How it works
A PPA sets the terms on which a generator sells power and a buyer takes it. The buyer may be a utility, a trader or a large consumer. The main terms are price, volume and risk allocation. Price can be fixed, escalate each year, or float with a floor and a cap. Volume can be pay-as-produced, a fixed baseload block or a shaped profile. The contract also says who bears imbalance and curtailment, who keeps the renewable certificates, what credit support the buyer posts, and what happens on early termination.
In a physical PPA the power is delivered over the grid to the buyer, directly or through a supplier, and the buyer pays the agreed price for each MWh. In a virtual PPA the generator sells into the wholesale market and the parties settle the difference against a strike price. Settlement per period = (K − M_t) × Q_t. K is the strike price in $/MWh, M_t the market price at the settlement point in period t, and Q_t the contracted energy in MWh. A positive result is paid by the buyer, a negative one by the generator.
Why it matters
For a developer, a PPA turns uncertain market revenue into a predictable cash flow, which is what lenders lend against. The price, the term and the buyer's credit together decide how much debt the project can carry. For an industrial buyer, it fixes part of its power cost for years and supplies renewable certificates. The risk terms can matter as much as the headline price. Who pays when output is curtailed, or when market prices turn negative, can shift a large part of the contract's value.
A worked example
A buyer signs a virtual PPA with a strike price of $50/MWh. In month one the generator delivers 10,000 MWh into the market at an average $38/MWh. Settlement = (50 − 38) × 10,000 = $120,000, paid by the buyer. The generator receives 38 × 10,000 + 120,000 = $500,000, exactly $50/MWh. In month two it delivers 8,000 MWh at $62/MWh. Settlement = (50 − 62) × 8,000 = −$96,000, so the generator pays the buyer $96,000.
Illustrative figures.
Across markets
Most corporate PPAs in India are physical, delivered under open access or a captive structure, and utilities buy much of their renewable power through long-term PPAs that follow central or state auctions. In the US, corporate buyers in organised markets mostly sign virtual PPAs settled at a hub or node. In Europe both forms are used, with physical PPAs often sleeved through a supplier, and corporate PPAs sit alongside government contracts for difference as a route to financing.