Power Purchase Agreements (PPA) for UK Businesses

A solar Power Purchase Agreement (PPA) is the zero-capex route to commercial PV. A third-party investor funds, owns, installs and maintains the system on your roof. You pay nothing upfront. They sell you the generated electricity at a fixed tariff, typically 12–15% below the equivalent grid retail rate at signature, for a 15–25 year term. PPA economics are genuinely strong for the right businesses — but they are not universally optimal. Cash with 100% AIA almost always beats PPA on lifetime IRR for a profitable limited company. PPA wins when corporation tax position, capex constraints, or tenure considerations rule cash out. Here's how to decide.

How a UK commercial PPA actually works

The contract structure is straightforward. Three parties involved: you (the offtaker), the PPA investor (typically a specialist solar asset fund such as Octopus Renewables, Bluefield, NextEnergy or Distributed Energy), and us (the EPC who designs, installs and maintains the asset on the investor's behalf). The investor finances the entire capex of the PV system. We design and build it. The investor takes legal title to the asset, sits it on their balance sheet, and recovers their investment over the contract term through PPA tariff payments from you. You sign a 15–25 year offtake contract committing to buy 100% of the generated electricity at the agreed tariff — usually structured as "as-generated" rather than "as-consumed", meaning you pay for every kWh the system generates, including any surplus exported to grid (the investor keeps SEG income). The contract is typically backed by a roof lease granting the investor access for the duration.

Tariff structures — fixed, indexed, and CPI-linked

PPA tariffs in 2026 land at 13–17p/kWh fixed for the contract term on suitable commercial sites. Three tariff structures are common. Fully fixed tariffs hold the same nominal rate for the entire 15–25 year term — simple, no escalation risk for you, but pricing reflects the investor's required IRR over a long flat-rate horizon, so headline tariffs run highest. CPI-linked tariffs rise with UK CPI inflation each year, typically capped at 3–4% per annum to protect against runaway inflation. Headline tariffs are lower than fully-fixed because the inflation linkage de-risks the investor. Most current PPAs use this structure. Pre-set escalator tariffs rise at a fixed annual rate (commonly 2–3% per year), regardless of actual inflation — predictable cashflow but creates basis risk against grid prices. Whichever structure you choose, the gap to grid retail typically widens over the contract term as wholesale and retail electricity prices climb. Modelled over a typical 25-year term against forecast grid prices, total cumulative savings on a 100 kW PPA range from £130k to £210k.

End-of-term options — the negotiation that often gets neglected

End-of-term provisions are where mediocre PPA contracts fall apart. Three options are typically available. Purchase at depreciated value: you buy the asset at fair market value, usually 10–25% of original capex depending on system age and remaining warranty life. We always negotiate a pre-agreed buyout schedule into the contract — "fair market value at expiry" without a defined formula leaves you exposed to investor opportunism. PPA extension: continue the agreement for 5–10 additional years at a renewed (typically reduced) tariff. The system is mostly depreciated by year 25 so extension tariffs can drop to 8–10p/kWh. Asset removal: the investor decommissions the system at their cost, typically on 90 days' notice. Useful if you've moved or the building is being sold. We negotiate all three options into every PPA we structure, with clear pricing formulas where applicable. Buyout valuations of 5–10% of original capex at year 25 are realistic and we won't sign contracts that give the investor unilateral pricing power at expiry.

Tax treatment — why PPA looks different on the books

PPA payments are operating expenses — you pay them as you would any utility bill. They flow through your P&L as cost of sales or operating cost, fully deductible against corporation tax in the year incurred. There is no asset on your balance sheet, no depreciation, no capital allowance schedule. For most UK businesses this is straightforward — your accountant treats the PPA bill exactly the same as a Drax or British Gas bill. Some PPA structures with very long terms or unusual control provisions trigger IFRS 16 lease accounting, putting a right-of-use asset and corresponding liability on your balance sheet. We always check this at the contract drafting stage and your auditor signs off the treatment. Compare with cash purchase plus AIA: under cash, you carry the asset, claim 100% AIA in year one (£25k tax relief on £100k capex at the 25% main rate), and depreciate the asset for accounting purposes over 20–25 years. Cash gives bigger tax reliefs upfront but uses your balance sheet and capex.

When PPA actually wins vs cash plus AIA

Be honest about the trade-offs. Cash purchase combined with 100% AIA almost always delivers stronger 25-year IRR than PPA for a profitable limited company. The investor's required IRR (currently 8–12%) sits between you and the underlying solar asset returns. PPA wins decisively in five specific situations. Limited corporation tax exposure — charities, social enterprises, businesses making losses, or businesses with insufficient profit to absorb a £25k tax relief in one year. Capex constrained — businesses where £100k+ capex outlay competes with stock, equipment, hiring, or growth funding and the marginal cost of capital is genuinely high. Tenant on leasehold premises — businesses on FRI leases with remaining terms shorter than the asset life (sub-15 years) where capex risk on the building is unattractive. Pending sale or relocation — businesses considering exit within 5 years where tying up working capital in a 7-year-payback asset doesn't fit. Group corporate strategy — large groups standardising on opex-only energy procurement for ESG accounting consistency across sites. If you fit one of these patterns, PPA is genuinely the right route. If you don't, cash with AIA usually beats it on IRR.

