Power Purchase Agreement

Start with the parties: a generator or developer sells power or settles a financial contract with a buyer, and their obligations are set out in the PPA. On-site arrangements can avoid the customer's upfront cost of owning a solar installation, because the developer may install and maintain equipment while charging for electricity generated.

Define the site rights too, since a rooftop project needs access for installation, maintenance and removal, and lease or property obligations may outlast an ordinary electricity purchase. Check the agreed rate, which may be fixed or rise each year through an escalator, and compare the full term rather than the first bill alone.

Check the quantity as well, because a buyer might pay for actual delivered generation, a minimum volume or a contracted amount, and the structure affects risk if use changes. Consider duration and exit terms: long contracts may suit long-lived assets but can constrain a business that moves, shrinks or changes operations, a building sale or lease ending may require assignment, buyout or removal, and developers may require a deposit, guarantee or parent backing that can have real financial effects.

A physical off-site PPA delivers power to an agreed point on a grid, subject to market rules and delivery arrangements, so it is not the same as electricity arriving directly from a distant project to the buyer's socket. A virtual or financial PPA is different again: the buyer continues to buy electricity separately, while the contract exchanges money based on a strike price and market price.

Market prices can move against the buyer, so a virtual PPA hedge is not a promise of savings in every year and settlement scenarios should be assessed; the US EPA's financial PPA guide explains that a virtual structure settles price differences without physically delivering electricity to the buyer. Ask who owns environmental attributes, because renewable energy certificates or equivalent instruments may be retained by the developer or transferred to the buyer, and the US EPA describes on-site PPA ownership, rates and renewable certificate rights.

A claim of renewable electricity use needs the appropriate attributes under the relevant accounting framework, so financing a project alone may not justify the claim. Check local law too, since some markets restrict third-party electricity sales or require special licences and a contract form from another country may not be usable.

Check project delivery and equipment performance: permits, grid connection, construction and commissioning can delay output and the contract should specify what happens, while on-site buyers should understand maintenance standards, metering, outages and any minimum production promises. Review utility charges, because a customer may still pay grid connection, demand and backup charges and a low PPA energy rate is only one part of total cost.

Bills and settlements depend on measured output, agreed prices and loss factors where relevant, so specify how errors are corrected, and separate energy from capacity, since a project rated at one megawatt does not deliver one megawatt in every hour and annual kilowatt-hours should be estimated realistically. Compare with the counterfactual by modelling expected grid price and usage with realistic uncertainty, because a single assumed rising grid tariff can make a weak deal appear attractive.

Use an illustrative saving carefully: if 500,000 kWh costs $0.30 under a PPA instead of a hypothetical $0.40 grid rate, the simple energy difference is $50,000, but other charges, timing and risk can change the result. For an owner, a PPA is a long-term allocation of price, operating and environmental-claim rights, so compare the entire contract and local market rules, not only the headline rate.