A power purchase agreement (PPA) is a contract between an electricity producer and a buyer. Who pays whom depends chiefly on whether it is a physical PPA, which provides for electricity delivery, or a financial (virtual or synthetic) PPA, which settles a price difference while the buyer buys electricity separately. In a financial PPA, the buyer pays the generator when the agreed market price is below the contract’s strike price; when the market price is above it, the generator pays the buyer. Neither structure has one standard set of terms, and a PPA does not automatically mean the buyer’s entire electricity bill is fixed.
What a long-term PPA does
A PPA sets agreed terms for a producer to sell electricity or for the parties to make a related financial settlement. The contract may cover a new renewable project or an existing generator, and can specify price, volume, delivery point, term, certificates, and what happens if either side fails to perform. The details vary by contract and jurisdiction; “PPA” alone does not tell you the payment flow.
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Long-term arrangements can give a buyer more predictable energy costs or a hedge against market price changes. But predictability is not the same as a guaranteed saving, and a contract does not remove every risk. A buyer may still face grid and retail charges, a mismatch between generation and consumption, credit exposure, or costs if a project is late. The UK Department for Energy Security and Net Zero describes corporate PPAs as one route to price certainty while also identifying these kinds of practical considerations in its corporate PPA overview.
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Most of the examples and market arrangements discussed in public guidance concern businesses and energy projects. Some customer PPAs can be made for onsite electricity, but readers should not assume that a long-term PPA is a routine household utility plan or that the terms described for one country apply everywhere.
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Physical PPA: payment for electricity
In a physical PPA, the contract provides for electricity to be delivered to the buyer, either behind the buyer’s meter at an onsite installation or at an agreed point on the grid for an offsite project. The buyer pays under the contract’s pricing terms for the contracted electricity. A generator, project owner, or supplier may be involved in arranging delivery, depending on the structure and local market rules.
Physical does not necessarily mean that identifiable electrons travel directly from a particular generator to a particular customer. Electricity is supplied through an interconnected grid; the contract and market arrangements define the delivery point and how the transaction is settled and accounted for. For an offsite arrangement, a licensed supplier or other intermediary may be needed to manage grid access, charges, and delivery. The exact roles need to be established in the contract.
Onsite and offsite arrangements
- Onsite: A project is installed at or near the customer’s site and electricity can be delivered behind its meter. The customer may pay the project owner for electricity generated under the agreement. The U.S. Environmental Protection Agency (EPA) describes customer PPAs in which a third-party developer owns, operates, and maintains the system, while the customer buys the output under contract. See the EPA’s customer PPA explainer.
- Offsite: A project generates elsewhere and the PPA specifies a grid delivery point or another delivery arrangement. The customer may continue to receive its ordinary electricity supply through a utility or retailer and pay that provider for supply and applicable charges, while the PPA covers contracted generation under its own terms.
A physical PPA may cover only a portion of a buyer’s consumption. In the UK Government’s description of a pay-as-produced corporate PPA, generation varies with the project’s output, so a business commonly retains a separate supply arrangement to cover consumption not met by that output. A PPA should therefore be read alongside, not as a presumed replacement for, the buyer’s other electricity arrangements.
Who pays in the physical structure?
The buyer pays for the contracted electricity according to the agreed price formula and invoices or settlement process. If the project produces less than expected, who bears the shortfall or pays a penalty depends on the contract. EPA guidance says physical PPA contracts can address delivery schedules, payment terms, under-delivery penalties, and termination provisions; the guidance does not make one allocation universal. The seller’s responsibilities for ownership, operation, and maintenance likewise depend on the structure and contract wording.
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Financial or virtual PPA: payment for the price difference
A financial PPA does not deliver the project’s electricity to the buyer. The generator sells its output into the wholesale market, and the buyer buys electricity separately for its own needs. The PPA parties then settle the difference between an agreed strike price and a specified market price. The buyer’s retail bill, grid charges, and other supply costs remain separate.
The EPA characterizes this as a financial hedge against electricity market price volatility. In practical terms, the buyer is not paying the strike price as its total electricity rate. It is making or receiving a separate payment intended to offset some market exposure, and that hedge is more effective when the project’s settlement price tracks the price the buyer pays for its own electricity.
