A Power Purchase Agreement (PPA)is a long-term contract between an electricity generator (the seller) and a buyer (usually a utility, corporation, or government entity) to purchase electricity at a pre-agreed price. These agreements are commonly used in the renewable energy sector but can also be applied to conventional energy sources.

Here’s how a PPA typically works:

1. Parties Involved
Seller: Often a renewable energy developer who owns and operates a power generation facility (like a solar or wind farm).
- Buyer: This could be a utility company, a corporate entity, or any other entity needing electricity.

2. Agreement Terms
- Duration: PPAs are usually long-term, lasting 10-25 years or more.
- Pricing The contract specifies the price at which electricity will be sold, which could be fixed, escalating, or pegged to market prices.
- **Volume**: The amount of electricity to be supplied is clearly defined, which could be the entire output of the facility or a fixed quantity.

3.Types of PPAs
- Physical PPA
: The buyer receives physical delivery of the electricity and is responsible for its transmission from the generator to their facility or the grid.
-Virtual (or Financial) PPA
Instead of physical electricity, the buyer and seller agree on a financial transaction. The seller sells the electricity to the market, and any difference between the market price and the PPA price is settled between the buyer and seller.

4. **Benefits**:
- **For the Seller**: Secures long-term revenue, making it easier to finance the construction of power projects.
- For the Buyer
: Provides price stability and often access to renewable energy, which can help meet sustainability goals.

5. **Risks**:
- **Market Risk**: If market prices for electricity drop below the PPA price, the buyer may end up paying more than the current market rate.