As the leading provider of PPA price data and transaction support, we’re here to help you navigate the full Power Purchase Agreement (PPA) journey.

Discover what a PPA is, how it works, and how to optimize it for your renewable project. Plus, download a helpful negotiation checklist to and a sample PPA contract to get started.

What You Will Learn:

• What is a PPA (Power Purchase Agreement)?
• Why do we use PPAs in renewable energy projects?
• What are PPAs for?
• What are the benefits of a PPA?
• Who needs a PPA?
• What is the PPA process?
• Who writes the initial contract?
• What should you negotiate in your PPA?

PPA Resources:

• PPA Prices
• The EFET Sample PPA Contract
• The RE-Source Platform
• The Pexapark PPA Checklist

Speak with a PPA expert at E-World

Request a meeting

 

What is a PPA?

A Power Purchase Agreement (PPA) is a contract between an energy buyer and seller to purchase energy generated by a renewable asset – whether the asset already exists or is planned.

PPAs can be signed for a short-term period, which is usually defined as 2 to 5 years, or a long-term period between 5 and 20 years. For the purpose of this guide, we will consider only long-term PPAs. If you’re interested in short-term agreements, click here to learn how our Portfolio Trading advisors manage short-term PPAs.

If you come across any unknown terms, we have you covered. Pexapark’s Glossary of Terms will help you quickly get up to speed at any point while reading our guide.

Note:
In a feed-in tariff world, renewable energy investors do not ask how you manage price risk.

Are solar and wind PPAs different? 

In this guide, we speak of PPAs for both solar and wind technology.

Thanks to the low cost of solar technology, solar is now one of the cheapest renewables available. That is what makes solar PPAs popular. The template of a solar PPA is comparable to that of a wind PPA, except for their profile risk. A solar asset has a relatively lesser risk than a wind farm because a solar asset does not produce energy during the nighttime, for example.

Are multi-technology / solar-plus-wind PPAs popular?

In recent years, there has been a significant uptick in PPAs combining multiple technologies, i.e., solar-plus-wind.

Many sellers are exploring physical hybridization of their existing assets from a technical point of view, to also maximize the value of their grid connection. In this case, there is physical co-location of the two technologies, however this is not a must.

Multi-technology PPAs are also possible for assets not physically co-located, and in this case the PPA takes the form of a framework agreement covering multiple assets and technologies, which results in the volumes being provided from a mix of projects.

The key benefit of either contractual approach is increased certainty on the profile of the supplied volumes, which often results in a net flattened profile, as standalone solar production is concentrated during the day, whereas onshore wind’s seasonality is more scattered.

Why do we use PPAs in renewable energy projects?

To promote renewable energy, governments initially provided financial incentives for investment such as subsidies (feed-in-tariffs, feed-in-premiums).

With improved technology, renewable assets have become cheaper to build. This has led to a surge in their development.

Consequently, governments have begun phasing out subsidy schemes, either due to unsustainable costs or a perceived lack of necessity.

Because the market shift from subsidized projects to open markets has drastically affected renewable investors, they now need to find alternative securities to replace government subsidies.

Feed-in tariff is ending:

What are PPAs for?

Project Financing:

Renewables often need a third-party funding source, such as a bank. It is, however, unlikely that a third party will lend without a security.

In the absence of a government subsidy, a wind or solar PPA provides that assurance.

A typical European 100-megawatt (MW) wind farm can cost between EUR 1-2 million per MW to build. Hence the need for a credit provider – such as a bank – to continually finance a renewable project.

When finance providers require a certain level of confidence in a renewable project, a PPA can provide such confidence. This means a buyer’s commitment to paying a fixed price per megawatt hour (MWh) for a long-term tenor (10-20 years) for the electricity that will be generated by the renewable asset.

From a lender’s perspective, one must also consider counterparty risk.

Is this energy seller’s credit profile strong enough to ensure ongoing operation in the next 10-20 years? Is this energy buyer’s credit profile strong enough to ensure no payment delay or default in the next 10-20 years?

Lenders call counterparties whom they consider strong enough to finance the cash flows as “bankable”.

COD Project Finance:

COD or Commercial Operation Date refers to the date at which the renewable asset 1) becomes fully operational 2) has a grid connection and 3) starts producing energy.

