What Is a Power Purchase Agreement (PPA)? 

5 Key Takeaways from the Article

1. A PPA, or Power Purchase Agreement, is a long-term electricity purchase agreement between a power producer and a corporate buyer.
2. The producer and buyer agree in advance on the electricity volume, price and delivery terms. 
3. Companies use PPAs to manage electricity price risk, procure renewable energy and support their emissions targets.
4. Before signing, the company should determine how much electricity it needs, when consumption peaks and what share of its procurement the PPA should cover.
5. Windly helps companies, power producers and project developers structure PPAs that match their objectives and risk appetite.

What Is a Power Purchase Agreement?

A PPA, or Power Purchase Agreement, is a long-term electricity purchase agreement between a power producer and a company purchasing electricity. The abbreviation PPA comes from the words Power Purchase Agreement. The EU Agency for the Cooperation of Energy Regulators, ACER, recognises PPAs as long-term instruments that can support price stability and the growth of renewable energy generation. 
The agreement term often ranges from 5 to 15 years. During this period, the buyer gains greater visibility into future energy costs, while the producer secures long-term revenue that improves the project’s bankability. A PPA can cover electricity from an operating asset or support the development of a new wind or solar project.

How Does a PPA Work?

A PPA establishes the commercial and operational terms for purchasing electricity from a specific generation asset. The parties define the contracted electricity volume, delivery model, pricing structure, contract term and division of responsibilities. Pricing may follow a fixed price or another structure agreed between the parties.
A PPA typically covers most of the generation asset’s output and may sometimes cover the entire production. During the contract term, the producer remains responsible for operating and maintaining the asset, managing production and balancing obligations, and keeping the asset available for generation. The electricity produced is allocated between the PPA buyer and the producer according to the agreed shares. The contract also defines how production shortfalls, maintenance outages, grid restrictions and Guarantees of Origin are handled. The process usually progresses through four stages:

1. The company’s consumption profile and procurement objectives are assessed.
2. A suitable generation asset and PPA model are selected.
3. The commercial and legal terms are negotiated, and the agreement is signed.
4. Electricity deliveries begin, after which volumes are measured, payments are settled and Guarantees of Origin are transferred according to the contract.

What Types of PPAs Are Available to Companies?

Companies can choose between Pay-as-Produced and Baseload PPA structures, depending on how closely they want the contracted deliveries to follow actual generation. Both structures can be used in a corporate PPA. Companies can also choose between a physical or virtual power purchase agreement. Those describe how the transaction is delivered and settled, while Pay-as-Produced and Baseload structures determine how volume and profile risk are allocated. The choice depends on the company’s consumption profile, need for predictability and ability to manage risk. Next, we examine how these two volume structures differ.

A Pay-as-Produced PPA Follows Actual Generation
Under a Pay-as-Produced PPA, the buyer purchases all or an agreed share of the electricity generated by a specific asset. The delivered volume varies according to wind or solar conditions and may not match the company’s consumption. The buyer therefore needs to procure additional electricity when production falls short and manage possible surplus volumes.

A Baseload PPA Provides a Predetermined Delivery Profile
Under a Baseload PPA, the seller commits to delivering a predefined volume during agreed period, regardless of the asset’s actual generation. The seller manages production shortfalls and surplus volumes through its wider portfolio or the markets. The buyer receives a predictable delivery profile, while the commercial terms reflect the additional risk carried by the seller.

What Do Companies Use PPAs For?

Companies use PPAs to manage electricity price risk, procure renewable energy and support their emissions targets. As we explain on our page, the contract functions as a long-term price hedge that stabilises the buyer’s costs and the producer’s revenue.
At Windly, we align the delivery and pricing structure with the company’s consumption profile and risk appetite. A long-term corporate power purchase agreement can also support the financing of a new wind or solar power plant. Guarantees of Origin allow the company to verify the renewable origin of the electricity.

What Are The Benefits of A PPA?

