A power purchase agreement, or PPA, works like this: a third-party developer installs, owns, and operates a renewable energy system (usually solar) on or for your property, and you agree to buy the electricity it produces at a set price per kilowatt-hour for 10 to 25 years. The developer pays for design, permitting, financing, installation, maintenance, and repairs. You provide the space — a roof, parking canopy, or open land — and commit to buying the power. Because the developer owns the equipment, you take on none of the hardware risk, and because the starting rate is typically set below your utility’s retail price, you generally see savings from day one.1Better Buildings & Better Plants Initiative. Power Purchase Agreement
What You Actually Pay
The core number in a PPA is the rate: a fixed price per kilowatt-hour for the electricity the system produces. Developers set that opening rate below your local utility’s retail price so the savings show up immediately.
Almost every PPA then applies an annual escalator, a percentage increase added to the rate each year. Escalators typically run between 1% and 5%.2US EPA. Solar Power Purchase Agreements The escalator is meant to track gradual system efficiency losses, rising maintenance costs, and expected increases in retail electricity prices. The risk is straightforward: if your utility’s rates stay flat or fall while your PPA rate keeps climbing, the deal can invert and the PPA rate can rise above what you would have paid the utility. Before signing, look at long-term rate projections for your utility and compare them against the escalator you are being offered.
The contract term is long — 10 to 25 years — because the developer needs that time to earn back its upfront investment in the equipment. Throughout the term, the developer keeps ownership of the system and handles all repairs and maintenance at its own expense.
Why the Rate Can Start Below Retail
The developer can offer a below-utility rate largely because it captures federal tax incentives you generally could not use directly. For systems placed in service after December 31, 2024, the applicable credit is the Clean Electricity Investment Tax Credit under Internal Revenue Code Section 48E.3Federal Register. Section 45Y Clean Electricity Production Credit and Section 48E Clean Electricity Investment Credit The base credit is 6% of qualified expenditures. If the developer meets prevailing wage and apprenticeship requirements during construction and the early operating years, the credit rises to 30%,4IRS. Prevailing Wage and Apprenticeship Requirements and most commercial PPA projects are structured to hit that threshold.
On top of the credit, the developer depreciates the system over five years under MACRS, creating additional early-year tax savings. Bonus depreciation, which allowed a larger first-year write-off, is phasing down and reaches 20% for property placed in service in 2026. All of these benefits stay with the developer, and the developer passes a portion of the value back to you through the lower per-kWh rate. You don’t claim any of it yourself.
Physical PPAs and Virtual PPAs
“Buying the power” can mean two very different things.
Physical PPAs
In a physical PPA, the system actually delivers electricity to your building. In a behind-the-meter setup, panels sit on your roof or land and wire directly into your electrical panel, so you consume the power as it is generated and pull less from the grid. If the system sits off-site, the developer injects power into the grid and the utility delivers an equivalent amount to your meter.
When the system produces more than you use, the surplus flows back to the grid and your utility issues a credit under local net metering rules. The PPA should say whether those credits belong to you or to the developer. Net metering policies, including credit rates and system-size caps tied to your historical usage, vary widely by state.
Virtual PPAs
A virtual PPA (also called a synthetic PPA or contract for differences) is a financial arrangement, not a physical power delivery. You and the developer agree on a fixed strike price. The developer sells the electricity into the wholesale market at the going spot price. If the market price is above the strike, the developer pays you the difference; if it is below, you pay the developer the shortfall.5US EPA. Financial PPA Your utility relationship doesn’t change. You keep buying power from your local provider, and the virtual PPA acts as a hedge against energy price swings.
Virtual PPAs are common for organizations in traditionally regulated electricity markets that restrict physical third-party sales, and for companies with facilities spread across multiple utility territories. One accounting wrinkle worth flagging for corporate buyers: virtual PPAs are typically treated as financial derivatives, which means quarterly fair-value updates and mark-to-market reporting on the financial statements.
Who Owns the “Green” — RECs
Every megawatt-hour of renewable electricity the system produces generates a Renewable Energy Certificate (REC), a tradeable instrument representing the legal rights to the environmental benefits of that generation.6US EPA. Renewable Energy Certificate Monetization The PPA specifies whether you or the developer keeps them. If the developer keeps them, you are still using clean power on-site, but you cannot claim the environmental attributes or count them toward any sustainability or emissions targets. If those claims matter to you, confirm in writing that the RECs come with the contract.
