---
title: "What is a power purchase agreement"
description: "A power purchase agreement, usually shortened to PPA, is a long-term contract under which the owner of one identified electricity generating facility sells"
canonical: "https://contracko.com/blog/what-is-a-power-purchase-agreement"
---
# What is a power purchase agreement

Source: https://contracko.com/blog/what-is-a-power-purchase-agreement

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[What is a power purchase agreement](https://contracko.com/blog/what-is-a-power-purchase-agreement)

# What is a power purchase agreement

Budi Voogt Aug 24, 2026

Copy for LLM

A power purchase agreement, usually shortened to PPA, is a long-term contract under which the owner of one identified electricity generating facility sells that facility's output to a named buyer at an agreed price. The buyer is called the offtaker, or the host customer when the plant sits on the buyer's own property. The seller is the party that owns and operates the plant.

That last detail is what separates a PPA from an ordinary electricity contract. A PPA is tied to a specific generator, not to a supplier's portfolio, and it runs long enough to finance that generator. The United States Environmental Protection Agency describes a physical PPA as "a contract for the purchase of power and associated renewable energy certificates (RECs) from a specific renewable energy generator", usually written as a 10 to 20 year agreement [1]. A solar PPA on a customer's own roof can run anywhere from six to 25 years [1].

This guide covers what a PPA does, who signs it, which clauses carry the money, and which dates a contract owner has to diarise. It is general information about how these agreements are structured, not legal or tax advice, and the regulatory examples are United States federal and state rules.

### Names, abbreviations, and near-synonyms

Several terms mean the same instrument. Power purchase agreement, electricity purchase agreement, energy purchase agreement, and corporate PPA all describe a contract for the output of a named project. Solar power purchase agreement, abbreviated SPPA, is the same instrument narrowed to a solar installation [1]. Green PPA and clean energy PPA are marketing labels for a PPA where the renewable attributes are part of the deal.

Some near-neighbours are different instruments and should not be treated as synonyms:

- A retail energy supply contract buys grid electricity from a supplier, not from a named plant.
- A green tariff is a utility product, sold and priced by the utility rather than negotiated with a generator.
- A REC purchase agreement buys only the environmental attributes, with no electricity attached.
- A solar lease rents the equipment for a fixed periodic payment. A PPA charges for what the system actually produces, which the EPA calls "a performance-based arrangement in which the host customer pays only for what the system produces" [1]. The two are also treated differently in state law: DSIRE's third-party PPA map notes Florida, Louisiana, Mississippi, North Carolina and South Carolina separately as states where solar leases are explicitly allowed [4]. The distinction is legal, not cosmetic.
- An offtake agreement is the generic category. Every PPA is an offtake agreement. Not every offtake agreement is for electricity.

### PPA versus an energy supply contract

If the practical question is which of the two documents is on the desk, this is the fastest way to tell.

|   | Power purchase agreement | Retail energy supply contract |
| --- | --- | --- |
| What is bought | Output of one identified facility [1] | Grid electricity from a supplier's portfolio |
| Term | 10 to 20 years for a physical renewable PPA, six to 25 for a solar PPA [1] | Much shorter, re-contracted at expiry |
| Price | Fixed per kWh with a stated escalator, or a strike price settled against the market [1][2] | Commodity rate plus regulated delivery charges |
| Environmental attributes | Named and allocated in the contract, and not always to the buyer [1] | Only if a green product or RECs are bought separately |
| Construction risk | Present on a new build: milestones, a guaranteed commercial operation date, delay damages [3] | None, the supply already exists |
| Availability | Depends on state law for third-party projects [4] | Depends on whether the state has retail choice [2] |

One structural point sits behind that last row. In traditionally regulated states, consumers "cannot choose who generates their power and are required to purchase from the utility in that area", while restructured states let customers choose between competitive retail suppliers [2]. A PPA does not remove the utility from the picture. The utility still wires the site, still provides backup power, and still bills for delivery.

## Purpose and common uses

A PPA exists to make a generating project financeable. A lender or tax equity investor will fund construction against a contract that says a creditworthy counterparty will buy the output for fifteen years at a known price. Without that contract, the project carries merchant price risk and costs far more to finance. Everything else the agreement does follows from that.

For the buyer, the same contract does three things: it fixes a large part of the electricity cost for a long period, it can supply the renewable attributes needed for a corporate emissions claim, and it does so without capital expenditure. The EPA lists no upfront capital costs, predictable pricing, and no performance or operating risk among the benefits to a host customer [1].

Common uses are on-site solar or storage at a warehouse, campus, or plant; off-site wind or solar bought by a large corporate load; utilities procuring generation to meet a portfolio standard; and public bodies contracting for renewable supply on their own buildings.

