What is a PPA?

A PPA is a long-term contract under which an electricity producer supplies electricity to a purchaser (offtaker). In the case of a merchant project, the producer is entirely exposed to market risk, whereas with a PPA the producer is able to guarantee the long-term purchase of the energy it produces thanks to the commitment made by the offtaker. The advantage of this, as opposed to a purely merchant facility, is that it makes accessing investment financing easier. Indeed, the PPA transfers the risks from the producer to the offtaker: the latter is willing to take on those risks in return for a supply of electricity at a cost that, given their assessment of the market for the period in question, they consider advantageous. Using a PPA to transfer the risks inherent in the development of long-term, capital intensive projects doesn't remove those risks, it just reallocates them between the parties involved.

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