Under a PPA contract, the COD marks the point at which the offtaker becomes obligated to begin purchasing energy. This date typically aligns with the release of a portion of project funding – such as remaining construction costs, potential additional fees, and tax equity. We call this release of final project capitalization COD Finance or takeout finance.

Hedging:

PPAs provide security that the project will bring a return on their capital investment upon completion, by reducing the cash flow uncertainty.

PPAs allow a portion of a project’s future energy generation to be sold to an energy buyer over a pre-defined and fixed period – typically between 2 and 30 years. The contract is usually agreed upon and signed before the project begins.

Investors are like risk managers. They aim to optimize their risk/return ratio. For them, entering into long-term PPA contracts is a way to manage the volatility risk. Prices in power markets are extremely volatile as they can change very frequently (every 5 to 30 minutes).

In such contracts, the offtaker can in turn provide a fixed price for the long-term. This will guarantee a return on investment in the future, with minimum risk regarding expected revenues.

Long-term Price Predictability:

Electricity prices can fluctuate greatly and frequently. The main characteristic of a power purchase agreement is the agreement to sell X amount of MWh from a renewables project to a buyer of energy at a fixed price.

While this allows a secure future stream of revenue on the seller’s side, the buyer also secures a certain amount of energy at a fixed cost.

What are the benefits of a PPA?

PPAs bring a range of strategic advantages to all parties involved in a renewable energy project by creating long-term revenue certainty in an otherwise volatile energy market.

Benefits for Renewable Asset Owners & Developers:

PPAs are crucial for turning renewable projects into bankable assets. In the absence of government incentives, they:

• Provide predictable revenue streams, helping to stabilize cash flows
• Enable financing by giving lenders the confidence of pre-sold energy at a fixed price
• Reduce project risks by distributing them more effectively among contractual parties

Benefits for Energy Buyers:

PPAs serve as a tool for both cost control and sustainability:

• Secure stable, long-term energy pricing, protecting against market volatility
• Support decarbonization goals by indirectly funding renewable projects and receiving associated “green attributes,” such as Renewable Energy Certificates (RECs)

Benefits for Lenders:

From a financing perspective, PPAs improve project bankability:

• Offer strong revenue certainty, as energy volumes and prices are contractually secured in advance
• Provide an opportunity to demonstrate support for the energy transition and renewable industry

Who are the typical Buyers and Sellers in a PPA?

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 substantial amounts of energy for manufacturing, such as a mining company (Alcoa for aluminum production). They would enter into power purchase agreements to get certainty about their long-term energy costs.

Energy Sellers:

Energy sellers are renewable asset owners or developers 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

What is the PPA process?

The following outlines a simplified version of the PPA process, as offered by our Advisory team when supporting clients on their PPA journeys.

1. How does a PPA start? Develop or re-finance a project with a PPA
2. Determine the optimal hedging strategy
3. Sourcing: Creating an RFQ and reaching out for buyers
4. Compare PPA offers received
5. Negotiation of the terms
6. Sign the PPA contract
7. You’ve Signed Your PPA, Now What? Managing Energy Risks
   
   

 

1. How Does A PPA Start? Develop or Re-Finance a Project with a PPA

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. In 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 customers through the existing transmission lines. A Physical PPA customer receives the physical delivery of (or title to) the energy through the grid.

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 on the source of energy consumed by the purchasing company.

Read more on the drivers of the increasing popularity of Financial PPAs and frequently asked questions around the structure in our Virtual PPAs: the shift from hassle to bustle blog.

There is a direct correlation between VPPA options becoming more popular and corporates wanting to aggregate demand in multiple countries, or source renewables in locations that it may prove more competitive to do so. Learn more about the concept by reading our Understanding the value of a Cross-border PPA: A guide for corporates guide.  

The Underlying Structure of a PPA

In addition to various contractual forms, PPAs come with different underlying structures and with different forms of hedging that will distribute the diverse energy risks between the buyer and seller. Some of the most common forms include Pay-as-Produced (PaP), annual, or monthly baseload.

In mature PPA markets, the availability of the PaP structure is decreasing due to cannibalization concerns, and demand for Baseload PPAs is on the rise. Read more on the drivers behind volume preferences in our Baseload PPAs: Essential tips for developers and lenders guide.

