What is a power purchase agreement (PPA)?

A power purchase agreement (PPA) is fundamentally a contract outlining the terms for the sale of electricity generated by a power producer to a buyer, which can be a utility or a large consumer of power. This type of agreement is crucial in the context of distributed generation, as it establishes the framework under which energy is exchanged.

The PPA typically includes important details such as the price per kilowatt-hour, the duration of the agreement, delivery obligations, and conditions under which the contract can be terminated. This legal arrangement provides certainty for both parties; for the seller, it ensures a stable revenue stream, while for the buyer, it guarantees a source of power at a predetermined price, which can be advantageous in budgeting and planning.

A PPA is especially significant for renewable energy projects because it can help secure financing by demonstrating a long-term commitment to purchasing the generated power. This support can enable developers to attract investors, as they have assurance of revenue coming from the sale of electricity over the contract term. Overall, PPAs are fundamental to the financial viability of many energy projects, particularly in the renewable sector, fostering the growth of clean energy sources.