A Power Purchase Agreement (PPA) is a legal contract between an electricity generator and a power purchaser. The power purchaser purchases energy, and sometimes also capacity and/or ancillary services, from the electricity generator. Such agreements play a key role in the financing of independently owned (i.e. not owned by a utility) electricity generating assets.
The seller under the PPA is typically an independent power producer, or “IPP.” Energy sales by regulated utilities are typically highly regulated, so that no PPA is required or appropriate.
The PPA is often regarded as the central document in the development of independent electricity generating assets (power plants), and is a key to obtaining project financing for the project.
Under the PPA model, the PPA provider would secure funding for the project, maintain and monitor the energy production, and sell the electricity to the host at a contractual price for the term of the contract. The term of a PPA generally lasts between 5 and 25 years. In some renewable energy contracts, the host has the option to purchase the generating equipment from the PPA provider at the end of the term, or may renew the contract with different terms, or can request that the equipment be removed.
One of the key benefits of the PPA is that by clearly defining the output of the generating assets (such as a solar electric system) and the credit of its associated revenue streams, a PPA can be used by the PPA provider to raise non-recourse financing from a bank or other financing counter-party.
Commercial PPA providers can enable businesses, schools, governments, and utilities to benefit from predictable, renewable energy.
In the United States, the solar power purchase agreement (SPPA) depends heavily on the existence of the solar investment tax credit, which was extended for eight years under the Emergency Economic Stabilization Act of 2008.