• Blog
• Energy Guides

Power Purchase Agreements: How they work, types, and pricing mechanisms

As the UK moves towards a clean energy grid, Power Purchase Agreements (PPAs) have transformed how renewable projects sell their electricity. They allow wind and solar developers to agree on a long-term price per megawatt hour before construction even begins.

This guide explains how Power Purchase Agreements work. Here’s what we cover:

• What is a Power Purchase Agreement?
• How Power Purchase Agreements work
• Types of Power Purchase Agreements
• Power Purchase Agreement pricing
• Key elements of Power Purchase Agreements

What is a Power Purchase Agreement?

A Power Purchase Agreement (PPA) is a long-term contract in which a buyer agrees to purchase electricity at an agreed price from the owner of a generation asset.

The buyer is typically an energy supplier or large corporation that commits to purchasing electricity directly from the generator at a predetermined price, usually for a period of between 5 and 20 years.

In the UK, PPAs are commonly used to provide revenue certainty for renewable energy projects that require significant upfront capital investment, while enabling the buyer to secure long-term energy costs.

How Power Purchase Agreements work

The following step-by-step process explains how a Power Purchase Agreement works in practice.

💡 The steps below describe a physical PPA, where actual electricity is delivered from the seller to the buyer. This differs from a synthetic PPA, which is a contract designed to hedge against electricity price risk rather than deliver power.

1. Electricity generation

The seller in a PPA generates electricity from assets that they have constructed, most commonly a new wind or solar farm.

The electricity generated by the asset is fed into the national grid. Large-scale projects usually connect to the high-voltage transmission network, while smaller sites link to local distribution grids that operate at lower voltages.

💡 In an on-site PPA, the power is instead delivered directly to the buyer using a private wire.

2. Metering and data collection

A settlement-grade half-hourly electricity meter measures how many megawatt hours (MWh) of electricity the seller feeds into the grid every 30 minutes.

This data is used to calculate the amount owed under the PPA in a monthly billing process.

The automatic meter readings are also sent to Elexon, the organisation responsible for managing balancing and settlement across the entire grid.

3. Sleeving process

A sleeving party acts as an intermediary, managing the transfer of electricity from the generator through the grid to the buyer.

Sleeving parties are Ofgem licensed energy suppliers authorised to deliver electricity to end users on the grid.

They incur the distribution costs listed below to use the grid, which are typically charged to the buyer as sleeving fees.

• TNUoS charges – for using the national grid.
• DUoS charges – for using regional electricity grids.
• BSUoS charges – for balancing activities on the grid.

3. Payment and settlement

The buyer in a PPA typically pays for the actual electricity delivered, since renewable generation varies day-to-day with weather conditions.

A PPA defines a price per megawatt hour (MWh) of electricity supplied during the contract. This rate can either remain fixed for the full contract term or be indexed to factors such as inflation or wholesale market prices.

Meter readings are then used to calculate the seller’s invoice, which the buyer pays according to the payment terms set out in the PPA.

4. REGO Certification

For renewable sources, the generator registers Renewable Energy Guarantees of Origin through the Ofgem portal for each megawatt hour (MWh) of electricity generated.

The REGO certificates are then transferred to the buyer, who retires them to demonstrate that the electricity they have consumed was generated from renewable sources.

Types of Power Purchase Agreements

In the UK, PPAs fall into three main types, defined by how the electricity reaches the buyer.

On-Site (Private Wire) PPA

An on-site Power Purchase Agreement is a contract in which a renewable energy generator installs, owns, and operates a power generation system on the same site where the electricity is consumed. It avoids using the grid to deliver electricity, saving distribution costs for both parties.

An on-site PPA is an effective way for large business energy customers to benefit from renewable electricity while avoiding upfront development costs.

• Location: At corporate premises with on-site electricity demand.
• Generation: Typically commercial solar panels or a biomass power plant.
• Distribution: Directly connected to the buyer’s premises via a private wire.

Excess electricity from on-site PPAs can be exported to the grid by the buyer through their business electricity connection, using schemes such as the Smart Export Guarantee.

Off-Site (Sleeved) PPA

An off-site Power Purchase Agreement (often called a sleeved PPA) is a contract where the buyer purchases renewable electricity from a generator that’s delivered through the national grid.

In this arrangement, a licensed energy supplier acts as the sleeving party, managing the flow of electricity from the generator to the buyer via the grid.

• Location: Anywhere connected to the grid.
• Generation: Large-scale wind farms or utility-scale solar farms.
• Distribution: Managed by a licensed energy supplier who oversees electricity distribution through the grid.

Domestic and business energy suppliers are often the buyers in off-site PPAs. They purchase the electricity that is then supplied to their customers through green business energy tariffs.

Synthetic (Virtual or Financial) PPA

A Synthetic Power Purchase Agreement is a financial contract between a generator and a energy supplier used to hedge against energy price fluctuations.

