Power purchase agreements (PPAs) have been called an investment in a greener future. They provide much-needed funding for renewable generation projects and help energy buyers offset price risks. But what are they exactly, and how do they work?

In this blog we’ll demystify PPAs: the definitions, types, terms, potential benefits, and practical steps to completion. Depending where you are in the procurement process, you’ll find information to help you get started, guidance on running a tender, and considerations for negotiating a PPA contract. 

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Phase 1: Starting the journey

What is a Power Purchase Agreement?

A Power Purchase Agreement (PPA) is a long-term contract between a buyer and a power generator, where the buyer agrees to purchase electricity at a pre-agreed price for a set period. Typically, PPAs last between 5 and 15 years, price certainty and helping bring new renewable energy projects to life.

In this article, we’ll focus on corporate PPAs — those used by businesses to secure green power. 

Corporate PPAs allow companies to source renewable energy directly from a generator (utility, independent power producer, investor), ensuring the energy they use is clean, traceable, and aligned with their sustainability goals.

What are PPAs used for?

PPAs de-risk clean energy procurement by locking in the price of electricity and the volume to be supplied at that price. The alternative is to make renewable power purchases on spot markets where prices can sink or spike sharply. It’s a choice between the security of a PPA or leaving it to luck.

Who needs a PPA?

PPAs are a great fit for large, creditworthy companies with stable energy needs, especially in power-intensive industries like tech, manufacturing, and mining. These sectors have a surging demand for energy and face increasing pressure from governments and investors to meet sustainability goals. 

Smaller businesses may find it harder to secure PPAs on their own. One option is to take part in an aggregated PPA agreement led by a bigger buyer. For SMEs looking to become more sustainable while maintaining flexibility and control, transparent green tariffs or renewable certificates (EACs / GOs / REGOs) may be better alternatives. 

Why do we associate PPAs with renewable energy?

At their heart, Power Purchase Agreements are energy supply contracts. You could, in theory, negotiate a PPA for any type of power generation. But their most potent use case is in helping energy buyers make the transition to renewables. 

With regulations tightening and sustainability commitments on the rise, more companies are setting net zero targets. Sourcing carbon-free power is crucial to achieving them, but renewable electricity comes with unique risks. 

On social media its soften framed like this:

Wind and solar can be disrupted by weather changes and daily fluctuations. This may increase price volatility and make the supply less reliable. 

PPAs mitigate those worries, making clean energy a safer buy. 

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How does a Power Purchase Agreement work?

1. Companies sign long-term agreements
Energy buyers commit to a fixed price per megawatt hour (MWh) with a third-party seller who agrees to build, maintain, and operate a renewable energy project.

2. The long-term agreement provides security
The fixed price and long-term commitment from a credible corporate buyer gives the seller confidence to secure financing for the project.

3. The renewable energy project is built and connected
The third-party seller installs the renewable energy project, which generates and delivers clean electricity to the power grid.

4. Companies receive energy attribute certificates
In return for their commitment buyers get renewable energy certificates and may also benefit from cost savings – or even earnings.

Starting with PPAs

• Determine your requirements as a buyer
• Start a tender process 
• Receive proposals from clean energy suppliers
• Compare the offers received
• Negotiate the terms
• Make a final assessment about fit and unforeseen risks
• Sign the PPA contract

Benefits of PPAs

For corporate energy buyers

• Power Purchase Agreements provide a hedge against price volatility by locking in prices or constraining volatility within acceptable parameters. Buyers gain protection against future upward price movements.
• Corporates can use PPAs to demonstrate net-zero progress and commitment to additionality — enabling the financing of a new clean generation projects. Additionality is easier to demonstrate compared to green tariffs or renewable certificates — simply put, without the company’s involvement, the project would not have been built.

For renewable energy projects

• PPAs can unlock financing for new renewable project construction. If they have agreements in place to sell energy to credit-worthy corporate buyers, renewable developers gain secure favourable terms with investors. 
• In the past, renewable generators had to sell directly to large utility companies. Mature PPA markets provide new projects with liquidity, competition, and a more scalable route to market. 
• Having enough PPAs in place can also help projects refinance at more favourable rates, freeing up capital for new renewable projects.

