What Is a Power Purchase Agreement?

Written by sam grover
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What Is a Power Purchase Agreement?
Power purchase agreements are for electricity. (power lines image by brelsbil from Fotolia.com)

A power purchase agreement (PPA) is an agreement by which one electrical company buys power from another electrical company rather than generating the electric power itself.

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Why Power Purchase Agreements?

PPAs are generally used when one company produces power but does not distribute it. This means that another company--which may produce power or may only distribute it--needs to be involved to sell the power to customers. It is the equivalent of an auto factory making cars and selling them to a dealer, who sells them to people.


Highly regulated utilities do not use PPAs, as they are controlled by a state-owned monopoly. Therefore, PPAs are acceptable only in regions where power is either lightly regulated or unregulated.


The major benefit of a large company using a PPA is that the company does not have to produce the power itself. Power generation is extremely expensive; this is why most people do not have generators in their houses and instead buy their power from a power company. By agreeing to buy power at a certain rate for a certain amount of time, a company can keep its costs fixed and avoid having to spend a large amount of money to build its own generator.

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