Power Purchase Agreement (PPA)

A PPA is a Power Purchase Agreement, which is a contract between a specific power producer (power plant) and a specific power purchaser (an “offtaker”) for the sale of generated electricity.

Unless standardised by government policy (which may be the case in countries with monopoly utility purchasers for example), the terms of a PPA are negotiated between the two parties. They can stretch to hundreds of pages and include a whole range of potential factors: length of agreement, fixed or varied price per MWh, guaranteed minimum purchase quantities, delivery schedules, penalties for non-delivery, inclusion or not of “green certificates” or other environmental attributes; and so on.

In most cases, the existence of an agreed PPA is a vital requirement in order to reach financial close, since it gives investors a clear basis on which to model the revenue generation of the power project.

A FiT (Feed-in-Tariff) is in effect a form of government-mandated PPA, in that it provides certainty for investors in terms of guaranteed sale of electricity and clear pricing for a specified period of time; without needing to negotiate these terms with a specific off-taker.