3. Sourcing: Creating an RFQ and Reaching Out for Buyers

To receive buying offers, the renewable project owner usually goes through a request for proposal or quotation (RFP/RFQ). Interested energy buyers can then make an offer of purchase.

4. Compare PPA Offers Received

Initial offers do not feature details. They contain only core commercial conditions. We call them Term Sheets.

They include, at a minimum, a price, a tenor, and a PPA structure. The offers received can vary a lot from one offtaker to another due to different underlying structures, the inclusion of costs (which are not included in others) or different price area basis, among others. Comparing one offer against another can be quite complicated.

At Pexapark, we compare these offers by running thousands of price scenarios based on our proprietary model. This enables us to advise our clients on the optimum structure for their PPA, to maximize their expected revenue and reduce their risk.

5. Negotiation of the Terms

While sellers and buyers can agree on an approximate price in advance, the details of the contract negotiation can take between 6 to 12 months. There are many important points to agree on.

>> Later in this article, you’ll find our PPA checklist containing 10 commercial points you should not miss when negotiating your PPA.

6. Sign the PPA Contract

Upon signing, a ready-to-build project or an operational project can have better chances for receiving finance or re-finance and construction can start for a specific Commercial Operation Date (COD).

7. You’ve Signed Your PPA, Now What? Managing Energy Risks 

Although PPAs guarantee the future purchase and sale of energy at an agreed price today, an energy asset needs operations and management over its lifetime. Furthermore, even though parties can agree and sign a PPA contract for 10 years, the concerned asset may be in operation for up to 30 years.

Monitoring the evolution of the market will help you answer these critical questions:

• When is the deadline to re-negotiate a new contract?
• Should I re-negotiate a new contract?
• How much risk am I exposed to now?
• What is the mark-to-market value of my asset?
• If I add an asset to my portfolio, how will it impact my overall risk/revenue exposure?

PPAs are complex financial contracts within a buyer’s financial portfolio. Therefore, we should take their management seriously. Proper value tracking and active management, as well as specific strategies, are crucial for protecting a PPA’s value against volatile energy markets.

This requires a strategy to monitor the asset’s value periodically and perform a mark-to-market valuation (the market value of the asset at a point in time) as prices evolve over time.

It is important to keep track of the exposure to market risks. Such systematic assessment will also identify key contract risks and inform targeted risk mitigation strategies to help lock in a reasonable value at the time of contract signing.

Who writes the initial contract?

The buyer is usually the one to create basic offers based on the RFP/RFQ from the energy seller.

Should there be interest on the seller side, the buyer will then provide a more detailed contract. Some more sophisticated buyers such as Google would usually have their own contracts.

In an attempt to standardize PPA contracts across Europe and to reduce transaction costs, the European Federation of Energy Traders (EFET) in collaboration with the RE-Source Platform, have issued a standard Corporate Purchase Agreement (CPPA). EFET is an association advocating policies and regulations in electricity and gas trading in Europe, established in 1999 to support the liberalization of electricity and gas markets in Europe. 

What should you negotiate in your PPA?

You’re in the midst of a PPA negotiation – but have you thought of everything?

We have your back and created a PPA checklist to ensure you are covered!

Here are the 10 key commercial points you shouldn’t miss if you want to successfully close your next PPA.

(You’ll find a downloadable checklist at the end of this article.)

1. Commercial Structure

The type of PPA structure you choose (pay-as-produced, annual baseload, etc…) will impact how the energy risks are distributed among the parties. For example, for the volume risk, in a pay-as-produced structure (a fixed price is paid for any volume produced), the buyer will carry a portion of the volume risk, but the seller is responsible for over – or underperformance.

Whereas in a monthly baseload structure, (a contract that buys a constant volume of energy every hour of each month), the volume risk will be carried by the seller as the volumes are to be guaranteed monthly.

2. Risk Allocation

Knowing how the principal energy risks can be allocated between the Seller and the Buyer is essential for negotiating a PPA. This is key to successful contract negotiation.

We recommend you go over the following five key energy risks:

• Price Risk:
  This risk is the probability that there is an adverse movement in the market price. It is unavoidable but can be mitigated. We take a future position of approximately the same size but in the opposite price direction in an exchange.
  
