Power Purchase Agreement (PPA)

A Power Purchase Agreement (PPA) is a long-term electricity supply contract between a power producer and an off-taker, such as an industrial company, utility, or energy trader. The agreement defines the volume of electricity to be delivered over a specified period—typically ten to twenty years—as well as the applicable pricing structure.

PPAs are most commonly used for electricity generated from renewable sources, such as wind and solar farms. For off-takers, they provide long-term price certainty and enable the procurement of electricity from clearly defined energy sources. At the same time, they offer project developers stable and predictable revenues, facilitating the financing of new energy assets.

At its core, a PPA primarily governs the commercial aspects of electricity procurement. The physical electricity usually continues to flow through the public grid. However, the agreement determines, on a contractual and accounting basis, how a specific volume of electricity is allocated to a given consumer.

Relevance for industrial heat decarbonization

PPAs are playing an increasingly important role in the electrification of industrial processes. One example is the use of high-temperature heat pumps for process heat generation. These systems can deliver temperatures of 200 °C and above, enabling them to replace fossil-fuel-based heat generation in many applications. However, they also require substantial amounts of electricity.

As a result, the price of electricity becomes a key factor in overall economic viability. PPAs can provide planning certainty in this context: long-term price agreements make operating costs more predictable and support investment decisions in electric heat technologies.

At the same time, PPAs enable access to renewable electricity. This allows companies to decarbonize their process heat and make their overall energy supply more sustainable as part of a broader decarbonization strategy.

Types of PPAs

Depending on their structure, PPAs can take different forms:

• Physical PPAs: Electricity is supplied on a contractual basis and delivered via the grid.
• Virtual PPAs: The agreement primarily serves as a financial hedge against electricity market price fluctuations.
• On-site PPAs: The generation asset is located directly at the consumer’s site.

In practice, PPAs are often combined with other energy management tools, such as demand-side management or thermal energy storage. This enables greater flexibility in aligning the electricity demand of electric heat technologies with the broader energy system.