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A power purchase agreement is a contract between an electricity generator and a purchaser that fixes the terms for the sale and purchase of power over a defined period. For solar projects the PPA secures a route to market and predictable cash flows, setting out price mechanisms, volume commitments, duration, credit arrangements and termination conditions. In the UK there are several PPA forms in common use: corporate PPAs where a non-utility buyer contracts directly with a generator, supplier-backed or sleeved PPAs where a licensed supplier acts as an intermediary, and merchant arrangements with hedging instruments rather than a long-term fixed contract.
Key commercial elements include price structure (flat price, index-linked or floor/ceil collars), contract length (often five to fifteen years), shape profiles matching generation and offtaker demand, and imbalance or imbalance exposure allocation. Credit risk is central: smaller offtakers may provide security or require parent guarantees; counterparties often use credit support annexes, letter of credit facilities or staged payments. For distributed solar and rooftop schemes, aggregation and portfolio PPAs are common to smooth output and reduce offtaker counterparty concentration.
PPAs operate within the wider UK electricity framework overseen by the energy regulator and market bodies. Ofgem regulates licensed electricity suppliers and network arrangements, while market settlement, balancing and transmission charging affect the effective value of contracted power. Developers and buyers must also consider renewable support mechanisms, such as Contracts for Difference or Renewables Obligation arrangements where applicable, which influence whether projects rely on merchant revenues or contracted offtake.
Understanding the legal and commercial mechanics of PPAs is essential for owners, developers and institutional investors assessing solar infrastructure. Contract design must align with project scale, grid connection arrangements and the credit profile of counterparties, and require coordination with regulatory obligations and market settlement processes to deliver reliable revenue streams.