  
• Negative Price Risk:
  Between 2023 and 2024, negative price hours in European energy markets rose by 49% – a trend expected to persist for the near future.
  
  Traditionally, most PPAs compensated for negative prices, placing the associated risk largely on the buyer. However, with the sharp increase in negative price occurrences, managing this risk has become a critical aspect of PPA negotiations.
  
  To ensure long-term sustainability (the purpose of a PPA), negative price risk – like any energy risk – must be shared sensibly between parties. Lenders are also paying closer attention to this issue, with early signals indicating that a balanced approach to dealing with negative prices is essential to maintain financing viability for PPA-backed projects.
  
  You can explore the topic further in our dedicated blog posts.

• Liquidity Risk:
  A market is called liquid – if buyer and seller can conclude large volume transactions quickly, without impacting the market price. Depending on the structure of the PPA, its cost or risk can be reduced.
  
  One can achieve this, for example, by getting a validity period (which comes at a cost) or agreeing on a price formula indexed on closing prices. The buyer and seller could agree to fix the PPA price closure referenced on publicly available prices such as forward prices observed on an exchange.

• Volume Risk:
  The annual energy production of a renewable asset is an estimate. Its likelihood is typically calculated and assessed based on long-term meteorological data.
  
  If a renewable asset is hedging a fixed volume at a fixed price, there is a risk that certain amounts of volume are not produced and need to be procured. If this is the case, the producer may have to purchase the missing volume at market prices that may be worse than the original fixed price. Optimizing the volume risk is crucial.
  
  You can make use of insurance guarantees or use certain PPA structures to reduce this risk.
  
  Pro Tip: It is important to note, however, that there is always a portion of the volume risk carried by the project owner. What happens if the plant isn’t producing any energy – for example, due to a lack of sun or wind?
  Even under a pay-as-produced structure (when a fixed price is paid for the energy produced), there is a form of volume risk due to potential non-production.

• Profile Risk
  Profile risk arises from the fluctuating nature of renewable energy (for example, there is no solar energy produced at night). In markets with high renewable energy penetration, times of high production can mean a significant decrease in power price, that is, revenue.
  
  This will depend of course on the location of the plant and type (solar or wind). You can mitigate this risk by choosing certain PPA structures.
  
  
• Balancing Risk:
  This refers to the difference between what was scheduled (usually a day ahead) and actual production (the imbalance cost). This risk can be reduced by fixing the imbalance cost through an agreement or using intraday trading, if available.

3. Duration

Below are some of the most important questions to consider regarding the duration of your contract:

• Do you know how long the fixed price is set for?
• Do you have to renegotiate the price before the end of your PPA contract?
• How is the start date of your PPA contract defined?
• Will the contract start upon COD (Commercial Operation Day)?
• If production does not happen, is there a grace period? If yes, how long is it and will it come at a cost?

4. Price Fixing

Sometimes closing a deal can take months… (from negotiating a PPA contract to closing it). Within these months, market prices can change, i.e., liquidity in the market can change and this could impact the price rather significantly.

To help mitigate significant price fluctuations during PPA negotiations, a reference price can be established. Ideally, this would be based on daily updated PPA prices – and yes, we offer exactly that. Explore our market-derived benchmark PPA prices here.

5. Credit Risk (on both seller and buyer sides)

The credit risk refers to the risk that the buyer will not be able to meet its contractual payment obligations agreed into the PPA contract. Know who your direct counterparty is and follow their company’s credit development.

Protections can be put in place, such as advanced payments, margining requirements, increased frequency of payments and a Material Adverse Clause (MAC). The same applies to the seller, e.g., what if the project runs out of money before COD? A guarantee needs to be in place.

6. Settlement

Is this a physical or financial PPA? Financial PPAs are hyped in the US but have proven to be unpopular in Europe.

There are two key differences in these PPAs contracts:

• Accounting:
  A financial PPA is considered a financial derivative and falls under specific accounting requirements set by the IFRS (International Financial Reporting Standards). This is relatively complex accounting which requires mark-to-market valuing.
  
  Physical PPAs, on the other hand, only account for the realized sale, which means a relatively simpler accounting structure.

