What Is a Power Purchase Agreement?

A power purchase agreement, or PPA, is a long-term contract between an electricity generator and a buyer. The buyer is typically a utility, corporation, or government entity. The seller is usually a developer that builds, owns, and operates a renewable energy project such as a solar farm or wind installation. The contract locks in a price per megawatt-hour of electricity over a fixed period, usually between 10 and 25 years.

PPAs exist because building renewable energy projects requires enormous upfront capital. A solar farm might cost hundreds of millions of dollars to construct, but the ongoing fuel cost is essentially zero. The PPA solves the financing problem: by guaranteeing a buyer for the electricity at a known price, the developer can secure loans and investor capital to build the project. The buyer, in turn, gets price certainty and often a rate below what they would pay on the open market.

Physical PPAs vs. Virtual PPAs

There are two fundamental structures for power purchase agreements: physical and virtual. In a physical PPA, the electricity generated by the project is physically delivered to the buyer through the grid. The buyer and the generator must be located in the same power market for this to work. The buyer receives both the electricity and the associated renewable energy certificates, known as RECs.

A virtual PPA, also called a financial PPA or synthetic PPA, works differently. The buyer and seller agree on a strike price per megawatt-hour. The electricity is sold to the wholesale market at the prevailing spot price. If the market price is higher than the strike price, the seller pays the buyer the difference. If the market price is lower, the buyer pays the seller. No physical electricity changes hands between the two parties. The buyer still receives the RECs, allowing them to claim the environmental attributes of the renewable energy.

Virtual PPAs have become enormously popular with large corporations because they remove the geographic constraint. A technology company headquartered in California can sign a virtual PPA with a wind farm in Texas. The company gets the renewable energy credits for its sustainability reporting, while the financial settlement happens as a separate transaction from the company’s actual electricity procurement.

How PPA Pricing Works

PPA pricing typically follows one of three models. The most common is a fixed-price PPA, where the buyer pays the same rate per megawatt-hour for the entire contract term. This provides maximum budget certainty. A developer might offer a fixed price of $35 per megawatt-hour for 15 years, and that rate never changes regardless of what happens in the broader electricity market.

The second model is a fixed-price PPA with an escalator. The starting price might be lower, but it increases by a predetermined percentage each year, typically between 1% and 3%. This structure helps the developer account for inflation in operating costs while still providing the buyer with predictable pricing. The buyer benefits from a lower starting price and can model the increases into long-term budgets.

The third model is an indexed PPA, where the price is tied to a market benchmark such as a power price index or a hub price. This structure exposes both parties to market risk but can result in lower overall costs if wholesale electricity prices remain stable or decline. Indexed PPAs are less common in renewable energy because they undermine one of the key advantages of a PPA, which is price certainty.

Why Corporations Sign PPAs

Corporate PPA activity has surged over the past five years, driven by sustainability commitments and economic incentives. Technology companies lead the charge. Amazon, Google, Microsoft, and Meta have each signed tens of gigawatts of renewable energy PPAs to power data centers and offset their carbon footprints. In 2025 alone, hyperscale technology companies signed contracts for over 40 gigawatts of solar power.

The economic case is straightforward. Electricity is often one of the largest operating expenses for energy-intensive businesses. A PPA locks in a known cost for 10 to 25 years, providing a hedge against volatile wholesale electricity prices. For companies operating data centers that consume hundreds of megawatts, this price certainty translates directly to more predictable financial planning.

Beyond economics, PPAs help corporations meet environmental, social, and governance goals. The renewable energy certificates that come with a PPA allow the buyer to claim the green attributes of the electricity on their sustainability reports. Many corporations have committed to 100% renewable energy targets, and PPAs are the primary mechanism for achieving those goals at scale.

Risks and Limitations of PPAs

PPAs are not without risk. The most significant is basis risk in virtual PPAs. The settlement price is based on a specific market node, but the buyer’s actual electricity costs may be at a different node with different prices. If the two prices diverge significantly, the financial hedge breaks down.

Contract length is another consideration. A 15 or 20-year commitment is a long time in any industry. If electricity prices drop substantially below the PPA price, the buyer is locked into an above-market rate. Conversely, if the developer’s costs increase or the project underperforms, the fixed price may not cover expenses. Both parties must conduct thorough due diligence on the project’s financial viability and the long-term electricity price outlook.

Creditworthiness matters as well. Developers prefer buyers with investment-grade credit ratings because the PPA is the financial foundation of the project. Smaller companies or those with weaker credit may struggle to secure PPAs on favorable terms or may need to provide additional financial guarantees.

The Future of Power Purchase Agreements

The PPA market is evolving rapidly. Several emerging trends will shape the next decade. Aggregated PPAs allow multiple smaller buyers to pool their demand and jointly contract with a single project, making PPAs accessible to mid-sized companies that cannot individually anchor a large renewable installation. Pay-as-produced structures, where the buyer takes whatever volume the project generates rather than a fixed quantity, are gaining traction as they more accurately reflect how renewable energy works.

24/7 carbon-free energy matching is another frontier. Rather than simply matching annual electricity consumption with an equivalent amount of renewable energy certificates, some companies are pursuing hour-by-hour matching. This requires pairing solar and wind PPAs with battery storage contracts, driving more complex but more impactful procurement strategies. As the grid decarbonizes and electricity demand grows, particularly from data centers and electrification, PPAs will remain a foundational tool for financing new energy infrastructure.