Risks and provisions to negotiate

Five risks need careful handling in PPA contracts. Tariff escalator runaway — even with CPI cap, sustained high inflation can push PPA tariffs above grid prices in extreme scenarios. We always model tariff trajectory against forward grid price curves and negotiate caps that protect against this scenario. Building sale — if you sell the building, the PPA needs to transfer to the new owner. Negotiate clear novation provisions and avoid contracts where the investor can demand penalty payments on transfer. Maintenance and downtime — the investor is responsible for maintenance and you don't pay for hours when the system is down, but make sure the contract clearly defines availability obligations and remedies for prolonged outage. Insurance and damage — clarity on who insures the asset, what happens if the building suffers damage, and how the asset is reinstated. Buyout valuation methodology — as noted above, never sign a contract with vague "fair market value" wording. Pre-agreed depreciation schedules or formulas are non-negotiable. We work through all five with your legal counsel before signature.

Worked example — 250kW PPA on a Yorkshire warehouse

Real-shape project: a 4,800 sqm distribution warehouse in Yorkshire, occupied by a 3PL operating on a 12-year FRI lease, three-phase 600 A supply, half-hourly meter showing 1.1 GWh annual consumption. Tenant has limited corporation tax exposure (start-up loss-making for next 3 years) and zero capex headroom — perfect PPA candidate. Octopus Renewables funded a 248 kW system at zero capex to the tenant. PPA tariff: 14.5p/kWh (CPI-linked, capped at 3% pa), 20-year term, end-of-term buyout option at the lower of fair market value or 12% of original capex, full novation to any successor tenant or new building owner. System generates 230,000 kWh/year. Tenant's blended grid import tariff at signature: 24p/kWh. Year-one savings: 230,000 kWh × (24 – 14.5) = £21,850 of avoided grid cost. Modelled 20-year cumulative savings (against forecast grid prices rising 3% pa, PPA rising 2.5% pa average): £620k. Tenant's only commitment: pay the PPA invoice each month (which is always materially below the equivalent grid cost) and provide reasonable roof access for routine maintenance.

The PPA contracting process — what to expect

PPA contracts run substantially longer than cash purchase contracts because three-party legal agreements take time to land. The process across most UK commercial PPAs runs through six stages and typically takes 12–20 weeks from initial enquiry to contract signature. Stage one: feasibility (1–2 weeks) — we model your meter data, assess roof suitability and DNO grid feasibility, and produce a draft PPA tariff range from our investor panel. Stage two: indicative offer (2–4 weeks) — investor reviews the project and issues an indicative term sheet covering tariff, term, escalator, end-of-term provisions and key conditions. Stage three: detailed due diligence (3–6 weeks) — investor commissions detailed engineering surveys, financial due diligence on the offtaker (your business) and legal review of any building lease where applicable. Stage four: contract drafting (2–4 weeks) — investor's lawyers draft the PPA, roof lease and connection agreement; your lawyers review. Stage five: negotiation (2–4 weeks) — terms agreed across all three parties, focus on end-of-term provisions, novation, performance guarantees and SEG export allocation. Stage six: signature and project mobilisation. Once signed, project delivery follows the standard install timeline (typically 4–9 months for sub-500 kW projects depending on G99). We coordinate the entire process — investor selection, contract drafting, technical delivery and handover.

The investor side — who funds UK commercial PPAs

The PPA investor market in the UK has matured substantially since 2020. Three classes of investor compete actively for SME and mid-market commercial PPAs. Specialist solar asset funds — Octopus Renewables, Bluefield Solar Income Fund, NextEnergy, Foresight and similar funds operate at scale across thousands of UK commercial PPAs. Strongest pricing for sub-500 kW SME deals because their cost of capital is lowest. Independent power producers (IPPs) — Distributed Energy, ALIVE, BNRG and similar specialise in commercial scale projects with hands-on project management. Often more flexible on contract terms than the large funds. Utility-backed PPAs — Centrica Business Solutions, EDF Renewables, Scottish Power and similar offer PPAs as part of broader utility relationships, sometimes with bundled energy supply. Pricing is typically less aggressive than specialist funds but the integrated relationship has value. We work with all three and run competitive tenders for projects above 500 kW where multiple investors will bid for the deal. The investor's required IRR drives the PPA tariff — currently 8–11% on standard SME deals — so a small change in cost-of-capital substantially shifts the headline tariff.