• Credit:
  For a financial PPA, the contracted volume will be traded on the market through a TSO and will comply with the credit requirement of the TSO.
  
  For a Physical PPA, the credit requirement will come from the buyer and often at higher credit requirements.
  
  Negative pricing is an increasing issue with renewables. It is thus critical to understand the market in which one is operating and to know how these negative prices are treated. There may be clauses in the contract that force the asset to stop producing during prolonged negative prices. This is an important and often overlooked item in a PPA contract.

7. Underlying Contract

Do you have an underlying master agreement contract in place based on the EFET (European Federation of Energy Traders) or an ISDA (International Swaps and Derivatives Association)? If yes, a term sheet usually suffices because the underlying contract has already been negotiated between the respective parties.

If this is not the case, we may want to consider a long-form contract where all the terms of the agreement are defined.

8. Changes in Law and Regulations

What happens if there is a change in the law that materially affects the obligations of one or both parties in the agreement? What if there is a change in the law affecting taxes? This can affect the balance of revenue or risk between the parties.

It is important to know how these changes will be managed in your PPA.

9. Guarantees

Guaranteed availability is a percentage of the volume that is guaranteed in the contract. Know how under-performance will be contractually treated.

A performance guarantee refers to the case where the production at COD does not meet the contractually agreed-upon expected production. Consider how this settlement will be addressed between both parties. In which case will the seller have to compensate the offtaker?

10. Termination

You should know what will trigger an early termination of your PPA contracts, such as a default or COD not occurring before a specific time, and the cost associated with it.

There is a reporting obligation under REMIT (Regulation on Wholesale Energy Market Integrity and Transparency). Under REMIT, wholesale energy market participants are required to report to the ACER (European Agency for the Cooperation of Energy Regulators) on the details of transactions and orders in relation to wholesale energy products (price, quantity, dates, etc.). It is important to note who will take care of obligatory reporting and at what cost.

Ready to Optimize Your PPA? Let’s Talk

A Power Purchase Agreement (PPA) is a contract to buy a specified amount of energy at an agreed price over a set period – signed before the energy is produced.

As government subsidies have declined, PPAs have become essential to renewable energy financing. By demonstrating that a renewable asset has already found a long-term buyer at a fixed price, PPAs offer the revenue certainty lenders need to secure their investment.

By providing this financial stability, PPAs play a crucial role in enabling investment in unsubsidized renewable markets.

However, PPAs are structurally and financially complex. Overlooking – or poorly negotiating – even a single contractual clause can significantly affect a project’s overall revenue. This underscores the need for a deep understanding of energy risks, valuation, and negotiation dynamics.

Our Pexapark Advisory Team supports renewable investors by guiding them through every stage of their projects – ensuring investors maximize revenue and achieve long-term success.

>> Contact us today to see how we can help you optimize your PPA.

PPA Resources

1. PPA Prices 

Due to a general lack of transparency in the PPA market, PPA prices in Europe are not readily available. In fact, the process of getting them is cumbersome. You would normally need to contact potential buyers, outline your project, sign NDAs (Non-Disclosure Agreements) and maybe get a price range.

To contribute to a more transparent PPA market, Pexapark provides PPA prices across Europe and the US for free. Drawing from over 15 years of origination experience, we understand energy buyers and how to calculate fair values of PPAs. 

• Register for a complimentary Pexapark account to access the most comprehensive PPA database and view key information on the latest deals closed in Europe and the US

2. EFET Template 

The EFET (European Federation of Energy Traders) has published a standard Corporate Power Purchase Agreement in cooperation with RE-Source Platform. In view of standardization, industry stakeholders have widely circulated and reviewed this CPPA.

• Check out Pexapark’s commentary on EFET’s Sample PPA Contract here
• Download EFET’s Sample PPA Contract here

3. RE-Source Platform 

The RE-Source Platform is a European alliance of stakeholders representing clean energy buyers and suppliers for corporate renewable energy sourcing.

This platform pools resources and coordinates activities to promote a better framework for corporate renewable energy sourcing at the EU and national levels.

• Learn more about RE-Source here. 

4. The Pexapark PPA Checklist 

Complete the form below to download the Pexapark PPA Checklist, for the 10 key commercial points you cannot miss in negotiation: