5 Principles for
PPA Risk Management

Power Purchase Agreements (PPAs) are the most common way to fund renewable energy projects, and are used for rooftop and utility-scale projects alike. Through a PPA, the Buyer (the “Offtaker”), typically makes no upfront investment in the project, and instead makes service payments ($/MWh) for the power produced by the project over the term of the agreement.

Off-Site PPAs are the industry-leading tool for Corporate Buyers to purchase large volumes of high-quality RECs (learn about RECs). Through an Off-Site PPA, the Buyer enters into a bilateral agreement with a large-scale solar or wind farm, often located far from its facilities, and commits to a certain PPA Price ($/MWh) for the power generated by the project. This price commitment provides a reliable revenue stream, enabling the Developer to raise non-recourse debt and finance the project affordably. In exchange for its commitment, the Buyer takes ownership of the energy attributes (the “RECs”) that are created to reduce its Scope 2 emissions.

In many cases, these Off-Site PPAs are financially-settled (a “Virtual PPA”), meaning that the power is not physically delivered to the Offtaker. Instead, the power is sold into the electricity spot market where the project is located, typically in exchange for a floating energy price that fluctuates hourly based on supply and demand. The VPPA is financially-settled as a contract-for-differences (CfD), where the Corporate Offtaker makes or receives settlement payments each period (often monthly) – depending on the relationship between the PPA Price and the Floating Market Price during times of production (Exhibit 1).

For example, if a Buyer agrees to a $40/MWh PPA Price for capacity on a project that produces 10,000 MWh in a given month, and sells that power into the spot market at a volume-weighted price of $50/MWh – the Buyer would receive a positive settlement of $100,000 for that month. Inversely, if the hourly market price fell to $30/MWh throughout that month, the Buyer would make a $100,000 payment to the project.