Compare the value of a fixed Power Purchase Agreement against projected wholesale market prices. Calculate NPV advantage and break-even scenarios.
Discounted cash flow comparison over contract term
A Power Purchase Agreement (PPA) is a long-term contract between a renewable energy generator (like a wind or solar farm) and a buyer (which could be an energy supplier, a large company, or a government body). The generator agrees to sell its electricity at a fixed price for a set period - typically 10 to 20 years.
Selling at a slight discount to today's market price seems counterintuitive, but the certainty of a long-term fixed price is extremely valuable. It means the developer can confidently approach banks for finance, knowing exactly what revenue they will receive each year. Without that certainty, the project might never get built at all. Think of it like fixing your mortgage rate - you give up the possibility of lower rates in exchange for predictability.
Large companies increasingly sign PPAs directly with renewable generators as part of their net zero commitments - these are called "corporate PPAs." Famous examples include Google, Microsoft and Sainsbury's, all of which have signed large UK renewable energy PPAs. Energy suppliers also sign PPAs to source renewable power for their customers.
If the market price rises significantly above the PPA strike price over the contract term, the generator has effectively left money on the table. The calculator helps quantify that risk versus the benefit of price certainty.
The calculator performs a discounted cash flow (DCF) comparison of two revenue streams over the PPA contract term:
The NPV difference quantifies the financial impact of the PPA pricing relative to projected wholesale market revenues. A negative NPV difference means the PPA generates less total discounted revenue than the projected merchant market - the "opportunity cost" of price certainty.
Real PPA valuation is significantly more complex. This model excludes: shape risk and capture price discount (wind and solar capture below average market prices due to generation profile), imbalance costs and balancing charges, credit risk and counterparty default provisions, collar structures (floor and cap), currency risk for international PPAs, and Renewable Energy Guarantee of Origin (REGO) certificate values which can add GBP 1-5/MWh.
The PPA capture price discount is often significant for solar (10-20% below average) and increasingly for wind as penetration grows. A sophisticated PPA model would apply shape-adjusted hourly price modelling rather than average annual prices.