The key benefits of a PPA relate to predictable electricity costs, price risk management and the financing of renewable energy generation. A long-term contract supports energy budgeting and reduces dependence on short-term spot price movements. According to the European Investment Bank, the agreement provides cost certainty for the buyer and stabilises the producer’s revenue. Predictable revenue can improve the bankability of a new project and support the development of additional renewable energy generation. Guarantees of Origin strengthen the company’s sustainability reporting and support supply chain emissions targets.

The benefits for the company and the producer can be summarised as follows:

• More predictable electricity costs
• Protection against spot price fluctuations
• More accurate long-term budgeting
• A more stable revenue stream for the power producer
• Better bankability for the energy project
• Supplements hedging strategy from 1-3 years hedging with a long-term hedge.

What Are The Risks of PPAs?

Most PPA risks relate to the market price of electricity, generation volumes, the consumption profile and the counterparty’s creditworthiness. We often hear our clients ask: What are the risks of PPAs? What are the downsides of a PPA? The buyer may pay the agreed price even if the market price falls below it. Variable wind and solar generation may also differ from the company’s consumption, requiring some electricity to be purchased separately. Under a virtual PPA, price movements in different market areas may weaken the intended hedge. A long contract term also reduces flexibility. Because a PPA commits both parties for years, counterparty creditworthiness is normally addressed through credit assessments, parent company guarantees or collateral requirements.

At Windly, we identify and assess these risks together with our clients. We analyse the buyer’s business needs, consumption profile, the project’s generation profile, market area, counterparty and contractual responsibilities. We then translate the findings into the optimal PPA structure and assist our clients throughout the procurement process. This helps the client enter into a long-term agreement with clearly understood and appropriately allocated risks.

How Do Pay-as-Produced and Baseload PPAs Differ?

Pay-as-Produced and Baseload are two key delivery structures used in PPAs. Under a Pay-as-Produced PPA, deliveries follow the actual output of the generation asset. A Baseload PPA provides a fixed delivery profile and transfers more generation-profile risk to the producer. The appropriate structure depends on the buyer’s consumption profile, flexibility and risk appetite, as well as the producer’s financing requirements. The following table summarises the key differences in volume, risk allocation, bankability and ESG impact.

What Should a Company Review Prior to Entering PPA Market?

Prior to entering PPA market, a company should review its electricity consumption, procurement objectives and acceptable level of risk. The delivery structure, pricing and contract term should support the company’s long-term energy strategy. The agreement should clearly allocate responsibilities for balancing costs, production shortfalls, delays and market changes. It should also define the treatment of Guarantees of Origin, collateral requirements, counterparty obligations, contract amendments and termination rights. A careful review helps the buyer understand the agreement’s expected value, risks and long-term financial commitments before signing the PPA.

Checklist before entering PPA market:

1. Careful analysis of electricity demand and consumption profile
2. Assess current PPA market conditions and set commercially realistic expectations
3. Decision of targeted volume, generation profile and delivery structure (Baseload or Pay-as-Produced)
4. Finding optimal pricing structure and contract term
5. Ensure internal alignment and a mandate to proceed with a PPA before approaching the market
6. Prepare comprehensive RFP material

Checklist before signing a PPA:

1. Pricing, pricing structure and contract term
2. Responsibilities and risk allocation
3. Guarantees of Origin and emissions reporting
4. Collateral and counterparty creditworthiness
5. Contract amendments and termination rights

Considering a PPA? Talk to Windly’s Experts

Windly helps companies, power producers and project developers structure PPAs that match their objectives and risk appetite. The process begins by defining the commercial objectives, consumption or generation profile and targeted schedule. Windly structures the contract term, pricing, delivery model and risk allocation and runs a competitive tender process between credible counterparties. Our experts also support the preparation of the request for proposal, term sheet negotiations, final contract negotiations and signing. Windly operates independently without holding equity in energy projects or maintaining ties to lenders.

Contact us if you want to explore available PPA opportunities or move your energy generation project towards the contracting stage.