A Power Purchase Agreement (PPA) is a bilateral contract between a buyer and a seller under which the parties agree on a price for energy over a defined period, generally in the medium or long term. It gives the generator predictable revenue and gives the consumer a stable, often renewable, supply of electricity.
Types of PPA: physical and financial
Depending on whether the energy is physically delivered, two main types of PPA can be distinguished:
- Physical PPAs: the energy is physically delivered from the generating facility to the consumer. They can be on-site (a direct connection between generator and consumer) or off-site (delivered through the grid). They suit consumers with stable demand who want a predictable price.
- Financial or synthetic PPAs: no physical delivery takes place. The parties settle the difference between the market price and the agreed price. For accounting purposes they are treated as derivative financial instruments, and they suit large consumers seeking budget stability or sustainability objectives.
Regulatory framework
There is no PPA-specific regulation in Spain. Physical PPAs are addressed indirectly by the Electricity Sector Act (Ley 24/2013, de 26 de diciembre, del Sector Eléctrico), by Royal Decree 2019/1997 organising and regulating the electricity production market, and by Directive (EU) 2018/2001 on the promotion of the use of energy from renewable sources. Financial PPAs fall under the EMIR Regulation and EMIR Refit, together with the applicable accounting and tax rules.
Advantages of a PPA
For the buyer
Price stability, protection against market volatility and a renewable supply backed by Guarantees of Origin, which helps meet ESG objectives.
For the seller
Stable, long-term revenue that improves the project’s bankability, makes financing easier to secure and increases the project’s appeal to investors.
Conclusion
A PPA is a strategic tool for both parties. The choice between a physical and a financial PPA depends on connection needs, the flexibility sought and the financial goals of each party.
