA. The grid operator is involved to the extent that residual
electricity can be supplied to the grid. Since the electricity generated by an on-site
PPA directly reduces a company's consumption, all on-site PPAs are also corporate
PPAs.
• For example, an industrial company with a suitable roof on its premises might
like to reduce its electricity procurement costs but is not willing to take on the
installation of a photovoltaic system on its roof. Instead, the company opts to outsource
the project (and the financial and operational risks). For this purpose, the company
enters an on-site PPA with a project planner, who now installs the photovoltaic system
on the roof and sells the electricity generated directly to the company.

8. Off Site PPAs:
Off-site PPAs do not constitute a direct physical supply of electricity between the plant and a nearby
consumer. It is merely an agreement to purchase a physical quantity of electricity as defined in the
PPA. In contrast to on-site PPAs, the producer delivers the electricity to the consumer through the
public grid. This requires an additional settlement via the balancing groups of the electricity
generating plant and the consumer. The power generation plant does not need to be located close to
the consumer. This provides additional flexibility, as the plant operator can now choose locations
with optimal conditions or a plant that already exists. A single plant can also enter into several
Power Purchase Agreements with different customers, who are credited their share of the electricity
production via their balancing groups. The price for the electricity supply is negotiated in the PPA,
meaning all participants have long-term price security. If applicable, charges and grid fees still need
to be paid to the grid operator.
Sleeved PPA:
A sleeved PPA is simply an off-site PPA in which an energy service provider takes on various
processes and acts as an intermediary between producer and consumer. It might provide the
following services: balancing group management, aggregating various electricity producers to its
portfolio, supplying residual quantities of electricity or selling surplus quantities, preparing feed-in
forecasts, marketing green certificates, or assuming various risks (such as balancing energy costs or
default / insolvency risks of a contractual partner).

9. Synthetic PPAs (also: Virtual PPAs)
Synthetic PPAs decouple the physical flow of electricity from the financial flow. This allows for even more
flexibility in contractual arrangements. In the case of synthetic Power Purchase Agreements (also known as
SPPAs), producers and consumers agree on a price per kilowatt-hour of electricity, just like a physical PPA.
However, the electricity is not supplied directly from the energy generating plant to the consumer. Instead,
the producer’s energy service provider (such as an electricity trader) takes the produced electricity into its
balancing group and trades it (on short-term power markets, to name one example). The consumer’s energy
supplier (such as a municipal utility) procures precisely the feed-in profile supplied by the producer to its
energy service provider on behalf of the consuming PPA partner, with procurement occurring on a platform
such as the spot market.
In the synthetic PPA, this electricity flow is now supplemented by what is known as a contract for
difference. In this contract, the PPA contract partners aim to compensate for the difference between the
agreed PPA price and the actual spot market price. This means each contractual partner in the PPA has two
payment streams: one with the respective energy service provider and one with the PPA contractual partner.
In each case, the payments add up to the PPA price defined at the beginning and provide both sides with the
desired price security.
Without direct physical delivery between the contracting parties (like an on-site PPA), and with no direct
balancing sheet link between them (like an off-site PPA), this represents a simple and administratively low-
cost PPA. It is well-suited for cases when a producer does not manage or wish to establish its own balancing
group, to name one example.

11. What are the Advantages of Power Purchase Agreements ?
The advantages of a Power Purchase Agreement include long-term price security, opportunities to finance
investments in new power generation capacities, or the reduction of risks associated with electricity sales
and purchases.
In addition, a specific physical supply of electricity with certain regional characteristics and guarantees of
origin can occur. Customers can use this opportunity to make their brand more sustainable and greener.
The open-end of the contract’s design also creates a great deal of leeway to reflect preferences of
individual plant operators and electricity consumers.
This also applies to pricing: PPAs can be signed at fixed prices, or can allow for greater participation in
market risks and opportunities.

12. What are the Disadvantages of PPAs?
PPAs are complex contracts and often require a great deal of time and negotiation prior to conclusion.
The long-term nature of PPAs can be a disadvantage in the event of price developments that end up
being negative for one party.
Furthermore, electricity production itself – especially from wind and photovoltaics – can fluctuate.
If the quantities of electricity – agreed upon well in advance – are not available at the time of delivery,
the plant operator must provide financial or physical compensation, or outsource to a third party such as
an electricity trader.

