What is a Power Purchase Agreement (PPA)?

A Power Purchase Agreement (PPA) is a long-term contract where a third party installer-investor finances, owns, and maintains a solar PV system on your roof, and you agree to buy the electricity it generates at a discounted unit rate. PPAs are zero-capex from your side: you don’t pay for the panels, you pay only for what they produce, typically 10-25% below your prevailing grid rate. Term is usually 15-20 years. The PPA provider keeps SEG export income. At end of term you typically have three options: extend the agreement, buy the system at residual value (often 10-20% of original cost), or have the system removed at the provider’s expense.

How a PPA contract is structured

A typical SME PPA includes:

• Term: 15, 18, or 20 years
• Unit rate (year 1): 10-25% below your current grid rate, e.g. you pay 28p/kWh for solar against 38p/kWh grid
• Annual escalator: usually RPI capped at 3% per year, sometimes a fixed 2-2.5%
• Minimum performance guarantee: PPA provider commits to generation levels — if undelivered, they compensate
• System availability: you pay only for what’s generated and delivered to your meter, never for unproduced energy
• Buy-out clause: typically year 7 onwards, at residual value calculated by formula
• End-of-term options: extend / buy out / remove

You sign the PPA, the provider installs the system at their cost, you start saving on electricity from the day commissioning completes.

When PPA is the right choice

PPA suits businesses where:

1. Capex appetite is zero — finance team won’t sign capital project
2. Debt capacity is fully used elsewhere
3. You don’t have a profitable year-end to absorb AIA
4. You expect to occupy the building for at least 10-15 years
5. You want immediate, predictable, no-fuss bill savings

PPA suits less well where:

1. You have cash available and a tax-paying year — cash purchase IRR beats PPA
2. You may sell the building in 5 years (PPAs can transfer but it adds friction to a sale)
3. The PPA provider’s unit rate is uncompetitive (always model against grid + asset finance)
4. You want 100% of the savings rather than sharing with a third party

Typical PPA economics — worked example

A 100 kW system on a daytime-occupied office. The PPA provider funds and owns. You pay them a unit rate for the energy delivered to your premises.

• Installation cost (provider’s books): £92,000
• PPA unit rate year 1: 28p/kWh (vs grid 38p/kWh)
• Annual generation: 90,000 kWh
• Self-consumption: 65% = 58,500 kWh delivered to you
• PPA payment year 1: 58,500 × £0.28 = £16,380
• Grid avoided: 58,500 × £0.38 = £22,230
• Net saving year 1: £5,850

Compare with cash purchase:

• Capex (after AIA): £69,000
• Saving year 1: £22,230 self-consumed + £1,925 export = £24,155
• Year 1 net: -£44,845 (paying off the install)
• Year 5: +£51k
• Year 25: +£480k

PPA delivers much smaller savings (you share with the provider) but no capex risk. Cash delivers much larger savings but ties up capital.

What to watch for in a PPA contract

• Escalator rate: a 5% uncapped escalator can put you above grid by year 12. Cap at 3% or RPI.
• Performance guarantee: must be specified in kWh/year, not “best efforts”
• Termination clauses: read the early termination penalties carefully
• Buy-out formula: should be public and transparent, not at “fair market value as determined by the provider”
• Property sale clause: how does the PPA transfer if you sell? Most allow assignment to new owner but check
• Roof access for repair: the PPA provider needs roof access — confirm the SLA on this
• Insurance: should be the provider’s responsibility, including consequential loss

Common PPA misconceptions

“PPA = free solar” — it’s not free. You pay for the energy you use, just at a discounted rate. The provider’s profit comes from the spread between their generation cost and your unit rate, plus SEG income.

“PPA always saves more than buying” — no. Buying outright with AIA usually wins long-term IRR. PPA wins on year-1 cashflow.

“PPAs only work for huge installs” — no longer true. SME-scale PPAs from providers like SunSave, Atrato Onsite Energy, Bryt Energy, and others work down to 50 kW.

“You can’t add a battery later under PPA” — depends on contract. Some allow customer-funded battery; some require provider sign-off. Ask before signing.

Next steps

For a PPA vs cash vs asset-finance comparison on your specific project, contact us. See our finance routes overview and cost guide. Related: tax relief, payback.