Under a Synthetic PPA, the generator exports electricity to the national grid and receives the current wholesale electricity market price. The buyer also purchases its electricity from the wholesale market.

The Synthetic PPA requires a financial settlement that effectively fixes the price of power sold for the generator, as follows:

• The generator pays the buyer the difference if the wholesale market price exceeds the agreed PPA price.
• The buyer pays the generator the difference if the wholesale market price is lower than the agreed PPA price.

Types of energy sources for Power Purchase Agreements

A Power Purchase Agreement is simply a long-term contract for the sale and purchase of electricity between a generator and a buyer. Nothing in these agreements limits or specifies the technology used to generate that electricity.

However, the market for PPAs in the UK is dominated by renewable energy projects, where significant upfront investment is required to build a generation asset capable of producing cost-free electricity for decades to come.

Here are the most common energy sources used for PPAs in the UK:

Wind farms

Wind turbines are the largest source of renewable electricity on the grid, generated from a mix of onshore and offshore UK wind farms.

Here are the typical features of PPAs for wind farms:

• Contract terms: 10–25 years.
• Output: Intermittent, but generally stronger during winter.
• Type: Typically sleeved, using a connection to the national grid.
• Common PPA buyers: Corporate buyers, local authorities, and energy suppliers.
• Example projects: Dogger Bank wind farms.

Solar photovoltaics

New utility-scale solar farms are being developed close to major demand centres in England.

Here are the typical features of PPAs used for these solar farms:

• Contract terms: 10–20 years.
• Output: Daytime, strongest during the summer months.
• Type: Typically sleeved, using a connection to the local electricity distribution network.
• Common PPA buyers: Retailers, universities, and energy suppliers.
• Example projects: Tillbridge Solar project in Lincolnshire.

Find out more about setting up these PPAs in our guide to selling solar energy through a PPA.

Biomass

Biomass and anaerobic digestion plants provide renewable electricity generation on demand, which is valuable for balancing the intermittent output from wind and solar sources.

Here are the typical features of PPAs for biomass power generators:

• Contract terms: 10–15 years.
• Output: Continuous, dispatchable generation.
• Type: Either sleeved or private-wire.
• Common PPA buyers: Industrial facilities and energy suppliers.
• Example projects: Drax Power Plant (North Yorkshire).

Nuclear

Nuclear power stations are a source of baseload low carbon energy, providing a reliable supply of electricity for energy suppliers.

Here are the typical features of PPAs for nuclear power stations:

• Contract terms: 25+ years.
• Output: Baseload.
• Type: Sleeved, with a connection to the high-voltage transmission network.
• Common PPA buyers: Energy suppliers.
• Example projects: Hinkley Point C, Sizewell C, Rolls-Royce SMRs.

Power Purchase Agreement pricing

The PPA price is the agreed rate at which the buyer pays for each megawatt hour (MWh) of electricity generated by the renewable asset over the term of the contract.

The sections below explain the most common types of pricing clauses used in Power Purchase Agreements.

Fixed priced PPA

Fixed price PPAs are most commonly used for new-build renewable energy projects.

The buyer agrees to purchase electricity from the generator at a predetermined, unchanging rate per megawatt hour (MWh) of electricity produced for the entire duration of the agreement.

As an example, the price in the PPA could be defined as follows:

Under a fixed price PPA, the generator is guaranteed a steady income, enabling them to raise finance for their project. The buyer, in turn, receives long-term price security, insulating them from volatile energy markets.

Indexed pricing in PPAs

An indexed PPA, also known as a floating or market-linked PPA, is a contract in which the price paid for electricity varies over time according to a reference index.

Instead of a fixed price, the PPA price is linked to an external benchmark such as:

• The published wholesale market price (e.g. Day-Ahead or N2EX)
• An inflation index (e.g. Consumer Prices Index or Retail Prices Index)

As an example, the price in the PPA could be defined as follows:

Index-based pricing in a PPA creates a long-term agreement that tracks the fair market value of electricity.

Hybrid pricing

Hybrid pricing in a Power Purchase Agreement combines elements of both fixed and indexed pricing to balance stability and flexibility for both parties.

The following is an example of a hybrid pricing PPA clause:

The pricing in this clause starts at £55/MWh and then increases or decreases by 20% of any change in the N2EX wholesale market price, giving the generator limited exposure to market fluctuations while keeping most of the price stable.

Floors, caps and collars in PPA pricing

In a PPA, floors, caps and collars are mechanisms that set limits on how high or low the unit price can move when it is linked to a variable index.

They are essentially risk-control tools, preventing either party from being overly exposed to extreme price movements. Here’s how each mechanism works:

• Floor: A minimum price per MWh.
• Cap: A maximum price per MWh.
• Collar: A combination of a floor and a cap, creating a price band.

