Power purchase agreements

The short version

A power purchase agreement is a long-term contract between an electricity generator and a buyer — typically 10 to 25 years — in which the buyer agrees to purchase some or all of the generator's output at a fixed or indexed price. The PPA is what makes renewable energy projects financeable: lenders require predictable revenue to underwrite project debt, and a creditworthy offtaker with a long-term commitment provides exactly that.

For buyers — utilities, corporate offtakers, load-serving entities — a PPA provides price certainty against volatile wholesale markets, a clear path to renewable energy procurement, and in many cases a hedge against rising carbon prices or regulatory risk.

How PPA pricing works

PPA prices are typically expressed in $/MWh and fixed for the contract term — or escalated at a fixed annual rate (0–2% per year is common). The negotiated price reflects the developer's cost of capital, expected capacity factor, ITC or PTC credits, and the competitive market for the project's output.

Utility-scale solar PPA prices in the US have fallen dramatically — from $80–$120/MWh in 2010 to $20–$40/MWh for the best 2024 projects, driven by panel cost reductions, larger project scales, and tax credit enhancement under the IRA. Wind PPA prices followed a similar trajectory at $20–$45/MWh for onshore projects. The OBBBA (July 2025) is reversing some of this trend: with the 45Y/48E wind and solar credits terminated for facilities placed in service after December 31, 2027 (12-month BOC safe harbor before July 4, 2026), new PPA pricing in 2026 is firming. Industry data show 2026 solar PPA indices climbing into the $40–$60/MWh range, and onshore wind into the $45–$70/MWh range, as developers reprice to reflect post-credit economics and supply chain constraints. Storage-only PPAs are also growing as a distinct category — the OBBBA retained the storage ITC.

What makes a PPA bankable

Lenders evaluate PPA bankability on several dimensions. Offtaker creditworthiness is paramount — an investment-grade utility or Fortune 500 corporate buyer provides much stronger credit support than a smaller counterparty. Contract term must be long enough to cover debt repayment, typically 15+ years. Volume obligations must match the project's expected output with reasonable curtailment provisions. Termination provisions — particularly change-of-law, force majeure, and default remedies — receive intense lender scrutiny.

Key risks for buyers

Basis risk is the most underappreciated PPA risk. A physical PPA entitles the buyer to power at the project's node — but the buyer's load is at a different location. If transmission congestion creates a price differential between the project node and the buyer's settlement point, the buyer bears that cost. Volume risk arises when the project's actual output differs from forecast — if the wind doesn't blow, the buyer still needs to source power elsewhere. Curtailment by the ISO reduces the buyer's effective energy delivery without necessarily reducing their obligations.

Physical vs. virtual PPAs

A physical PPA involves actual electricity delivery — the generator produces power, schedules it to the grid, and the buyer takes delivery. A virtual PPA (VPPA) is a financial contract: the developer sells power into the wholesale market and the corporate buyer pays or receives the difference between the fixed PPA price and the floating market price. VPPAs are covered in depth in the Procurement section.