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.