Who pays when the market price moves?
| Market price compared with strike price | Settlement between PPA parties | What it means for the buyer |
|---|---|---|
| Market price is above the strike price | Generator pays the buyer the difference, subject to the contract’s reference price, volume, and settlement rules. | The payment can offset some higher electricity-market costs, but does not automatically equal the buyer’s extra retail costs. |
| Market price is below the strike price | Buyer pays the generator the difference, subject to the contract’s rules. | The buyer may owe a settlement even while paying a lower market-based price for separately purchased electricity. |
| Market price equals the strike price | No price difference is due for that matched price and volume under a simple difference-settlement model. | Other electricity bills and contract charges still apply. |
For illustration only, the EPA gives a strike price of 10 cents per kilowatt-hour. If the reference wholesale price is above that level, the generator owes the difference; if it is below, the buyer owes the difference. This is an EPA example, not a current market quote. Real contracts define the reference market, settlement interval, volume, and calculation method; the EPA says settlements are typically monthly in its description of financial PPAs. Read the contract rather than assuming that this simplified example captures its invoicing mechanics. More detail is in the EPA’s financial PPA explanation.
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The generator’s market revenue and the buyer’s electricity cost can move differently. They may use different market locations, prices, or time intervals, and a buyer’s load profile may not match when the project generates. If the two price series diverge, a settlement can be smaller or move in the opposite direction from the buyer’s actual cost change. This mismatch risk is sometimes called basis risk; the important point is to check exactly which project price is settled against which buyer exposure.
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How long is “long term,” and what does the term commit each side to?
There is no universal PPA term. The EPA describes physical PPAs as usually running 10 to 20 years, and its customer PPA guidance reports onsite customer PPAs as typically between 15 and 20 years. Those are general descriptions from U.S. EPA pages, not guarantees or benchmarks applicable to every market or contract. The UK Government says corporate PPA terms in Great Britain are typically 10 to 15 years and that some run longer. These figures describe different contexts and should not be collapsed into one standard.
A long commitment matters because it can extend beyond the period in which the parties can confidently predict electricity prices, project performance, business needs, or a buyer’s credit position. A new project may also take time to build and commission. The parties should define when supply or financial settlement starts, what happens if commissioning is late, and which party bears any interim costs.
The UK Government estimates corporate PPAs represent 2.5% to 5% of Great Britain’s power trading market, while noting that formal statistics are limited. That estimate describes Great Britain and is not a measure of the share in other markets.
Who bears the main risks?
A contract price allocates some exposure but cannot eliminate the operational, financial, and legal risks around a long-term transaction. The following questions identify where risk can sit; the signed agreement, market rules, and applicable law control the result.
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- Price risk: A fixed price or strike price can make a portion of costs more predictable. If market prices later move favorably for the buyer, however, a long-term commitment may cost more than buying at the then-current market price. Under a financial PPA, settlement direction changes as the reference price crosses the strike price.
- Volume and profile risk: Pay-as-produced contracts expose the buyer to variable output. Generation may not occur when the buyer needs electricity, or may exceed the amount it can use or hedge. In a baseload model, the generator commits to a preset volume or profile and takes on more volume risk; the UK Government notes that this can mean a higher price. Load-following and percentage-of-output models allocate the mismatch differently.
- Operations and performance risk: A project can underperform, require maintenance, or fail to deliver expected output. Customer PPA structures described by EPA commonly leave the third-party owner or developer responsible for owning, operating, maintaining, and performing the system, but remedies and responsibility for losses must be checked in the agreement.
- Counterparty and credit risk: Each party depends on the other to make payments or deliver as agreed over many years. A buyer should assess credit support, guarantees, collateral, default rights, and the financial capacity of the counterparty. The UK Government observes that long-term contracts linked to new assets tend to favor larger buyers with robust creditworthiness.
- Development and timing risk: If a new project starts late, planned supply or settlement may be delayed. The buyer may need other arrangements during the gap. Contract terms should set milestones, notice requirements, remedies, and the consequences of a missed commercial-operation date.