### The main PPA structures

Physical PPA. Electricity is actually delivered. The project "may be located on-site at the user's location or off-site with the electricity being grid-delivered to the buyer" [1]. On-site is the classic rooftop or car park array. Off-site means the plant sells into the grid at a defined delivery point and the energy is scheduled to the buyer's account, often through a retail supplier acting as sleeve.

Financial or virtual PPA (VPPA). No power changes hands. The parties agree "a 'strike price' per kilowatt-hour that the seller will receive for its delivery of electricity into the wholesale market", the generator sells to the grid, and each month "the customer receives from (or sends to) the renewable electricity generator the net difference in price per kilowatt-hour between the strike price and wholesale market price" [2]. The RECs are typically conveyed to the customer [2]. Because nothing is physically delivered, a VPPA is not limited by where the buyer's sites are, but the EPA notes availability is "limited to customers with large electricity loads and investment-grade credit" [2].

Utility PPA. A utility or other load-serving entity is the offtaker. These are the longest and most standardised, historically around 20 years "to enable amortization of project debt", though corporate offtakers increasingly ask for 15, 12, or even 10 year terms [3].

## Parties involved

- Seller or generator. Owns the plant, usually through a single-purpose entity so that lenders can take security over it. Carries construction, operating, and output obligations.
- Buyer, offtaker, or host customer. Pays for the energy or settles the price difference. On an on-site deal the host also grants site access, which is a separate real estate document.
- Financiers. Lenders and tax equity investors are not signatories, but they shape the contract. The PPA "will therefore contain provisions authorizing the seller to assign the PPA as collateral; requiring the buyer to provide consents, estoppels, or other documents needed in connection with financing; and giving the lender various protections" [3].
- Utility or grid operator. Provides interconnection, delivery, and backup supply. Not a party to the PPA, but the delivery point and the interconnection agreement decide what the seller is actually obliged to hand over.
- Solar services provider or developer. On third-party owned rooftop deals, this party "functions as the project coordinator, arranging the financing, design, permitting, and construction" [1].
- EPC and O&M contractors. Build and maintain the plant under contracts that sit behind the PPA. The buyer rarely sees them, but their performance drives whether the output guarantees are met.

## Key terms and clauses

Term and commencement. The delivery term normally starts at commercial operation, meaning the point at which the facilities "have been tested and commissioned and are both authorized and able to operate" [3]. Before that, energy sold during testing is usually priced at a test energy rate that is lower than the contract rate [3].

Price and escalation. "The price may be flat, escalate over time, or contain other features. An escalating price is often set to escalate at the beginning of each new 'contract year'" [3]. On rooftop solar PPAs the EPA reports pricing at or slightly below the retail electric rate, frequently with "an annual price escalator in the range of 1 to 5 percent" [1]. A [price indexation clause](https://contracko.com/glossary/price-indexation-clause) compounds, so the year-20 rate is the number worth modelling, not the year-one headline.

Delivery point. The contractual place where title and risk pass. In a busbar sale that is typically "at the high side of the transformer at the project's substation", with the buyer providing transmission from there [3]. In a VPPA the equivalent concept is the settlement location, and it may not be the same node where the plant actually sells.

Environmental attributes. Renewable energy certificates are a separate product from the electricity. Physical PPAs treat them inconsistently: in many cases "the RECs are not conveyed to the customer and are instead sold by the project owner into the compliance market" [1]. A buyer that wants to claim renewable use has to own them. The EPA is explicit that a Green Power Partner "must retain the associated renewable energy certificates (RECs) generated by the system" to make that claim [1]. Contracts also carve out tax credits and incentives from the attributes being sold [3].

Output and availability guarantees. "An output guarantee requires the seller to pay the buyer if the project's output over a specified period fails to meet a specified level" [3]. Availability guarantees instead require the equipment to be available a set percentage of the time, usually in the 90 to 95 percent range, with hours lost to force majeure, curtailment, and scheduled maintenance excluded [3].

Curtailment. Where the buyer can order the project to stop generating for economic reasons, the PPA "usually requires the buyer to pay the purchase price for the curtailed generation", though "buyers often negotiate the right to a certain amount of uncompensated curtailment" [3]. The size of that free allowance is a real commercial term.

Credit support. Sellers post security "in one of three forms: cash deposited in escrow, a letter of credit from a highly rated ('A' or better) bank, or a guarantee from a creditworthy entity", and post-commercial-operation security is "usually set somewhere between six and 18 months of expected payments" [3]. Buyer-side credit support is negotiated the same way: a rated offtaker often posts nothing up front but becomes obliged to if its credit rating falls below a negotiated threshold [3][5].

Change in law. Sellers commonly agree to spend up to a capped amount to preserve the value and use of environmental attributes after a change in law, and owe nothing further once that cap is reached [3].

