When Does a Power Purchase Agreement (PPA) Actually Make Sense?
05/08/2026

Short Answer

 A PPA makes sense when your organization has large, stable load (10+ MW), a long-term planning horizon, and a strategic sustainability mandate. But PPAs are overused. Many mid-sized buyers with variable loads and shorter planning cycles are better served by flexible retail procurement combined with renewable energy certificates (RECs). 

What a PPA Is

A power purchase agreement is a 10–20 year contract to buy electricity from a renewable energy project at a set price. Physical PPAs deliver actual power; virtual (financial) PPAs settle the difference between the agreed price and the wholesale market price, with the buyer receiving RECs.

When a PPA Fits

  • Large, stable load (10+ MW):PPAs are sized to a project’s output. If your load is too small, you’ll have excess generation and basis risk on the surplus.
  • Long-term horizon: A 15-year contract requires confidence in your load forecast, financial position, and operational footprint for the full term.
  • Sustainability mandates:PPAs provide verifiable additionality—you’re directly enabling new renewable generation. This is a stronger claim than purchasing unbundled RECs.
  • Strong credit: Developers typically require investment-grade credit because your contract finances project construction.

When a PPA Doesn’t Fit

  • Load under 5–10 MW:Transaction costs make smaller deals uneconomical for developers. Retail green products or community solar are more practical.
  • Variable or declining load:If consumption could change due to efficiency projects, facility closures, or production shifts, the PPA creates a costly mismatch.
  • Short planning cycles: If you plan in 1–3 year windows, a 15-year PPA introduces commitment risk that doesn’t align with how you run the business.

Costs People Underestimate

  • Basis risk: If the PPA settlement node differs from your load zone, prices can diverge and the hedge becomes imperfect.
  • Shape risk: Wind and solar generate when conditions allow, not when you use power. The mismatch settles at market prices.
  • Legal and advisory costs: Transaction costs of $50K–$150K are common for mid-market PPA deals.
  • Accounting complexity : VPPAs may require mark-to-market accounting under ASC 815/842, introducing earnings volatility.

Alternatives for Mid-Market Buyers

  • Retail green products: supplier bundles RECs into a standard contract. Simpler, shorter commitment.
  • Unbundled RECs: purchase certificates separately from supply. Most flexible, weaker additionality claim.
  • Community solar: subscribe to a local project and receive bill credits. No long-term lock-in.

Bottom Line

PPAs are powerful for organizations that fit the profile. But before signing a 15-year commitment, evaluate whether simpler, more flexible approaches meet your sustainability goals without the complexity and risk.

 

Frequently Asked Questions

What is a power purchase agreement (PPA)?

A PPA is a long-term contract (10–20 years) to buy electricity from a renewable energy project at a set price. Physical PPAs deliver power; virtual PPAs are financial contracts where you also receive renewable energy certificates.

How big does my load need to be for a PPA?

Most developers require 5–10 MW minimum, with many preferring 20+ MW. Below that, retail green products, community solar, or unbundled RECs are more practical.

What is basis risk in a PPA?

Basis risk is the financial exposure when the PPA settlement location differs from your load location. If market prices at the two locations diverge, the hedge is imperfect.