PPA Basics

A solar farm costs $200 million to build and produces electricity for 30 years. No bank will lend $200 million without a guaranteed buyer. The power purchase agreement (PPA) is that guarantee: a long-term contract between a generator and a buyer that makes the project financeable.

A PPA is a contract in which a buyer (a utility, corporation, or government) agrees to purchase electricity from a specific generator at a fixed or formulaic price for a defined term, typically 10-25 years. The PPA provides revenue certainty that allows the developer to secure project finance (debt + equity). Without a PPA, lenders face the risk that wholesale market prices could fall below the project's breakeven cost, making the loan uncollectable.

Structure the deal. A wind developer signs a 20-year PPA at $35/MWh with a utility. The developer uses this contract to borrow $300 million at 5% interest, knowing revenue is locked in for two decades.

Allocate the risk. The developer bears construction and performance risk (if the wind farm underperforms, it still owes debt payments). The buyer bears price risk (if wholesale prices drop to $20/MWh, the buyer still pays $35/MWh).

Why would a buyer agree to pay $35/MWh for 20 years when future spot prices might be lower?

Price certainty has value. The buyer locks in a known cost for decades, hedging against fuel price volatility and potential carbon pricing. Corporate buyers also gain renewable energy claims for sustainability reporting. The premium over current spot prices buys predictability.

PPAs are the financial mechanism that converted cheap renewable LCOE into actual built capacity. Without them, most utility-scale solar and wind projects would not exist.

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