A PPA, or power purchase agreement, is a long-term contract between an energy buyer and a power generator, typically for renewable electricity from a solar or wind project. The buyer agrees to purchase power at a set price, and the seller agrees to build, maintain, and operate the energy system. These contracts usually run 10 to 20 years and give the buyer predictable energy costs while giving the developer the revenue certainty needed to finance construction.
How a PPA Works
The basic structure is straightforward. A developer builds a renewable energy project, like a solar farm or wind installation, either on the buyer’s property or at a separate location. Once the system is generating electricity, the buyer purchases that power at a fixed price per kilowatt-hour spelled out in the contract. The seller owns the equipment and handles all maintenance, repairs, and day-to-day operations. The buyer simply pays for the electricity it receives.
Most PPA contracts include a price escalator, meaning the rate you pay increases slightly each year. But these escalation rates are generally below the historical price increases you’d see from a traditional utility, so the buyer still comes out ahead over the life of the contract. The locked-in pricing is one of the main reasons businesses and institutions sign PPAs: it shields them from the volatility of wholesale electricity markets.
Along with the electricity itself, the buyer typically receives renewable energy certificates (RECs). Each REC represents the environmental attributes of one megawatt-hour of clean energy generation. Owning the RECs is what allows a company to formally claim it’s powered by renewable energy, which matters for sustainability reporting and corporate climate commitments.
Physical PPAs vs. Virtual PPAs
There are two main flavors of power purchase agreement, and the distinction matters because they work very differently in practice.
A physical PPA means the buyer takes legal title to the actual electricity at an agreed-upon delivery point on the grid. From there, the buyer is responsible for managing that energy: scheduling it, forecasting how much the project will generate, and either consuming it directly or selling any surplus into the wholesale market. Physical PPAs are common for on-site installations, like rooftop solar on a warehouse, where the power flows directly to the buyer’s facility. They also work for off-site projects, though managing grid delivery adds complexity.
A virtual PPA (sometimes called a VPPA or financial PPA) doesn’t involve any physical delivery of electricity to the buyer at all. You keep buying power from your regular utility the same way you always have. Instead, the virtual PPA is a financial contract. The buyer pays the developer a fixed price per megawatt-hour, and the developer sells the actual electricity into the wholesale market at whatever the going rate happens to be. The two sides then settle the difference.
This settlement works through a mechanism called a contract for differences. If the wholesale market price is higher than the fixed PPA price, the developer passes the positive difference back to the buyer. If the market price drops below the fixed PPA price, the buyer pays the developer the gap. Over time, the buyer’s net cost for energy stays close to the agreed-upon fixed rate. The buyer also receives the RECs from the project, which is the whole point for companies pursuing renewable energy goals.
Virtual PPAs are popular with large corporations because the buyer and the renewable project don’t need to be in the same region or even on the same power grid. A company headquartered on the East Coast can sign a virtual PPA with a wind farm in the Midwest and still claim the clean energy attributes.
Who Uses PPAs
PPAs were originally the domain of electric utilities buying power from independent generators, but the market has expanded dramatically. Today, major corporations, universities, hospitals, and government agencies are among the most active PPA buyers. Tech companies with massive data center energy needs have been especially aggressive in signing these deals to meet net-zero commitments.
For smaller organizations, community solar programs sometimes use a PPA-like structure where multiple buyers share the output of a single project. The economics work similarly: you pay a contracted rate for your share of the generation, and the developer handles everything else.
Costs and Payment Structures
The most common arrangement is pay-as-you-go: you’re billed monthly based on how much electricity the system actually produces. There’s no upfront capital cost for the buyer, which is a major draw. The developer finances, builds, and owns the project, recovering its investment through your energy payments over the contract term.
Some agreements offer a prepaid PPA option, where the buyer pays the total discounted cost of the contract upfront in a lump sum, with no monthly payments for the rest of the term. Because the developer takes on zero credit risk in this scenario, prepaid PPAs typically come with more favorable pricing. This structure shifts more financial risk onto the buyer, since you’ve already paid for energy that won’t be generated for years, but the per-kilowatt-hour cost can be meaningfully lower.
PPA pricing varies based on the technology (solar tends to be cheaper than wind in most regions), the size of the project, the contract length, and local market conditions. Prices are typically quoted in dollars per megawatt-hour and are negotiated between buyer and seller.
What Happens When the Contract Ends
Most PPAs include end-of-term options that are spelled out from the start. For on-site systems, the buyer can often purchase the equipment at fair market value, renew the agreement at updated terms, or have the developer remove the system entirely. For off-site or virtual PPAs, the contract simply expires, and the buyer can negotiate a new deal with the same or a different developer.
Because these contracts run 10 to 20 years, it’s worth paying close attention to the terms around early termination. Exiting a PPA before its term ends can involve significant buyout fees, since the developer structured its financing around the full contract period. If your organization might relocate, downsize, or change its energy needs substantially, the termination provisions are one of the most important sections of the agreement.
Key Risks for Buyers
Locking in a price for a decade or more is a double-edged sword. If wholesale energy prices drop well below your PPA rate, you’re stuck paying more than the market price until the contract expires. This is especially relevant for virtual PPAs, where the contract-for-differences settlement means you’d be writing checks to the developer during periods of low market prices.
Renewable energy generation is also inherently variable. Solar panels produce nothing at night, and wind turbines sit idle on calm days. The amount of electricity a project generates in a given month won’t perfectly match your consumption, which can create mismatches you’ll need to manage, either by purchasing supplemental power from the grid or selling surplus generation.
For physical PPAs, the buyer takes on operational complexity around forecasting generation and scheduling delivery. For virtual PPAs, the financial settlement mechanics require some accounting sophistication, and the contracts may need to be reported on your balance sheet depending on how they’re structured.