What Are Power Purchase Agreements And How Do They Work?

What is a PPA?

A Power Purchase Agreement or PPA is a contract between a power producer and a power purchaser. These power producers are renewable energy projects, while power purchasers can range from utilities or large corporations. PPA’s usually have a term of 15-25 years and allow for power purchasers to lock in their cost of electricity. PPA’s often include a yearly escalator, usually in the range of 1%-2%.

Why are PPA’s Important?

PPA’s are important as they make renewable energy projects financeable. When projects sign a PPA, they can demonstrate to lenders and investors an ability to pay them back through a long-term, predictable revenue stream. PPA’s are also advantageous for the power purchaser as they can lock in a fixed price for power, mitigating risk associated with volatility in the price of electricity.

Who are common PPA power purchasers?

The most common power purchasers or “offtakers” are utilities and large companies, including Amazon, Microsoft, Meta, and Google. These companies have large global operations and use PPA’s as a means to stabilize long-term energy costs and offset emissions. As of 2024, Amazon is the largest corporate clean energy purchaser.

What do offtakers do with the power?

Utilities buy the power at wholesale prices and distribute it to their customers at higher retail rates.

Corporate offtakers resell their purchased power back to the grid, instead of receiving physical delivery of the power. In exchange for the power, they receive Renewable Energy Certificates or REC’s. These REC’s are then used to offset their utility bills. The resold power is then distributed by utility companies to their consumers.

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