What is a Power Purchase Agreement?
In Short
Understanding the Full Answer
A Power Purchase Agreement is a commercial structure used to buy electricity from an energy asset. In a solar PPA, the client does not usually pay the full upfront cost of the solar system. Instead, a third party funds, owns and operates the system, and the client buys the electricity generated under an agreed tariff.
This can be useful for businesses that want access to solar energy but do not want to allocate large upfront capital to own the system.
A PPA usually deals with:
- The electricity tariff.
- Contract duration.
- System ownership.
- Maintenance responsibilities.
- Performance obligations.
- Escalation rates.
- Buyout options, if applicable.
- End-of-term arrangements.
- Risk allocation between the parties.
Internationally, PPAs are commonly used as long-term energy contracts between an energy buyer and seller, especially where renewable-energy assets are involved.
Why Businesses Consider PPAs
A business may consider a PPA because it wants:
- Lower upfront capital exposure.
- Predictable energy pricing.
- Reduced grid electricity consumption.
- Specialist system ownership and maintenance.
- A commercial pathway that does not require the client to own the asset from day one.
- Better energy cost planning over time.
In South Africa, PPAs are increasingly relevant because businesses are trying to manage electricity cost increases, grid uncertainty, sustainability requirements and long-term operational resilience. Eskom’s 2026/2027 tariff information shows revised rates effective from 1 April 2026 for Eskom direct customers and from 1 July 2026 for local authority tariffs, with total standard tariffs adjusted by 8.76%.
Practical Example
A food processor may want solar energy but may prefer not to spend capital on owning the system. Under a PPA, the provider can fund and operate the solar installation, while the client pays for the electricity generated at an agreed rate.
What a PPA Is Not
A PPA is not a free solar system.
The client still pays for electricity. The difference is that the payment is structured as an energy purchase rather than an upfront asset purchase.
A PPA also does not automatically mean the client gets backup power. If backup is required, the system must be designed with battery storage, generator integration or another resilience layer.
Key Questions Before Signing a PPA
Before entering a PPA, a business should ask:
- What is the starting tariff?
- How does the tariff escalate?
- How long is the contract?
- Who owns the system?
- Who maintains the system?
- What happens if the system underperforms?
- Are there buyout options?
- What happens at the end of the term?
- Does the PPA include battery storage or only solar?
- How does the PPA compare with capex or financed ownership?
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