What is Power Purchase Agreements?

What is a Power Purchase Agreement?

A power purchase agreement (PPA) is a long-term contract between an electricity generator and a buyer (the "offtaker") that establishes the terms for electricity delivery and payment over a fixed period, typically 10-25 years. In the corporate clean energy context, PPAs most commonly involve a company contracting to purchase the output—and associated renewable energy certificates—from a specific wind or solar facility, often before it is built. The PPA provides revenue certainty to the developer and price certainty to the buyer.

Why It Matters

Corporate PPAs have become the primary mechanism through which large companies procure renewable energy. The Clean Energy Buyers Alliance (CEBA) reported over 46 GW of cumulative corporate PPA capacity contracted globally through 2024, with Amazon, Meta, Google, and Microsoft consistently among the largest buyers. PPAs offer advantages that unbundled REC purchases cannot: direct additionality (the PPA often enables project financing), long-term price hedging against volatile wholesale electricity markets, and a stronger sustainability narrative.

For project developers, corporate PPAs have replaced government feed-in tariffs as the primary revenue mechanism enabling project finance in many markets. A 15-year PPA from a creditworthy corporate offtaker allows developers to secure debt financing at favorable terms, reducing the cost of capital and ultimately the cost of energy. This symbiotic relationship has been a major driver of renewable energy cost declines—utility-scale solar PPA prices fell below $30/MWh in many U.S. markets by 2024.

The financial structure of PPAs also matters to corporate buyers. Virtual (or synthetic) PPAs—structured as contracts for differences rather than physical electricity delivery—allow companies to contract with projects in distant locations while settling financially based on market prices. This flexibility enables a company headquartered in New York to contract with a wind farm in Texas, receiving RECs and financial settlement without the complexity of physical power delivery across grid regions.

Risk management is a central consideration. PPAs expose buyers to basis risk (the difference between the project's local price and the buyer's settlement hub), volume risk (generation variability due to weather), and counterparty risk over long contract durations. Sophisticated buyers structure PPA portfolios across technologies, geographies, and contract terms to manage these risks.

How It Works / Key Components

Physical PPAs involve direct delivery of electricity from generator to buyer, typically requiring both parties to operate on the same grid. The buyer pays a fixed price per MWh and receives both the electricity and associated RECs. Physical PPAs are most common for on-site or near-site generation (rooftop solar, behind-the-meter installations) and for utilities or large industrial loads with direct grid interconnection.

Virtual PPAs (VPPAs) are financial contracts where no physical electricity delivery occurs. The buyer and generator agree on a fixed "strike price." When the wholesale market price exceeds the strike price, the generator pays the buyer the difference; when the market price falls below, the buyer pays the difference. The buyer also receives the RECs. VPPAs enable geographic flexibility—the project and buyer can be in different grid regions—but introduce basis risk and require mark-to-market accounting treatment that can create income statement volatility.

Aggregation structures have emerged to make PPAs accessible to mid-sized buyers. Rather than a single company contracting for the full output of a 200 MW wind farm, multiple buyers aggregate their demand through a coordinating entity. Google's "clean energy marketplace" concept and third-party aggregators like LevelTen Energy and Schneider Electric's NEO Network facilitate these multi-buyer structures, reducing minimum volume requirements and transaction costs.

PPA pricing reflects technology costs, project location, market conditions, and contract structure. Solar PPAs in the U.S. Southwest have been contracted below $25/MWh; offshore wind PPAs in Europe may exceed $80/MWh. Escalation clauses (typically 1-2% annually), curtailment provisions, change-of-law clauses, and credit support requirements are key commercial terms that significantly affect the all-in cost and risk profile of each agreement.

Council Fire's Approach

Council Fire guides organizations through the full PPA lifecycle—from energy strategy development and market analysis through RFP management, commercial negotiation, and ongoing contract management. We help clients structure PPA portfolios that align with sustainability targets, financial risk tolerances, and operational requirements, ensuring that renewable energy procurement delivers both credible climate impact and sound economic outcomes.

Frequently Asked Questions

What size company can benefit from a PPA?

Historically, PPAs required minimum volumes of 50-100 MW, limiting access to very large buyers. Aggregation platforms and smaller project sizes have reduced minimums to 5-20 MW in many markets. Companies with annual electricity spend above $5-10 million are generally good candidates. Smaller organizations can access PPA benefits through utility green tariffs, community solar programs, or retail supply agreements that embed PPA-sourced renewable energy.

How do PPAs affect Scope 2 emissions reporting?

A PPA that delivers RECs (whether physical or virtual) enables market-based Scope 2 reporting using the renewable energy attributes of the contracted project. This typically results in a zero or near-zero emission factor for the contracted electricity volume. The PPA must meet the GHG Protocol's Scope 2 Quality Criteria—including conveyance of contractual instruments and a clear claim on the attributes—to qualify. PPAs generally provide the strongest Scope 2 accounting treatment because they directly link the buyer to a specific generation source.

What are the main risks of corporate PPAs?

Key risks include price risk (the strike price may become unfavorable if wholesale markets shift), basis risk (settlement hub prices may diverge from project node prices), volume risk (generation varies with weather), counterparty risk (project or buyer default over a 15-20 year term), and accounting complexity (VPPAs may require mark-to-market treatment under ASC 815/IFRS 9). Regulatory risk—changes in grid rules, REC eligibility, or tax treatment—can also affect long-term value. Effective risk management requires portfolio diversification and robust contractual protections.