For policymakers

• PPAs create a favourable economic environment where more clean projects can be financed and built, accelerating the renewables transition.
• As governments scale back subsidies designed to kick start the first clean energy projects, corporations can step in to fill the gap and provide long-term price certainty.  

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Phase 2: Understanding PPA mechanics

What are the different types of PPA?

PPAs come in different formats based on who is signing the agreement, the way the energy is delivered, by the physical distance between generation and consumption sites, and whether the clean energy project is planned or already in operation.

We explain the variations in more detail.

On-site vs on-site PPAs

On-site Power Purchase Agreements

On-site PPAs usually show up as rooftop solar installations on a factory or large corporate estate. Buyers effectively lease the solar arrays from a renewable generation specialist which handles installation and manages the equipment, ensuring electricity flows directly into the firm via private wire. 

On-site PPAs are popular with corporate buyers as they don't need to rely on the poles and wires that transport energy from generator to consumer. 

The availability of on-site PPAs is limited, however, to those with enough space. If a business is spread across multiple small locations or located in a dense urban setting, there likely won't be enough land or roof space for solar generation.

That’s why most PPAs are negotiated for purchasing clean power off-site. 

On-site Power Purchase Agreements

There are two main types of off-site PPA: physical and financial.

Physical or ‘sleeved’ PPAs see an agreed volume of clean power physically transported from a renewable energy generator to a corporate buyer via the public grid. 

In the UK, physical PPAs are often facilitated by an electricity supplier since they already have the necessary licensing and expertise to ensure its delivery. They can also provide top-ups if intermittency reduces supply from your chosen generator.

Financial or ‘virtual’ PPAs don’t physically deliver any power. Instead, the renewable generator sells its power directly into the wholesale market and the corporate buyer procures electricity from an electricity supplier. 

Differences between physical and financial PPAs

Financial PPA pricing example

The financial PPA creates a contract-for-difference (CfD) between them whereby the buyer compensates the generator if the wholesale price falls below an agreed ‘strike’ price. One common price structure compensates the energy buyer if the wholesale price rises higher than the market price.

From a buyer’s perspective, that formula would look like this: (market price - strike price) x volume.  

So if the PPA established a strike price of £50/MWh, and 5,000 MWh of power were delivered in a given month, and in that month the market price was £60/MWh, the difference would be (60 - 50) x 5,000 or £50,000. That’s the amount of compensation the generator would need to pay the buyer. 

Since the PPA only covers the virtual transaction, the buyer still needs to physically obtain electricity. The price hedging mechanism in a financial PPA ensures that if the market price rises, the payment is adjusted to offset the higher costs.

If the market price falls, the buyer will pay the generator. Even though no electricity has changed hands, both buyer and seller have established a price hedge that respectively locks in their costs and revenues.

Hourly matched PPAs

Hourly matching ensures that a company’s electricity consumption is matched to the renewable generation it purchases in real time — hourly or even sub-hourly. Time-stamped clean energy certificates aligned with actual consumption make it possible.

Hourly matching can be integrated into PPAs as part of a diversified sourcing strategy. By analysing your total demand data and comparing it with historical (or projected) generation data from potential projects, you can identify the best CFE matches and shortlist them for further commercial and qualitative analysis.

Renewabl’s Track platform gives buyers an easy way to gather their demand data in one place for analytics and reporting.

For a deeper dive, read Renewabl’s Utlimate guide to hourly matching.

Common PPA risks you’ll need to manage

Credit risk

When you sign a PPA, there is always the potential for financial loss if either the buyer or seller fails to fulfill their contractual obligations. 

For example, if a corporate energy buyer agrees a PPA with a renewable energy project before it’s complete and operational, delays in construction or lower-than-expected performance could leave the buyer without the electricity they’ve already paid for. On the other hand, if a buyer fails to meet their payment obligations, it could jeopardise the financial stability of the renewable energy project. 