What You Bring to the Deal
Before a developer will quote a rate, it needs a picture of your consumption, your site, and your creditworthiness.
Expect to hand over 12 to 24 months of utility bills. The developer uses that history to size the system to your actual load and to avoid overproducing beyond what you can use or what net metering allows. Incomplete usage data leads to inaccurate pricing or a badly sized system.
The developer will inspect the site. For roof-mounted systems, you’ll need documentation on the roof’s age, material, and structural capacity. For ground-mounted systems, expect to provide the legal property description and any easements that affect the right to build. The developer evaluates shading, orientation, and available area to project output.
Because the developer is signing up for a decade or more of payments from you, it will run a credit review. Commercial hosts may be asked for audited financial statements; residential customers may need to clear a credit score threshold.
The utility runs an interconnection study to confirm the grid can accept the new source. Application fees run roughly $75 to $800, and the study itself can cost from a few hundred to several thousand dollars depending on complexity.7U.S. Environmental Protection Agency. Interconnection Guidelines
Performance Guarantee and Insurance
Most PPAs include a minimum production guarantee. If the system generates less than the guaranteed amount, the developer owes you a credit or payment for the shortfall. Read the details carefully: the guarantee level, the measurement window (annual versus lifetime), and the remedy all live in the contract. A guarantee that only measures cumulative lifetime output can hide several early years of underperformance.
Insurance splits along ownership lines. Commercial developers typically carry property insurance on the system at replacement cost, commercial general liability coverage (industry-standard templates call for at least $1,000,000 per occurrence and $2,000,000 aggregate), employer’s liability, and workers’ compensation. The host generally maintains its own commercial general liability coverage at comparable levels.
If the developer damages your roof or property during installation, standard terms require repair or reimbursement. For roof penetrations, developers typically warrant against penetration-caused damage for at least a year after installation or the length of any existing installer roof warranty, whichever is longer. The developer also carries indemnification obligations covering damage or injury from its negligence during the term.
Getting Out Early: Buyouts
Most PPAs let you buy the system at specific points during the term, often around years six or seven and again near year ten. The buyout price is usually the greater of fair market value or a contractual termination value, which may include the present value of the electricity the system would have produced over the rest of the term.8National Renewable Energy Laboratory. Power Purchase Agreement Checklist for State and Local Governments
The reason buyout windows rarely open before year six is federal tax recapture. If the system changes hands within five years of being placed in service, the developer has to give back part of the investment tax credit it claimed, with the recapture amount dropping by 20% for each full year the developer holds the system. After year five, there is no credit left to repay. Any earlier buyout price will reflect the developer’s recapture exposure.
Selling the Property Before the PPA Ends
A PPA does not travel automatically with the sale of your property. Most contracts require the developer’s written consent to assign the agreement, and the buyer typically has to pass a credit review much like the one you went through. Some developers have transfer teams that will work with your agent and the buyer’s lender.
Third-party-owned systems often show up as a UCC-1 fixture filing in the real estate records, publicly noting the developer’s ownership interest in the equipment. Depending on whether the system stays or leaves, that filing needs to be updated or released. Disclose the PPA early, and write the assignment into the purchase agreement as a contingency so both sides know what they are taking on.
If the buyer will not assume the PPA, your alternatives are exercising a buyout, negotiating a termination, or having the developer remove the system — any of which can cut into your sale proceeds.
What Happens at the End
When the term runs out, you generally have three choices: renew the agreement on renegotiated terms, buy the system at fair market value, or ask the developer to remove it. If you buy, you take over ownership, maintenance, and whatever production remains, and you give up the performance guarantee and monitoring the developer had been providing. For an aging system, fair market value may be low enough that purchase is attractive if the panels still produce useful output.
If you choose removal, the developer pays for decommissioning: dismantling panels, racking, wiring, inverters, and foundations, and restoring the site to substantially its original condition, including repairing the roof and membrane where mounting hardware came out. Salvage value on panels, copper, and steel can offset the developer’s removal costs, but that math does not affect your right to have the site restored at the developer’s expense.8National Renewable Energy Laboratory. Power Purchase Agreement Checklist for State and Local Governments
One Boundary: State Availability
Third-party PPAs are not legal in every state. A small number of states prohibit third-party electricity sales outright, and others limit PPAs to certain customer types (such as government agencies or nonprofits), cap system sizes, or require specific regulatory approvals. Before you go far down the process, confirm with your state’s public utility commission or energy office that a PPA is available for your customer type and project size.