PPA

Three constructions

In an on-site PPA the installation sits at the consumer's premises and the power never enters the public grid. Network charges, levies and surcharges do not fall due on that volume, and that is where the advantage over grid supply comes from.

In an off-site PPA generation and consumption are in different places, the power travels through the grid and carries the full charges, levies and taxes. The advantage then rests entirely on the price difference against procurement and on price certainty across the tenor.

In a virtual or financial PPA no power moves between the parties at all. What is agreed is a settlement against a reference price while both sides stay physically in the market. That is a hedging instrument, not a supply relationship.

The volume at which it starts to pay

A PPA costs money before the first kilowatt hour moves: diligence, drafting, balancing group arrangements, ongoing settlement. Those costs are largely independent of volume, which is why there are thresholds below which the effort eats the benefit. As rough orientation, an on-site PPA starts to carry itself at annual consumption around 150 MWh, an off-site PPA at several gigawatt hours, and purely financial structures well above that.

What gets negotiated

The pricing formula: fixed across the tenor, collared with a floor and a cap, or a contract for difference against a market price. Volume flexibility: minimum and maximum offtake, and who carries the risk when the installation produces more or the business needs less. And the security package: generation guarantees on one side, credit standing or a bank guarantee on the other.

Standard documents exist for the contractual base, among them the EFET template and the standard contract published by the German Energy Agency. They do not remove the negotiation, but they shorten it considerably.

The offtaker's credit

To a lender, a PPA is worth exactly as much as the offtaker's ability to pay across the tenor. Where an offtaker carries no rating, a bank guarantee or other security takes the rating's place, and with neither the contract is valued more conservatively in the model than it looks on paper.

Seen from project review, a PPA is not a revenue model. It is a document with a tenor. What matters is less the price than the relationship between contract tenor and financing tenor. A contract running 5 years against a financing running 15 leaves ten years open, and those ten years get modelled on a market price assumption nobody can evidence.

Second, the load profile. A PPA over an annual volume says nothing about whether consumption happens when the installation generates. In a daytime operation the two curves largely overlap; in a shift operation with night load they do not. The coincidence across all 8,760 hours is the number that counts, not the annual total.

Third, the pricing formula belongs to the capital structure. A fixed price supports a larger senior piece than a formula tracking market prices, because the lender discounts the unhedged part.