To address PPA credit risk, both buyer and seller can build guarantees like letters of credit or other financial instruments into the agreement.

Volumetric risk

Volumetric risk is the uncertainty that arises from gaps between the projected and actual volume of clean energy generated and consumed. 

Since most PPAs source power from weather-dependent wind and solar, there can be a lot of variation in the amount of electricity generated versus what was agreed in writing. 

If what’s produced doesn’t match what was agreed, the financial impact depends on the market price at the time of the mismatch. Buyers will need to source extra electricity from the wholesale market, which exposes them to financial risks.

Regulatory risk

The transaction agreed in a PPA has to be compatible with the regulatory and legal environment buyers and sellers operate in. Policy changes to emissions regulations, grid infrastructure, or renewable energy subsidies can influence a PPA’s profitability and risk profile. 

Consider a scenario where new carbon pricing or stricter environmental standards are applied to renewable energy procurement portfolios. Either of these could significantly impact PPA pricing and contractual terms.

Shape risk

Shape risk arises when there’s a mismatch between supply and demand on an hourly basis. Since renewable energy depends on weather conditions, supply can be intermittent. There may be a discrepancy between the times of day when a buyer wants to purchase energy and the time of day when a generator can produce it. 

Shape risk captures the fact that generators want to sell their electricity as it’s generated, while buyers want delivery of electricity at times of day that align with their operational needs.  

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Phase 3: Finding the right project

How to run a PPA tender

Given the operational risks and sums involved, a typical PPA tender process will take up to 6 months to complete. Most will involve these key steps:

Analyse requirements

As a corporate buyer you need to be clear about your requirements for a Power Purchase Agreement: 

– technology preference
– size of the PPA
– contract details and price structure
– term
– desired start date. 

Once this data has been collected, a tender document is created with a summary of requirements, evaluation criteria, and instructions on how to submit a proposal. 

Send the tender

Now the tender can be distributed through a platform that matches your requirements with a list of relevant projects. The goal is to connect broadly and maximise the number of high-quality proposals. Suppliers registered on a tendering platform are pre-vetted to ensure they have a track record of delivery, sound finances, and experience with the type of projects suited to corporate buyers.

Renewabl Trade simplifies the tender process for clean energy PPAs that align to your actual consumption. Learn how we can help fill the gaps in your portfolio and help you achieve your renewable energy targets.

Gather results

Respondents will submit proposals based on the tender framework, including meter data or an expected generation profile if the project is still under construction. This data will be used in the next stage – evaluation – and feeds into hourly matching and carbon avoidance analysis.

Evaluate bids and create a shortlist

In most cases the tender will generate a large number of responses that need to be whittled down to a shortlist. The aim is to select projects that best match your requirements and then progress them to the second and final stage. Compliance with the tender’s requirements and price competitiveness will normally determine who makes the cut.  

Price competitiveness is determined by comparing the offered strike price to the projected electricity price during the PPA’s effective term. This may require advanced modelling that  uses the hourly generation profile of the project and compares it to an hourly resolved forward curve of market prices. Lack of far-dated price liquidity usually means the price curve is based on a forecast. 

Platform providers like Renewabl can provide forecasts, helping buyers assess the financial effectiveness of offers and enabling clear project-to-project comparisons and rankings.

Ask for additional info 

At this stage you can ask for more detailed data and specific aspects of the project. This could include an assessment of potential development risks like grid connection, planning and permitting, and environmental assessments.  

As a buyer, you can introduce a term sheet and ask each project / generator each seller to provide their feedback. This will be a good indicator of how aligned each party is likely to be contractually. 

If there are key contractual issues that can't be reconciled through negotiations, it's best to discover them early in the process.

Negotiate the PPA contract

Now you have most of the information you need to make a decision, but there are a few final checks to make and additional questions to answer:

• Does the project and proposal make sense from a financial perspective? E.g. will it result in savings for the company, what are the credit requirements, and what are the costs involved?

