Power Purchase Argreements: navigating through increasingly complex and varied procurement options

Around the world, the electricity sector and markets have been evolving to accommodate changes in electricity demand and the introduction of renewables and other energy technologies. With this, energy procurement strategies have also been evolving, and becoming more complex, making it more difficult for offtakers to navigate and select the most appropriate option.

There are several procurement options available for offtakers, including but not limited to:

• Buying electricity directly from a retailer
• Installing on-site generation and self-consuming
• Power Purchase Agreement (PPAs), which can involve Financial or Physical PPAs
• Energy aggregation, where businesses combine their energy demand to negotiate rates with a supplier
• Participating in the wholesale market. 

Selecting the appropriate procurement strategy depends on several different factors.

What are power purchase agreements?

Corporate PPAs are long-term contracts between a business and an energy developer/project. Under such contracts, which are available as a Physical or Financial PPA, the parties agree on an electricity supply at a pre-agreed price and timeframe. So, what is the difference between physical and financial PPA?

A Financial PPA, otherwise known as a Virtual PPA, is a financial agreement that does not involve the physical delivery of electricity. In this arrangement, the offtaker agrees to purchase the project’s generation at a fixed price, guaranteeing some price certainty; however, that output gets sold to the wholesale market at the market price. The parties involved in the PPA then settle the price difference based on the wholesale market outcomes. A key point here is that a Financial PPA may result in the buyer receiving/purchasing renewable energy certificates (RECs) to offset its carbon, rather than the electricity directly from renewables themselves. These types of PPAs are the most common contract structure in the U.S. market.  

On the other hand, a Physical PPA, which can be executed through private wire, is more straightforward. The parties agree on electricity supply at a fixed price, and the electricity is physically delivered to the offtaker. In this arrangement, the buyer benefits from directly consuming renewable energy and directly offsetting carbon. Whilst the offtaker does not take the financial risk nor the operational risk associated with the asset, the offtaker would not own the plant and therefore, only has restricted access to the plant. Additionally, the offtaker wouldn’t receive full financial benefits from the asset, as the PPA is most likely based, in simple terms - on the Levelised Cost of Electricity supplied plus a mark-up.

Besides private wire, Physical PPAs can also be structured as a sleeved PPA. In this model, the contracted generation is supplied via the public grid. The licenced electricity supplier then “sleeves” that electricity to the offtaker and the supplier manages balancing, grid charges and metering. The offtaker here would pay the supplier under a structure that reflects the generator’s electricity output. This model is attractive if the generator and offtaker are far away and does not require physical infrastructure connecting the two sites. Initially, the European market strongly favoured sleeved PPAs; however, there has been a slow shift towards virtual PPAs, which could be due to the simpler contracting structure.  

Key considerations for power procurement

When considering the different procurement strategies and PPA options, there are key elements to consider.

What is the strategic goal?

• Is ownership of assets important to the business?
• Is scalability and flexibility an important factor?
• Are there any pressing timelines?

Understanding priorities regarding the ownership of assets, timelines, scalability, and flexibility for a procurement strategy is crucial in choosing the right option. Financial PPAs can offer faster contract implementation processes for companies that are under tight timelines, whilst also providing more flexibility and scalability due to the flexibility with the project’s location. However, a Physical PPA can offer simpler payment processes.

Developing the asset and self-consuming would allow ownership of the asset and would allow the offtaker to maximise its benefits, in exchange for carrying the operational and financial risks of the asset. Therefore, if ownership is a key aspect, then a PPA may not be as appropriate. From a sustainability perspective, on-site generation can deliver emissions reductions, provided the organisation follows recognised accounting guidance such as the Greenhouse Gas (GHG) Protocol.

Would the site be fit or suitable for generation?

• Does the site have available land?
• Would the site be eligible for required planning permissions?
• Does the organisation have a large enough load profile to support on-site assets?
• Is there a good renewable resource in the area?

Site suitability can often be the deciding factor between procurement options, given that any mismatch in site size or load profile can significantly affect return on investment (ROI). 

What specific sustainability objectives are being pursued?

• Is true carbon accounting a priority for the business?
• Is compliance and market-based accounting more important?

This is an important consideration for energy procurement selection. A Financial PPA supports a market-based accounting system, the electricity received reflects the grid mix but the associated RECs allow the organisation to report market-based scope 2 emissions in line with the Greenhouse Gas (GHG) Protocol. With a Physical PPA, and more particularly a private wire, the electricity is guaranteed to be renewable. Whilst both options can result in reduced carbon emissions for the business, a Physical PPA often strengthens an ESG narrative.

What are the implications?

As with anything, the benefits of each option come with respective implications for both the developer and buyer. One unavoidable implication is the intermittency of renewable sources. The sun doesn’t always shine, and the wind doesn’t always blow, but energy is always needed. With a Financial PPA, this risk can be addressed through an imbalance settlement whereby, depending on the PPA agreement, either the buyer or developer is required to pay the cost of additional energy required to meet the demand from the grid. The price of settlements is set against system buy and sell prices that can be volatile. On the other hand, a Physical PPA is naturally more exposed to the risk of renewables' intermittency, meaning the energy user must have a backup plan to avoid loss of power. Such back-ups can be through the installation of energy storage on site (most often battery storage), meaning additional capital expenditure (CAPEX). Alternatively, shortfalls can be met with grid power, but this would affect overall carbon accounting.  

Is it one or the other?

Not necessarily. Hybrid models are becoming increasingly popular, whereby users are combining different options to benefit from diversity and taking advantage of the benefits of each type. Besides introducing hybrid approaches to the commercial elements, hybrid PPAs can include a portfolio combination of technologies, which can help smooth out the output and hedge against the intermittency of renewables.

Whilst a hybrid model comes with many benefits, it could require a complex commercial and regulatory set-up. For a hybrid model to work successfully, every option and business variable should be thoroughly investigated to ensure it is the optimal choice for your business.  

Which option would work for me?

As choosing between a Physical or Financial PPA set up is not a binary choice, determining the optimum option for your business will depend on specific circumstances and wider business goals. Whilst the European market has been slowly shifting towards virtual PPAs from sleeved PPAs, it may not be the most appropriate choice for all offtakers. When considering a PPA, it is important to consider the political and regulatory climate as well. Therefore, not simply the length of the contract that is important, but also the flexibility to provide ways to ensure that the PPA evolves with the market. An example of the influence of policy on PPAs can be taken from the U.S., where the PPA price increased by around 4% in July 2025 after the “One Big Beautiful Bill” was passed, removing financial support for renewables. This political change has also caused a sense of urgency in the market as developers race to finalise PPAs.  

We understand that the complexities of knowing the difference and deciding between procurement options can be overwhelming for businesses and site managers. At Ricardo, we are well-versed in energy procurement options and understand under which circumstances each option or combination works best.

If you require support to identify the best option for your needs, contact our experts today. 

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