A PPA, or power purchase agreement, is a long-term contract in which a developer builds a renewable energy system and sells the electricity it produces to a buyer at a pre-agreed price. PPAs are the financial backbone of most large-scale solar and wind projects, giving developers the revenue certainty they need to secure financing and giving buyers a predictable energy cost, often lower than retail electricity rates.
How a PPA Works
The basic structure involves three roles: a developer, a buyer (called the “offtaker”), and usually one or more investors. The developer installs, owns, and operates the energy system, whether that’s solar panels on a warehouse roof or a wind farm on leased land. The offtaker signs a contract to purchase the electricity generated over a set period. The offtaker pays only for the power produced, not for the equipment itself.
Behind the scenes, the developer typically creates a separate legal entity for each project, called a special purpose entity. This entity raises the debt and equity needed to build the project, with the signed PPA serving as proof of future revenue. Banks and investors treat the PPA as the financial anchor of the deal. Without a signed buyer, most renewable projects can’t get funded. This is why PPAs matter so much to the industry: they turn sunshine and wind into a bankable asset.
For the buyer, the arrangement means little to no upfront cost. The developer handles design, permitting, construction, and ongoing maintenance. You simply buy the electricity, typically at a rate that’s competitive with or below what you’d pay your utility.
Physical PPAs vs. Virtual PPAs
Not all PPAs deliver electricity the same way. The two main types are physical and virtual, and the difference matters for how money and energy flow.
A physical PPA delivers actual electricity from the renewable project to the buyer. This is common when the solar panels or wind turbines are on or near the buyer’s property. Along with the power, the buyer also receives renewable energy certificates (RECs), which are the official proof that the electricity came from a clean source. RECs are what allow a company to claim its operations run on renewable energy.
A virtual PPA (sometimes called a financial PPA) doesn’t deliver physical electricity. Instead, it’s a financial contract. The buyer and developer agree on a fixed “strike price.” The developer sells power into the wholesale market at whatever the going rate is, and the two parties settle the difference. If the market price is higher than the strike price, the developer pays the buyer the difference. If it’s lower, the buyer pays the developer. The buyer still receives the RECs, which is the main point for companies pursuing sustainability goals. Virtual PPAs let a corporation in one state support a wind farm in another without needing the electrons to physically travel between them.
The trade-off between the two comes down to cost predictability versus cash flow variability. Physical PPAs give more direct cost control since you’re replacing grid electricity with a known price. Virtual PPAs introduce settlement payments that fluctuate with the market, which can create quarter-to-quarter swings in cash flow even if the long-term economics are favorable.
Contract Length and Pricing
PPA contracts are long. The industry standard falls in the 20 to 30 year range. Wind PPAs typically run about 20 years but can be as short as 10 to 15. Solar PPAs sometimes extend to 25 or even 30 years, though 15 to 20 year terms are commonly executed. These long durations reflect the useful life of the equipment and the time needed for developers and investors to recoup their capital.
The most common pricing structure is a fixed price per kilowatt-hour for the full contract term. This is the main appeal for buyers: you lock in a known electricity cost for decades, insulating yourself from volatile utility rates. Some contracts include a fixed annual escalator, typically 1% to 3% per year, which still keeps costs predictable even as they gradually rise. More complex structures exist too, including contracts with price floors and ceilings, indexed pricing that adjusts with inflation or market benchmarks, and multi-buyer arrangements where several offtakers share the output of a single project.
Risks to Understand
PPAs aren’t risk-free, and the risks differ depending on which side of the contract you’re on.
Volume risk is the chance that the project doesn’t generate as much electricity as expected. Developers estimate output using 20 to 30 years of weather data, but individual years can fall short. A cloudy year for solar or a calm year for wind means less revenue for the developer and potentially less savings for the buyer.
Profile risk (also called shape risk) comes from the unpredictability of when renewable generation happens. Even if total annual output meets expectations, the timing might not match when the buyer needs power. Solar generates midday, not at night. Wind can be seasonal. In pay-as-consumed contracts, where the buyer only pays for what they actually use, this timing mismatch is the supplier’s problem entirely.
Balancing risk stems from the gap between forecasted and actual production at any given moment. When a project produces more than forecast, the excess (called “long volume”) gets sold back to the grid, often at unfavorable prices. When it produces less than forecast (“short volume”), the shortfall must be purchased from the grid, sometimes at a premium. These imbalances create costs that someone in the contract has to absorb.
For virtual PPA buyers specifically, there’s also market price risk. If wholesale electricity prices drop well below your strike price for an extended period, you’ll be making settlement payments to the developer on top of buying your actual electricity from the grid. The RECs still have value, but the financial hedge can work against you.
Why Companies Sign PPAs
The motivations fall into two buckets: economics and sustainability. On the economic side, locking in a fixed electricity price for 15 to 25 years provides budget certainty that’s hard to get any other way. When wholesale electricity prices rise, a PPA buyer is shielded. Many companies also find that PPA rates are simply cheaper than their current utility costs, especially in regions with high retail electricity prices.
On the sustainability side, PPAs are one of the strongest tools for corporate renewable energy claims. Owning the RECs from a project gives a company verifiable proof of clean energy use for ESG reporting, carbon accounting, and public commitments like RE100 (a global initiative where companies pledge 100% renewable electricity). The concept of “additionality” is key here: a PPA that finances a new renewable project, one that wouldn’t have been built without the contract, represents a genuine contribution to the clean energy transition rather than just buying credits from an existing facility.
How PPAs Differ From Buying Green Power
You can support renewable energy by simply buying RECs on the open market or enrolling in a utility green power program. These options are simpler and require no long-term commitment. But they don’t offer the price certainty of a PPA, and the additionality claim is weaker since you’re typically buying certificates from projects that already exist and would operate regardless of your purchase.
A PPA, by contrast, is a direct financial commitment that helps bring new renewable capacity online. The long contract term gives the developer and their investors confidence that the project will generate returns, which is what makes the financing possible in the first place. For organizations large enough to commit to the volume and duration, a PPA delivers both stronger sustainability credentials and more predictable energy costs than any alternative short of building and owning a project yourself.