What is a PPA? How power purchase agreements are structured

When an industrial consumer buys renewable power from a generator — whether from a rooftop system it doesn't own or from an off-site solar farm — the arrangement is usually set out in a power purchase agreement (PPA). A PPA is a long-term commercial contract that defines what power will be supplied, at what price, for how long, and what happens when things go wrong.

The parties

• Seller — the generator or project company that owns the plant
• Buyer — the consumer, or in utility-scale projects, a distribution company or intermediary
• Sometimes lenders, who may have rights under direct agreements

Common PPA settings

See CAPEX vs OPEX solar for factories and open access vs group captive.

Key terms

Term

How long the PPA lasts. Renewable PPAs commonly run for many years to give the generator revenue certainty for financing.

Tariff

The price per unit of electricity. Structures include:

• Fixed tariff — the same price throughout
• Escalating tariff — increasing at a set rate
• Discount to grid tariff — linked to the consumer's utility tariff

Volume

• Take-or-pay — buyer pays for contracted energy whether or not it uses it
• Take-and-pay — buyer pays only for energy delivered and taken
• Contracted capacity — maximum the seller will supply

Delivery point

Where energy is delivered and measured — the plant, a grid substation, or the consumer's premises. Losses and charges before or after this point affect cost.

Generation guarantee or shortfall

What happens if the plant generates less than expected — compensation for shortfall, or no obligation. Buyers should understand who bears weather risk and plant performance risk.

Payment terms

When invoices are issued, when payment is due, and late payment consequences.

Payment security

Generators often ask for security — a letter of credit, bank guarantee or deposit — to protect against non-payment.

Change in law

If laws, regulations or charges change, who bears the cost? This is a crucial risk allocation clause, especially for open access where charges are set by regulation.

Force majeure

Events outside either party's control — natural disasters, certain government actions — and how obligations are suspended or terminated.

Termination

Events allowing termination — such as payment default, insolvency or prolonged non-supply — and termination payments.

Transfer

Whether either party can transfer the PPA — for example, if the plant is sold, or the consumer's facility is sold or relocated.

Risk allocation

A PPA is fundamentally about who bears which risk:

For industrial buyers

Before signing:

• Model landed cost over the term, not just year one. See landed cost of open access power.
• Check that volumes match your expected consumption
• Understand change-in-law exposure
• Check exit options if your facility changes
• Confirm the PPA supports your sustainability reporting. See renewable power and sustainability reporting.

For generators

Lenders will scrutinise:

• Buyer creditworthiness
• Payment security
• Termination payments
• Change-in-law protection

PPAs and regulation

Off-site PPAs operate within open access regulations, which define charges, scheduling and banking. A PPA cannot override regulations, so terms must be consistent with current rules. Check with the state regulator and distribution company.

Questions to ask

• What exactly is the tariff, and how does it change?
• What volume am I committing to?
• What happens if generation falls short?
• Who bears changes in regulatory charges?
• What security must I provide?
• How can I exit, and at what cost?

Common mistakes

• Focusing only on the headline tariff
• Accepting take-or-pay volumes above expected consumption
• Ignoring change-in-law clauses
• Not planning for facility relocation or sale
• Signing without legal review

Reviewing a PPA over its life

A PPA is not "sign and forget". Over a long term, consumption changes, regulations change and plant performance changes. Review delivered energy, invoices and charges against the contract at least annually, and keep a log of any regulatory changes that might trigger change-in-law provisions. Disputes are far easier to resolve when both sides have kept clear records.

How we help

Through open access and group captive and C&I solar work, we help industrial consumers understand PPA structures, compare options and coordinate with developers. Legal review should come from qualified lawyers.