PPA Structures for Solar and Wind Projects
A Power Purchase Agreement (PPA) is a contract between a power generator and a buyer (offtaker) that defines how electricity will be sold. For renewable energy projects, the PPA structure directly impacts project bankability, debt capacity, and equity returns.
Why PPAs Matter for Financing
Lenders care intensely about PPAs because they determine revenue certainty:
- Revenue predictability: A fixed-price PPA provides stable, forecastable cash flows
- Counterparty risk: The creditworthiness of the offtaker affects debt terms
- Tenor: Longer PPAs support longer debt tenors and higher leverage
- Price structure: How prices adjust over time impacts inflation protection
Main PPA Structures
1. Fixed-Price PPA
The buyer pays a fixed price per MWh for all electricity generated. This is the most common structure for contracted renewable projects.
- Example: $45/MWh for 15 years
- Revenue formula: Production (MWh) × Fixed Price
- Best for: Maximizing debt capacity and bankability
2. Fixed-Price with Escalation
The price starts at a fixed level and increases annually, typically tied to inflation or a fixed percentage.
- Example: $42/MWh escalating at 2% annually
- Benefit: Protects against inflation, improves later-year cash flows
- Consideration: Starting price is usually lower than a flat PPA
3. Merchant (No PPA)
The project sells electricity into wholesale spot markets with no contracted price. Revenue depends entirely on market prices.
- Revenue: Highly variable based on market conditions
- Impact: Much lower debt capacity (higher DSCR requirements, shorter tenor)
- When used: Markets with strong forward curves, or projects with existing debt paid down
4. Contract for Differences (CFD)
The project sells power at market prices, but has a financial contract that pays the difference between market and a "strike price."
- If market price > strike: Project pays buyer the difference
- If market price < strike: Buyer pays project the difference
- Effect: Creates synthetic fixed-price revenue
- Common in: UK, Australia, some US corporate PPAs
5. Hybrid / Partial Merchant
Part of the output is sold under a fixed-price PPA, and the remainder is sold at market prices.
- Example: 70% contracted at $48/MWh, 30% merchant
- Benefit: Balances stability with upside exposure
- Debt sizing: Typically sized only on contracted portion
Comparison of Structures
| Structure | Revenue Certainty | Typical DSCR | Max Gearing |
|---|---|---|---|
| Fixed-Price (IG offtaker) | High | 1.20x – 1.35x | 75-85% |
| Fixed-Price (Sub-IG) | Medium-High | 1.35x – 1.50x | 65-75% |
| CFD | Medium-High | 1.30x – 1.45x | 65-75% |
| Hybrid (70/30) | Medium | 1.40x – 1.55x | 60-70% |
| Merchant | Low | 1.60x – 2.00x+ | 40-55% |
Key PPA Terms to Understand
Offtaker Credit Quality
The creditworthiness of the buyer is critical. Investment-grade corporates or utilities provide the best terms. Sub-investment-grade offtakers require higher DSCRs or credit support.
Tenor
PPA length affects debt sizing. Lenders typically require debt to mature 1-2 years before PPA expiration (the "tail"). A 20-year PPA might support 18-year debt; a 10-year PPA limits debt to 8-9 years.
Curtailment Risk
Who bears the risk if the grid operator curtails (reduces) output? Options include:
- Seller bears risk: Project revenue falls if curtailed
- Buyer bears risk: Buyer pays for "deemed generation" even if curtailed
- Shared: Split based on curtailment type or hours
Settlement Period
How often prices settle matters for cash flow modeling. Most PPAs settle hourly or in 15-minute intervals, but payment is typically monthly.
Corporate PPAs vs. Utility PPAs
Utility PPA
Contracted with a utility company, often through a competitive auction or regulatory process.
- Typically longer tenor (15-25 years)
- Often bundled with RECs
- Physical delivery to utility's system
Corporate PPA (CPPA)
Contracted directly with a corporate buyer like Google, Amazon, or Microsoft.
- Growing rapidly as corporates pursue sustainability goals
- Often structured as virtual/financial PPAs (CFDs)
- Credit quality varies — tech giants are often IG, others may not be
- Tenor typically 10-15 years
PPA Considerations for Financial Models
When modeling a project with a PPA, ensure your model captures:
- Base price and escalation: Starting $/MWh and annual increase
- Volume: Expected production profile (accounting for degradation)
- Tenor and expiration: When does the PPA end?
- Post-PPA assumptions: What happens after? Merchant? Re-contract?
- Curtailment assumptions: Expected % and who bears cost
- Settlement mechanics: If CFD, model physical and financial legs separately
Model Any PPA Structure
InfraFin.AI supports fixed-price, escalating, merchant, and hybrid PPA structures with automatic revenue calculations.
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