Power Purchase Agreements Explained: What They Are and When They Make Sense
A Power Purchase Agreement is a long-term contract between a business and an electricity generator — typically a renewable energy project — where the business agrees to buy a defined volume of electricity at a fixed or formula-linked price over a multi-year period. PPAs have been used for decades in large-scale energy procurement, but falling renewable generation costs and growing corporate sustainability pressures have made them increasingly relevant to mid-sized UK businesses that would previously never have considered them.
What a PPA actually is
At its core, a PPA replaces part or all of your conventional energy supply with electricity contracted directly from a generator. Instead of buying electricity from a licensed supplier who sources it from the wholesale market, you’re buying from the entity that owns the generation asset — a wind farm, solar park, or other renewable facility.
The generator gets long-term revenue certainty, which allows them to raise project finance. The buyer gets price stability and, in most structures, the right to claim that the electricity they’re consuming comes from a specific renewable source — which has value for sustainability reporting, net-zero commitments, and customer-facing green credentials.
On-site versus off-site PPAs
On-site PPAs involve a generator — typically a solar PV or small wind installation — built on or immediately adjacent to your premises. The developer funds, installs, and owns the generation asset; you buy the electricity it produces at a contracted price, typically for 10–25 years. You don’t own the equipment, which means no capital expenditure — but you also don’t capture the residual value at contract end. For businesses with suitable roof or ground space, on-site solar PPAs are the most straightforward entry point into corporate PPA structures.
Off-site PPAs involve a generator located elsewhere in the grid — a wind farm in Scotland, a solar park in East Anglia — with the electricity delivered to you via the grid and the financial settlement handled through a sleeving arrangement with a licensed supplier. You pay the generator the contracted PPA price and pay the licensed supplier for the transmission, distribution, and balancing charges. Off-site PPAs are more complex to structure but can be larger in volume than on-site generation could support, and they come with REGOs (Renewable Energy Guarantees of Origin) certifying the renewable source.
What PPAs cost and what they save
On-site solar PPA pricing currently runs at approximately 6–10p/kWh for new projects — significantly below grid supply rates, which for SMEs have been in the 20–28p/kWh range in recent years. The saving is largest when grid prices are high; if wholesale prices fall significantly over the contract term, the PPA can look expensive relative to the prevailing market. This is the central risk: you’re locking in a price that looks attractive today but may not look attractive in year 12 of a 15-year agreement.
Off-site PPA pricing is more complex because it depends on the specific project, location, and contract structure. The financial benefit is less straightforward than on-site solar because you’re still paying grid charges on top of the generator price — but the price certainty over the PPA term can still represent meaningful budget stability compared with annual contract renewal risk.
The sustainability credentials
A PPA with a specific, identified renewable generator — as opposed to a standard green tariff backed by REGOs from any renewable source — provides more substantive sustainability credentials. Under GHG Protocol Scope 2 reporting guidance, there is a meaningful distinction between a market-based claim (a specific PPA with additionality and direct attribution to a generator) and a location-based claim (your grid electricity, which in the UK is a mix of sources). Businesses subject to investor, customer, or regulatory ESG scrutiny are increasingly expected to demonstrate the former, not just the latter.
Who PPAs are suitable for
On-site solar PPAs are viable for: businesses with large roof or ground space (manufacturing, logistics, retail parks, schools, leisure centres); a credit profile that gives the developer confidence in the 15–25 year revenue stream; and a relatively stable, predictable electricity consumption profile — generators need to know their output will be consumed, not curtailed.
Off-site PPAs typically require minimum consumption volumes of 1–5GWh per year to be cost-effective to structure — putting them in reach of larger SMEs and mid-market businesses, but outside the viable range for smaller consumers. This is changing as aggregated PPA structures emerge, allowing smaller businesses to participate in a collective agreement.
PPAs alongside conventional procurement
A PPA doesn’t replace your energy contract entirely — it covers a portion of your consumption at a fixed price, with the remainder procured conventionally. The optimal split depends on your load profile, the PPA generator’s output pattern, and your risk tolerance. A business that takes 60% of its consumption via a solar PPA and procures the remaining 40% on short-term contracts has a very different risk and cost profile from one that procures 100% on annual fixed contracts.
Telnergy advises on both conventional procurement and renewable structures. If you’re considering whether a PPA makes sense for your site or portfolio, we can assess your consumption profile and provide an independent view before you engage with any developer or structured finance provider.
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FAQ
What happens at the end of a PPA term?
For on-site PPAs, the contract typically includes options for renewal, purchase of the asset at a formula price, or removal of the equipment by the developer. Most businesses either renew on revised terms or purchase the asset, which by year 20 of a solar installation will have a remaining useful life of 5–10 years at low marginal cost. The residual value of a well-maintained solar PV system at contract end is meaningful.
Can I exit a PPA early?
PPAs typically have termination clauses that allow early exit in defined circumstances — change of ownership, site closure, regulatory change — subject to a termination payment reflecting the financial loss to the developer. Early exit for commercial convenience (the PPA price has become uncompetitive) is generally not available without significant penalty. The long-term nature of the commitment is the central risk to assess before signing.
Is a PPA the same as a green tariff?
No. A green tariff is a standard energy supply contract where the supplier backs your consumption with REGOs purchased on the open market — typically from any renewable generator, with no direct relationship between you and the specific generation source. A PPA involves a direct contractual relationship with a specific generator, often with additionality (the generator wouldn’t exist without your revenue commitment). For sustainability reporting purposes, the distinction matters increasingly: direct PPAs provide stronger claims than REGO-backed green tariffs.
Telnergy Limited is an independent commercial energy consultancy established in 2002, based in Christchurch, Dorset. Ofgem registered TPI · ADR Ref E3561 · CRN 04576876.