Jul 30, 2021
Power Purchase Agreements (PPAs) are contracts that allow companies to procure electricity directly from power producers, and their adoption is steadily growing. Under the PPA model, solar power systems are installed on the consumer’s premises at no upfront cost, with the electricity generated used on-site. In an on-site PPA, the system is located at or near the point of consumption, while off-site PPAs deliver electricity from remote facilities. Physical PPAs involve the purchase of both electricity and its environmental attributes, whereas virtual PPAs separate the financial transaction from the physical delivery.
PPA stands for Power Purchase Agreement—a contract between a power generator and a buyer for the purchase of electricity.
Traditionally, electric utilities purchased electricity from power producers through wholesale agreements. In recent years, however, an increasing number of companies have entered into corporate PPAs to procure electricity directly as end users.
It is important to note that the original definition of a PPA differs from what in Japan is now called the ’PPA model’.
This article explains the PPA model, including off-site and on-site PPAs, as well as physical and virtual PPAs.
The PPA model is a business model in which solar power generation equipment is installed at no cost to the consumer. The PPA operator installs the system on the consumer’s premises—such as rooftops or unused land—and the consumer uses the electricity generated, paying the PPA operator for the power consumed. This arrangement is known as the third-party-ownership (TPO) model for solar power.
Originally developed in the United States, where no feed-in tariff (FIT) system existed, this model significantly accelerated the spread of residential solar power. Since the electricity is generated and consumed on-site, there is no need for the utility’s grid, so no transmission fees apply. These economic advantages have contributed to the growing adoption of the model in Japan as well.
An on-site PPA involves installing solar power systems on the consumer’s rooftop or nearby land, with electricity used directly on-site.
In contrast, an off-site PPA supplies electricity from a remotely located power facility via the public transmission and distribution network.
A Physical PPA is a contract in which electricity and its associated environmental attributes are purchased together—similar to on-site and off-site PPAs.
In contrast, a Virtual PPA treats electricity and environmental attributes as separate, with each transacted independently. Companies such as Apple and McDonald’s have adopted this model in the U.S. and other countries.
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