Default, termination, and assignment. Typical defaults are non-payment, bankruptcy, and failure to provide or replace credit support within the agreed time, with termination rights on an uncured default [3]. [Assignment](https://contracko.com/glossary/assignment) provisions matter more here than in most commercial contracts because the lender's collateral assignment sits on top of them.

Purchase and end-of-term options. On third-party owned systems the buyer often wants the right to buy the plant. Options priced at anything other than fair market value at the time of exercise are "generally disfavored by tax attorneys" because of United States federal tax rules on ownership [3]. Timing is shaped by the same framework. The EPA gives six years as the shortest common SPPA term because it is "the time by which available tax benefits are fully realized" [1], and under United States federal tax law, 26 U.S.C. 50(a), the investment credit recapture percentage steps down from 100 percent within one full year after the property is placed in service through 80, 60, 40 and 20 percent across the following four years, so a disposition inside that window claws back part of the credit [6].

## Important dates and lifecycle events

A PPA is a date-driven contract. Most of what goes wrong operationally is a missed window rather than a misread clause.

| Event | Why it matters |
| --- | --- |
| Effective date | Starts obligations that run before any power flows, including exclusivity and development milestones |
| Conditions precedent satisfied | Financing, permits, and interconnection have to land by a stated date or the deal can unwind. See condition precedent |
| Construction milestones | Missing one can let the buyer "terminate the PPA, collect delay damages, or require the seller to post additional credit support" [3] |
| Guaranteed commercial operation date | The date the plant must be operating by. Missing it exposes the seller to per diem delay damages, and construction-period security is usually sized to cover them through to the drop dead date on which the buyer can terminate [3] |
| Commercial operation date (COD) | Delivery term starts, pricing switches from the test energy rate to the contract rate [3] |
| Contract year anniversary | Where an escalating price steps up [3] |
| Guarantee measurement periods | The annual or multi-year windows in which output and availability are tested [3] |
| Credit support expiry | A letter of credit expires on its own terms. Replacement failure is a default event [3] |
| Purchase option windows | Open and close on fixed dates, and are usually the only chance to buy the asset [3] |
| Term expiry | Triggers whichever of extension, purchase, or removal was negotiated |

Two of those deserve a diary entry the day the contract is signed. The first is the guaranteed commercial operation date, because it is the buyer's only leverage on a late project. The second is the purchase option window, because it is short, it falls a decade or more after signing, and by then the person who negotiated it has usually moved on.

## Risks and common mistakes

Assuming the RECs come with the power. They frequently do not [1]. An organisation that reports renewable electricity use on the strength of a PPA whose attributes were sold into a compliance market has a reporting problem, not a contract problem, and it surfaces during assurance.

Reading the year-one price. A 1 to 5 percent annual escalator over a twenty year term produces a very different average than the opening rate suggests [1]. The comparison that matters is the whole-term cost against a forecast of what the alternative would have been.

Ignoring basis risk in a virtual PPA. Norton Rose Fulbright describes electricity basis risk as "the risk that the project owner takes by using the electricity prices at a 'hub' for settling a VPPA while selling electricity from the project into the spot market at 'node' prices" [5]. Where the contract pushes that exposure onto the buyer, the effective price is not the strike price.

Not pricing negative settlement hours. Wholesale power prices can dip into negative values during periods of low demand [5]. Where a virtual PPA has no floating price floor, the buyer settles against that negative number. Where it has one, typically set at zero for solar projects, the buyer "ends up paying the full fixed price with no offset" for those hours [5]. Either way the floor is a term to price, not a boilerplate line to skim.

Treating a third-party PPA as universally available. As of May 2026, DSIRE records at least 29 states plus Washington DC, Puerto Rico, and the Northern Mariana Islands as authorising or allowing third-party solar PPAs, with the remainder either apparently disallowed or restricted by legal barriers, or of unclear status [4]. Several of the permissive states carry conditions: Arizona limits them to certain sectors, Arkansas to tax-exempt entities, Colorado, Nevada and Texas apply system size limits, and Virginia limits them to certain utilities and customer types [4].

Losing the surrounding documents. A PPA on an on-site project does not work on its own. It sits with a site lease or licence, an interconnection agreement, and often an EPC and an O&M contract. Filing the PPA and nothing else means the access rights and the removal obligation are missing when they are needed.

Letting the guarantee measurement lapse. Output and availability guarantees only pay if the shortfall is measured and claimed within the contract's window [3]. No one sends a reminder.