• Does the seller have the required experience and track record of delivery? Consider if the project’s risk profile fits the tender brief, and if there are development risks that the company is unwilling to take.

Assess the final wording

Now you’ve reached the contract stage and have a working draft. With support from legal, consider if the wording allocates risk fairly between you and the seller. Assess if there are any unexpected risks that were not addressed in the term sheet, and if the commercially sensitive terms are quantifiable. 

Accounting considerations

Finally, review the proposed price structure to make sure it doesn’t lead to unwanted accounting issues. This review should be undertaken by qualified accountants that have experience with commodity contracts, as they can identify any potential accounting-related problems or triggers. 

You should also double check that it meets sustainability goals throughout the contract. For example, will the contract guarantee delivery of the required volumes to mitigate scope 2 emissions? 

After these final sanity checks are complete, it should be clear which proposal ranks highest. Now you can make a decision about which generation project to sign a PPA with. 

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Phase 4: Preparing to sign

Contractual considerations when negotiating a PPA

The negotiation and agreement of the final contract is a critical stage of the process. If your in-house legal team isn’t experienced with PPAs, it’s a good idea to bring in an external legal counsel with energy expertise to offer advice and support throughout the process.

Comparison of short term (3-5 years) and long term PPAs:

Understanding PPA prices 

PPA prices are shaped by a variety of market and contractual conditions. While the specifics can vary by region, these are broadly applicable across Europe.

Factors influencing PPA prices

• Wholesale power prices: PPA prices often reflect broader market trends, including fluctuations in wholesale power prices.
• Renewable energy technology: The type of renewable technology (e.g., wind, solar, biomass) can affect pricing, depending on the region. For example, despite solar PPA prices declining in many regions, some countries like Ireland have seen short-term increases due to local market conditions.
• Market conditions: Political decisions, government policies, and investment trends can significantly impact PPA prices. Changes in subsidy structures or environmental regulations, for example, may affect renewable energy costs. 
• Contract duration: Longer-term contracts generally have different pricing structures than shorter-term agreements. The market is shifting toward longer PPAs, often with more favorable pricing for longer commitments.

Negative price risk: The potential for negative electricity prices – when supply exceeds demand – influences PPA prices. Some buyers are willing to pay a premium to reduce this risk

The PPA outlook in 2025

PPAs are gaining in popularity, with more first-time corporate buyers entering the market every year since 2021. After a volatile 2024, marked by significant renewable power price volatility and a record number of new corporate PPA entrants, 2025 is shaping up to be another year of evolution and growth.

With PPAs expected to account for 20 GW of clean energy generation, the market is entering a period of transition. More small- to mid-sized companies are expected to enter, while larger firms with existing PPAs reap more rewards from their current agreements. 

According to data from S&P Platts, the first quarter of 2025 has seen more interest in shorter term PPA deals and hybrid opportunities — for example, combining solar and storage or wind and solar. The technology sector is expected to remain the largest buyer of PPAs, as data centres continue to increase capacity to meet soaring demand for power-hungry AI.

Next steps for energy buyers

Today there are two routes to PPA creation: work with sellers directly or use a tendering platform.

Negotiating one-to-one with renewable generators or utilities with clean energy assets is the most straightforward option – though it may not be the most efficient. Multiple projects with promising PPA offers will need to be assessed individually. That takes time and effort, and lacks the competitive tension needed to draw out the lowest rates and most advantageous terms. 

Best PPA tendering platform

Working through a digital PPA platform allows you to reach a range of promising projects at once, streamlining the competitive tendering process. It also gathers the necessary data in one place, making it easier to assess. The digital approach to tendering makes things easier, helping you find the best fit for your needs with features like search functionality and ‘match-making’ algorithms. 

Leading platforms like Renewabl offer a digital, fast and efficient tendering process with broad market coverage. This ensures your PPA journey begins with maximum impact, greatly improving your chances of successful market engagement. They’ll also be able to provide more granular analytics such as hourly matching statistics and carbon quantification to help you make the final decision with confidence.