Factors that influence PPA pricing

The price per megawatt hour (MWh) agreed in a PPA is negotiated between the buyer and the seller when the contract is signed. However, several key factors influence the rate they settle on:

• Current market conditions – The prevailing business electricity prices otherwise available in the market.
• Contract length – Longer PPAs typically have lower prices, as the generator benefits from greater revenue certainty for project development.
• Generation type – PPAs from renewable sources, such as wind and solar, are typically cheaper because the electricity they produce is intermittent, compared with the on-demand generation provided by biomass plants.
• Supply guarantees – A “pay-as-produced” structure offers lower prices compared with a PPA that guarantees a minimum delivery volume.
• Buyer creditworthiness – The best business energy suppliers can typically negotiate lower rates, as they present a reduced default risk compared with smaller suppliers.

Key elements of Power Purchase Agreements

This section explains the key elements of a typical Power Purchase Agreement used for renewable energy projects in the UK.

Parties

A PPA defines the following contractual parties:

• Buyer (Off-taker) – The business, organisation or licensed energy supplier that agrees to purchase the electricity generated.
• Seller (Generator) – The entity responsible for developing, owning and operating the renewable generation asset.
• Energy supplier (Sleeving Party) – The party responsible for managing the distribution of the electricity generated.

Term

PPAs are typically long-term agreements lasting between 5 and 20 years. During this period, the electricity generated is delivered at the agreed price.

In most cases, the term is defined as a fixed number of years, starting from the date on which the generator first begins delivering electricity to the grid. The agreement will also define:

• Early termination fees – The method for calculating the fee payable to the other party if the buyer or seller terminates the agreement before the end of the agreed term.
• Force majeure – Provisions that allow for early termination or renegotiation in exceptional circumstances, such as natural disasters or grid failures.

The agreement also establishes a framework for renewal or renegotiation at the end of the fixed term.

PPA pricing

A Power Purchase Agreement sets out the agreed price at which the buyer will purchase electricity from the seller during the contract term.

The pricing clause specifies how the unit price per megawatt hour (MWh) of electricity delivered under the agreement will be calculated. It also defines how frequently invoices are issued and the payment terms required of the buyer.

Baseload vs pay-as-produced in PPAs

Power Purchase Agreements define the volume of electricity to be sold and purchased under the contract.

• Pay-as-generated – The corporate buyer purchases electricity only when it is generated by the renewable energy project, with no guarantee of a fixed volume.
• Baseload PPA – The buyer receives a fixed volume of electricity throughout the term. The seller agrees to purchase additional electricity from the wholesale market to cover any shortfall.
• Minimum and maximum – The buyer commits to purchasing electricity within a defined range, allowing some flexibility in the generation output from renewable assets.

The delivery clause in the agreement also specifies whether the buyer will sell the REGO certificates generated by the renewable asset.

Power Purchase Agreement risks and who bears them

Power Purchase Agreements allocate and transfer risks between the generator and the buyer. The table below summarises the five key risks involved in a PPA and indicates which party is responsible for each.

Power Purchase Agreements FAQs

Our energy experts answer some of the most commonly asked questions about Power Purchase Agreements.

What is the difference between PPA and corporate PPA?

The key difference between a PPA and a corporate PPA lies in the identity of the buyer within the contract.

In a standard Power Purchase Agreement, the buyer is typically an energy supplier (e.g. British Gas, Octopus, EDF Business Energy, etc.) purchasing electricity on behalf of its customers.

In contrast, the buyer in a corporate PPA is a business that purchases electricity directly from a generator. Find out more in our guide to energy procurement with a corporate PPA.

What’s the difference between a portfolio and named asset PPAs?

In a portfolio PPA, renewable electricity is generated from multiple assets, allowing generators to offer more flexible terms and shorter contract durations.

In contrast, a named asset PPA relates to electricity generated from a single, specific asset, meaning the volume produced depends on the performance of that individual site.

The largest wind farm operators in the UK, such as Ørsted, SSE, Scottish Power and E.ON, offer portfolio PPAs to their customers, as they operate extensive portfolios of wind farms that generate substantial volumes of renewable electricity.

How do Power Purchase Agreements work with the CfD scheme?

The Contracts for Difference (CfD) scheme is a government mechanism that guarantees large-scale renewable energy developers a fixed price for the electricity they generate. Participants receive a top-up to the prevailing wholesale market price of electricity.

Developers with a CfD agreement also commonly use a Power Purchase Agreement to sell their electricity, receiving payments according to the process described above.

In this scenario, the government does not use the PPA price to calculate the CfD top-up. Instead, it applies a wholesale market benchmark, which encourages CfD holders to secure the best available price for their PPAs.

Back to blog Back to water guides

• Share:
• 
• 
• 
•