Power Purchase Agreements
What they are and how they work
What is a PPA?
A Power Purchase Agreement (PPA) is a long-term contract between an electricity generator (usually renewable) and a buyer (corporate, utility, or trader). The buyer agrees to purchase electricity at a fixed or indexed price over a period of 10-25 years.
PPAs are essential for financing renewable energy projects. They provide generators with revenue certainty to secure project finance, while buyers lock in energy costs and green credentials.
Why PPAs Matter
For Corporates
- Price certainty for energy budgets
- Meet RE100 and net-zero commitments
- Hedge against wholesale price volatility
- Demonstrate ESG leadership
For Generators
- Revenue certainty for project finance
- Lower cost of capital
- Route to market for merchant projects
- Avoid wholesale market exposure
Types of PPA
Physical PPA
Electricity is physically delivered to the buyer. Requires a licensed supplier to "sleeve" the power and handle balancing.
Example: A wind farm sells 100% of output to a utility who delivers it to a corporate HQ.
Virtual PPA (VPPA)
A financial contract (Contract for Difference). No physical delivery. Both parties settle against a reference price.
Example: A tech company signs a VPPA at £50/MWh. If market is £60, generator pays corporate £10 difference.
Sleeved PPA
A utility acts as intermediary, purchasing from the generator and selling to the corporate. Adds shaping and balancing services.
Example: EDF buys wind output, shapes it to baseload, and sells to corporate at a premium.
How Settlement Works
Most PPAs settle monthly. The basic formula is:
Reference Price
The market price used for settlement. Could be baseload average, capture price, or day-ahead.
Strike Price
The agreed contract price (e.g., £55/MWh fixed for 15 years).
Volume
Actual generation in MWh (or contracted volume for fixed-shape deals).
Important: Shape Risk
Wind and solar don't generate a flat "baseload" profile. They generate when the wind blows or sun shines, often when prices are lower due to oversupply. This is called cannibalization and is measured by the Shape Factor.
Key Metrics for PPAs
| Metric | What it means | Learn more |
|---|---|---|
| Capture Price | Volume-weighted price achieved by the generator | Details → |
| Shape Factor | Capture Price ÷ Baseload Price (typically 0.85-0.95 for wind) | Details → |
| Baseload Price | Simple average of all half-hourly prices | Details → |
| Green Premium | Price difference when renewables are high vs low | API → |
How EnergyOracle Helps
PPA settlement requires trusted, auditable reference prices. That's what we provide:
Audit-grade data
Direct from Elexon with full provenance and timestamps
Pre-calculated metrics
Capture prices, shape factors, monthly averages via API
On-chain settlement
Trustless, automated settlement with our Solidity contracts