- Environmental attribute risk: A PPA alone does not establish that the buyer owns the renewable energy certificates (RECs) or can make a particular renewable-use claim. In Great Britain, the relevant certificates are commonly called REGOs. The contract should say whether attributes transfer to the buyer or are retired on its behalf, and what evidence of retirement is provided.
What to check before signing or relying on a PPA
Compare the actual contractual terms, not just the headline price. A lower price may be paired with a less favorable volume profile, a longer commitment, or different credit requirements. These questions are useful for a business evaluating a contract and for an individual reviewing an unusual electricity arrangement.
| Contract feature | Questions to resolve |
|---|---|
| Delivery or settlement | Is electricity delivered to the buyer, or is this a cash-settled hedge? If physical, where is delivery measured and who arranges supply? If financial, which market price is used? |
| Onsite, offsite, sleeved, or unsleeved | Where is the generator located relative to the buyer? Does a licensed supplier manage access to the grid, billing, or related charges? |
| Volume model | Is the contracted amount actual generation, a stated percentage, a preset baseload profile, or tied to the buyer’s load? Who pays for shortfalls, excesses, or mismatches? |
| Price and settlement formula | Is the rate fixed, indexed to inflation, or subject to an escalator? What are the reference market, settlement interval, volume, and invoice timing? |
| Term and project start | When does the commitment begin and end? What milestones apply to a new build, and what happens if commissioning or supply is delayed? |
| Certificates and claims | Who receives or retires RECs or REGOs? What documentary evidence is provided, and which environmental claims does the contract support? |
| Credit, default, and exit | What collateral, parent guarantees, penalties, termination rights, and early-exit liabilities apply? Are payment duties secured if the counterparty fails? |
| Market and location | Does the market permit this structure? Does the project’s grid area align with the buyer’s supply market and the contract’s pricing reference? |
For physical delivery, geography and market rules can determine whether the arrangement is possible. The EPA says physical PPAs by non-utility consumers in the United States are generally limited to competitive markets and require the buyer and generator to be in the same power market for physical delivery. That is a U.S. description and should not be generalized to other countries. Great Britain and EU arrangements have their own rules and market structures.
The European Commission’s Directorate-General for Energy announced on 22 April 2026 a recommendation intended to address barriers to PPA uptake, including access for smaller buyers, guarantees and other risk-reduction measures, accounting rules, and guarantees of origin. An EU-level recommendation is not proof that every member state has implemented identical rules or that a particular guarantee is available to an individual buyer. See the Commission’s 22 April 2026 announcement.
Can a smaller buyer use one?
Long-term contracts can be difficult for smaller buyers to negotiate because they require market expertise, a credible counterparty, and often a way to manage credit and volume exposure. A broker or procurement adviser may help a business assess terms and negotiate; a route-to-market trader may offer more standardized terms to buyers without wholesale-market expertise. That assistance does not make a contract low-risk or ensure that its price is suitable. A buyer should verify the adviser’s relevant market experience, fees, conflicts, and the proposed counterparty’s role before relying on the advice.
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The UK Government has described policy efforts related to financing PPA risk, including a €500 million pilot announced in February 2025 involving European Investment Bank counter-guarantees and a 2025 lending envelope intended to support banks and insurers underwriting PPA risks. The page describes the lending envelope as very new and reports no outcome data at the time covered. These announcements are not a promise that support is currently open to a particular buyer; eligibility and availability need to be confirmed with the relevant institutions and in the buyer’s jurisdiction.
Bottom line: identify the payment flow before comparing prices
For a physical PPA, the buyer pays for contracted electricity delivered under the agreement and may still pay a utility or retailer for remaining supply and charges. For a financial or virtual PPA, the buyer continues buying electricity separately and settles the difference with the generator: the buyer pays when the market reference is below the strike price, and the generator pays when it is above. The useful comparison is therefore not just “PPA price versus utility rate,” but the complete contract—delivery, volume, market reference, term, certificates, credit support, and exit obligations.
PPAs involve jurisdiction-specific contract, regulatory, tax, and accounting questions. A buyer should have the proposed agreement reviewed by professionals familiar with the relevant electricity market before treating a quoted strike price or renewable claim as a complete description of its cost or rights.
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