## Related contract types

- Retail energy supply contract. Buys grid power from a supplier. Short, portfolio-based, no construction risk.
- Site lease or roof licence. Gives the developer the right to occupy the site for the life of the plant, usually longer than the PPA itself. Contracko's guide to [lease agreements](https://contracko.com/blog/what-is-a-lease-agreement) covers the mechanics of term, renewal, and access.
- Interconnection agreement. Between the generator and the transmission or distribution provider. Sets what the plant may export and who pays for network upgrades. Not a party to the PPA, but its milestones gate the PPA's.
- EPC contract. The engineering, procurement and construction contract that builds the plant. See [what a construction contract covers](https://contracko.com/blog/what-is-a-construction-contract) for how milestones and [liquidated damages](https://contracko.com/glossary/liquidated-damages) work in that setting.
- O&M agreement. Ongoing operation and maintenance, often written as a framework with service levels. The structure is the same as a [master service agreement](https://contracko.com/blog/what-is-a-master-service-agreement) paired with an [SLA](https://contracko.com/blog/what-is-an-sla).
- REC purchase agreement. Attributes only, no electricity. Sometimes bought alongside a PPA that did not convey them.
- Tolling agreement. The offtaker supplies the fuel and pays for conversion capacity. Common in gas, not in renewables.

## Contract-management checklist

Capture at signing

1. Record the seller entity, the buyer entity, and the guarantor behind each, not just the trading names.
2. Record the contracted capacity, the delivery or settlement point, and the metering basis.
3. Record the year-one price, the escalation rate, the escalation date, and the modelled year-final price in one field each.
4. Record who owns the environmental attributes, for which years, and whether they transfer automatically or on request.
5. Attach the site lease, interconnection agreement, and any consent or estoppel given to a lender to the same contract record.
6. Record the [notice period](https://contracko.com/glossary/notice-period) and the notice address for every notice the buyer might have to serve, including default and termination.

Diarise

1. The guaranteed commercial operation date, plus a check 90 days before it.
2. Each contract year anniversary where the price steps up.
3. The close of every output and availability measurement period, plus the claim deadline that follows it.
4. Every credit support expiry, with a reminder at least 30 days before, since failure to replace is a default.
5. The opening and closing dates of each purchase option window, with a reminder at least six months before opening.
6. Term expiry, with a reminder far enough ahead to run an extension, buyout, or removal decision.

Review on a cadence

1. Quarterly: invoiced volumes against metered output, and curtailment hours against the free allowance.
2. Annually: whether the guarantees were met, whether a claim was made, and whether the counterparty's credit has moved.
3. Annually: whether the price paid still tracks the alternative, so the extension decision is not made cold at expiry.
4. On any change of control or refinancing: whether consent was required and whether it was given in writing.

Most of that is record keeping that fails quietly, years after anyone was paying attention. [Contracko](https://contracko.com/features) keeps a PPA and its surrounding documents in one searchable repository with contract types, metadata, and file attachments, and custom fields hold the things a generic contract record has nowhere to put, such as the delivery point, the escalation date, the attribute owner, and the option window. AI analysis reads the agreement and surfaces the dates and obligations in it, [contract data extraction](https://contracko.com/features/contract-data-extraction) turns a portfolio of agreements into structured data, including [energy purchase agreements exported to a spreadsheet](https://contracko.com/contract-data-extraction/energy-purchase-agreement-to-excel), and [expiration reminders](https://contracko.com/features/expiration-reminder) can be repeated and assigned to the person who actually has to act. [Reporting](https://contracko.com/features/reporting) gives one live view across the portfolio. There is a free trial, no credit card required, and [pricing](https://contracko.com/pricing) is published.

## Sources

[1] U.S. Environmental Protection Agency, Green Power Partnership (solar and physical PPA definitions, term ranges, escalators, and REC retention for green power claims). epa.gov/green-power-markets/solar-power-purchase-agreements and epa.gov/green-power-markets/physical-ppa

[2] U.S. Environmental Protection Agency, Green Power Partnership (financial PPA strike price and settlement, and regulated versus restructured retail markets). epa.gov/green-power-markets/financial-ppa and epa.gov/green-power-markets/us-electricity-grid-markets

[3] Stoel Rives LLP, The Law of Solar and The Law of Wind (utility-scale PPA clause practice, from commercial operation and delivery point through guarantees, curtailment, credit support, and purchase options). stoel.com/insights/reports/the-law-of-solar/power-purchase-agreements-utility-scale-projects

[4] DSIRE, N.C. Clean Energy Technology Center, 3rd Party Solar PV Power Purchase Agreement (PPA) policy map, May 2026 (which states allow, restrict, or leave unclear third-party solar PPAs). dsireusa.org/resources/detailed-summary-maps

[5] Norton Rose Fulbright, Corporate VPPAs: risks and sensitivities (electricity basis risk and negative price floors). projectfinance.law/publications/2020/june/corporate-vppas-risks-and-sensitivities

[6] United States Code, 26 U.S.C. 50(a) (the five-year investment credit recapture schedule). law.cornell.edu/uscode/text/26/50

Images in this article were generated with the assistance of AI.

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