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What Is a Power Purchase Agreement?

Updated March 23, 2017

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.

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.

Exceptions

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.

Benefits

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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About the Author

Sam Grover began writing in 2005, also having worked as a behavior therapist and teacher. His work has appeared in New Zealand publications "Critic" and "Logic," where he covered political and educational issues. Grover graduated from the University of Otago with a Bachelor of Arts in history.