CONTRACTS
Solar PPA: the power purchase agreement explained
Practical guide · ~9 min read
A PPA (Power Purchase Agreement) is a long-term electricity purchase contract. For a solar project, it replaces or complements a regulated tariff and secures revenue — which changes everything for bankability.
1. The main types of PPA
- Corporate PPA (offtaker = a company) vs utility PPA (offtaker = a supplier/aggregator).
- Physical (actual delivery of electricity) vs financial / virtual (contract for difference on the market price).
- Pay-as-produced (the offtaker takes generation as it comes) vs baseload (guaranteed profile, riskier for the producer).
2. Price and term
The price can be fixed or indexed (inflation, market). The term (often several years to a decade or more) determines the share of the business plan covered by the contract, the rest being valued at market (merchant).
3. Why a PPA strengthens financing
Contracted, predictable revenue lets the bank size debt with a better DSCR and higher gearing. The credit quality of the offtaker is decisive: it is what "carries" the security of the revenue.
4. The risks to model
- Offtaker credit: default or renegotiation.
- Volume / profile: gap between (intermittent) solar generation and the contracted profile.
- Residual price: the uncovered share and the post-PPA period, exposed to the market.
5. Impact on the business plan
In the model, the PPA translates into a contractual price curve over its term, then a merchant switch. Testing several post-PPA price scenarios is essential to measure the robustness of returns.
6. The clauses that matter for bankability
Beyond price, a few clauses decide whether a PPA is "bankable":
| Clause | Why it matters |
|---|---|
| Term & price | Determines the share of secured revenue and its visibility |
| Volume commitment | Pay-as-produced (low producer risk) vs baseload |
| Offtaker credit quality | Core of revenue security; sometimes backed by guarantees |
| Change in law / force majeure | Allocation of regulatory and exceptional risks |
| Termination & indemnities | Protects the lender if the offtaker defaults |
7. PPA or regulated tariff?
A regulated tariff (feed-in premium awarded through a tender) offers great visibility but little flexibility and conditioned access. A PPA brings flexibility (term, price, counterparty) and an ESG narrative for the offtaker, at the cost of a credit risk to bear. Many projects combine both over time, or a PPA on part of the volume and merchant on the rest — which the financial business plan must be able to model layer by layer.
FAQ
What is a PPA?
A PPA (Power Purchase Agreement) is a long-term electricity purchase contract between a producer and an offtaker (a company or a supplier), at a fixed or indexed price. It secures the project revenue and makes financing easier.
Why does a PPA help finance a project?
Because it makes revenue predictable over a long term: the bank can size the debt with confidence (better DSCR, higher gearing). Bankability still depends on the term, the price and, above all, the credit strength of the offtaker.
What are the main risks of a PPA?
The offtaker's credit risk (default), volume/profile risk (pay-as-produced vs baseload), and price risk on the uncovered share (merchant period after the PPA). These risks are modelled in the business plan.
What is the difference between a physical and a financial (virtual) PPA?
In a physical PPA, electricity is actually delivered to the offtaker. In a financial PPA (or virtual / private CfD), there is no delivery: the parties exchange the difference between a fixed price and the market price, with the producer selling its electricity on the market separately. The hedging effect is similar, but the accounting and regulatory treatment differ.
Is a PPA enough to finance 100% of a project with debt?
No. Even with a strong PPA, the bank requires equity and a safety DSCR; it looks at the PPA term relative to the debt tenor, the offtaker's quality and the residual merchant exposure. A PPA improves the financeable gearing, it does not bring it to 100%.
PUT IT INTO PRACTICE
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P50/P90 generation, offtake contracts (feed-in, PPA, merchant), debt, taxes, NAV valuation — from a single asset to the consolidated portfolio, with bankable figures.
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