13. Benefits of a PPA
For a renewable asset owner/developer:
A PPA allows renewables projects to increase their level of revenue certainty. Normally, this would not be
possible in fluctuating energy markets in absence of a government incentive.
A PPA:
•Enables the financing of their renewable project by lenders
•Reduces risks by efficiently allocating them among the contractual parties
For an energy buyer:
•Assures fixed long-term costs
•Enables a company to (indirectly) fund a renewables project and receive “green attributes”, such as Renewable
Energy Certificates
For the lender:
•Offers revenue certainty, as an amount of energy has been sold in advance at an agreed price
•Allow for the claim of their contribution to the renewable industry

14. Who needs a PPA?
The Energy Buyers
• Energy buyers can use PPAs to get their energy from renewable sources. This also enables them to reach their
green energy goals.
• Utilities are energy providers such as Axpo (Switzerland), Vattenfall (Sweden) and Holaluz (Spain). They
have their own generating assets but also buy additional power to supply their customers. This also enables them
to meet potential regulatory obligations set by governments (minimum green energy requirements or targets).
• Corporates are companies with relatively large energy consumption needs across several locations such as:
Google, Amazon, and Nike. They buy energy from renewable assets to achieve their ambition of reducing their
carbon footprint.
• Industrials are companies that require large amounts of energy for manufacturing, such as a mining company
(Alcoa for aluminum production). They would enter into power purchase agreements in order to get certainty on
their long-term energy costs.
The Energy Sellers
Energy sellers are the renewable asset owner or developer of renewable assets. We usually call them sellers,
although they can fall into the following categories:
•Investment companies that focus on infrastructure
•Independent producers of electricity
•Renewable energy asset managers
•Utilities and energy companies that wish to build their own renewables assets
•Infrastructure funds investing in renewables

15. How does a
Power Purchase Agreement Work?
1.Implement, develop or re-finance a project with a PPA
2.Determine the structure of the contract
3.Create an RFQ and reach out for buyers
4.Compare the offers received
5.Negotiate the terms
6.Sign the PPA contract
7.Manage your energy sales and risk throughout the life
of your asset

16. 1. How does it start?
The process of a Power Purchase Agreement starts with:
•A renewable project ready to be built. It has a size,
location, and a pre-agreed connection to the electricity grid.
Or,
•An existing project that needs refinancing
2. Determine the Optimal Hedging Strategy
Form of a PPA
Power Purchase Agreement contracts come in many forms.
You may have already heard of physical and virtual PPAs.
As a matter of fact, there are other forms too.
But for this introduction, we’ll focus on these two.
What is a Physical PPA?
Physical PPAs refer to the purchase of energy at the meter point (the reception point of
production). Typically, a utility supplies the energy to its many customers through the existing
transmission lines. A Physical PPA customer receives the physical delivery of (or title to) the
energy through the grid.

17. What is a Financial Power Purchase Agreement (Financial PPA)?
A financial PPA, (also called virtual PPA and synthetic PPA) allows a company to buy renewable
energy virtually. There is no need to own the title of physical energy. This enables companies to
focus on their “green impact”, such as corporates, to receive renewable attributes without
owning the asset.
These “green” additionalities allow a credit link
between the purchaser and the renewable asset owner.
A virtual PPA will not impact the source of energy
consumed by the purchasing company.
Vocabulary tip:
Renewable attributes are energy credits, renewable
energy certificates, etc.

18. Conclusion
A PPA is a contractual agreement to purchase an amount of energy at an agreed price, for a
certain time, in advance of producing the energy.
PPAs are now common in renewable energy businesses due to the decline of government
subsidies. Without subsidies, there is a lack of financial security for lending institutions, such as
banks, to invest in a renewables project. As a result, lenders require a new way to secure their
investment. A PPA can prove that the concerned renewable asset has already found a long-term
buyer at a fixed price.
PPA contracts thus enable renewable investment by providing revenue certainty to investors and
lenders in unsubsidised markets.
However, PPAs are complex in their structure and pricing. Overlooking or inadequately
negotiating a contractual clause can impact the overall revenue of a PPA project.
This necessitates a thorough understanding of energy risks, valuation, and negotiation issues.