Power purchase agreement

What it means

A power purchase agreement, or PPA, is a long-term contract to buy electricity directly from a generator, often a renewable one, at a price agreed in advance. It typically runs for many years, giving the business predictable energy costs and the generator a secure offtake to finance a new plant.

There are physical PPAs, where the electricity is actually delivered to the buyer through the grid, and financial or virtual PPAs, where the parties only settle the difference between the agreed and market price while the buyer purchases power normally from its supplier. A transfer of guarantees of origin is usually part of the deal.

PPAs are an important tool for cutting Scope 2 emissions. A company buying power from a solar or wind farm together with guarantees of origin can report it as low-carbon under the market-based method, supporting its carbon neutrality targets.

How it works in practice

PPAs suit companies with high, stable consumption, for example in manufacturing, logistics or data centres. Smaller firms can join through aggregated PPAs, in which several buyers purchase together from one source, or through supplier products linked to a specific plant.

Before signing, assess price risk, the generation profile against the consumption profile, the counterparty's credit risk and the early termination terms. A fixed price for ten years protects against rising prices, but if market prices fall the company ends up paying more than its competitors.

In the accounts, check whether the contract is a derivative measured at fair value, especially for a virtual PPA. For CSRD reporting the PPA is important evidence, and in green financing it can support better loan terms.

What to watch out for

A long-term fixed-price commitment is a significant financial risk. If the company's consumption changes, for example when production moves, the contract can become disadvantageous and costly to exit. Volume and flexibility must match the business plan.

A claim of green electricity must be backed by guarantees of origin that are properly transferred and not used twice. Without them there is a greenwashing risk, and customers or auditors may challenge the company's climate claims.