Power purchase agreement (PPA).

In plain English

A power purchase agreement, or PPA, is a contract in which a buyer agrees to purchase the electricity a particular generator produces, at a price written into the contract, for a long stretch of years. The seller is usually a developer building or running a solar or wind project, and the buyer can be a utility, a company, or a household. Because the buyer is committed for years, the seller can count on a steady stream of revenue, which is what lets the project get financed and built. Some PPAs deliver the actual electricity. A financial PPA, also called a virtual PPA, delivers none; the two sides settle the difference between the contract price and the market price, so the buyer is hedging its electricity cost rather than taking the power.

01Why it matters

When a solar company offers to put panels on a roof for no money down, the offer is often a PPA: the household pays for the power the panels produce, at the contract rate, for the length of the contract. Whether that costs less than the utility depends on the starting rate, how the rate changes each year, and how long the contract runs.

02The math, step by step

A homeowner signs a 20-year solar PPA. The installer owns the panels on the roof and sells their output to the homeowner at 12 cents per kilowatt-hour, rising 2 percent a year. By year 20 the rate is about 17.5 cents. Whether that beats the utility depends on what the utility charges over the same 20 years, which nobody knows on the day the contract is signed.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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