Power Purchase Agreements (PPAs) UK: Legal Guide

At a glance

• What a PPA is: a long-term commercial contract between an electricity generator and a buyer, fixing the price, volume and duration of electricity supply — a private arrangement, not a government scheme.
• Main structures: physical PPAs (electricity actually flows, usually sleeved through a licensed supplier) and virtual/synthetic PPAs (a financial hedge against wholesale prices, with no physical delivery).
• Typical buyers: licensed electricity suppliers acting as offtakers, large corporates seeking price certainty or sustainability credentials (corporate PPAs), and on-site or private-wire buyers taking power directly from a nearby generator.
• Not the same as a CfD: the Contracts for Difference scheme under the Energy Act 2013 is a separate government-backed mechanism between a generator and the Low Carbon Contracts Company (LCCC) — a private PPA has a different counterparty and different terms. Check the current position on how a specific project's CfD and any PPA interact.
• Licensing: under the Electricity Act 1989, generating, distributing or supplying electricity without a licence or an applicable exemption is a criminal offence — most PPA structures route around this using a licensed supplier or a recognised exemption.
• Green certification: REGO certificates, administered by Ofgem, evidence the renewable origin of electricity and are typically priced and transferred separately from the power itself — the PPA should say expressly what happens to them.
• Contract length: commonly ten to fifteen years for corporate PPAs, though shorter merchant arrangements and longer project-finance-driven terms both exist — always check current market norms before relying on a specific figure.

What is a Power Purchase Agreement?

A Power Purchase Agreement is a contract between a party that generates electricity and a party that wants to buy it. In the UK, the generator is often a renewable project — a solar farm, an onshore or offshore wind site, hydro, or a battery-backed asset — and the buyer is a licensed electricity supplier acting as an offtaker, a large corporate consumer, or a public sector body.

The agreement sets out the commercial terms: how much electricity will be sold, at what price, over what period, and how it will be delivered or accounted for. Because PPAs commonly underpin project financing, lenders typically scrutinise the contract closely before releasing funds — a weak or ambiguous PPA can make a project unbankable regardless of how sound the underlying generation asset is.

A PPA is a private, negotiated contract. It is legally separate from the licensing and market-code framework that governs electricity generation and supply in general, and separate from any government-backed revenue support (such as a CfD) the generator may also hold. Confusing the two is one of the most common misunderstandings in this area — see the regulatory backdrop section below.

Types of PPA structure

Physical (direct and sleeved) PPAs

Under a physical PPA, electricity generated actually reaches the buyer, either through a direct private-wire connection or, more commonly, by being "sleeved" through the public grid by a licensed electricity supplier. The sleeving supplier manages grid access, network charges, and the administrative and balancing obligations that attach to moving power across the system, in exchange for a fee. This structure lets a corporate buyer without its own supply licence still take physical delivery of renewable power.

Virtual (synthetic) PPAs

A virtual PPA, also called a synthetic or financial PPA, involves no physical delivery under the contract itself. The generator sells its output into the wholesale market as it normally would, and the buyer continues to procure its actual electricity from its existing supplier. Separately, the generator and buyer settle the difference between an agreed strike price and a market reference price for the contracted volume — functioning as a financial hedge and, often, as the mechanism by which the buyer can claim the environmental attributes of the underlying generation.

Corporate PPAs

A corporate PPA is simply a PPA where the buyer is a business consumer rather than a licensed supplier — typically pursuing long-term price certainty, protection against wholesale volatility, or evidence towards sustainability commitments. Corporate PPAs can be structured as either physical (sleeved) or virtual arrangements, and the choice affects accounting treatment, balance sheet exposure, and how the deal is reported.

On-site and private-wire PPAs

Where a generator sits on or next to the buyer's premises, electricity can be supplied directly over a private wire without using the public distribution network at all. This can avoid certain network charges and licensing steps, subject to the class exemptions available under the Electricity Act 1989 regime, but it raises its own issues — including third-party access obligations to any private network, and what happens to any export surplus. See our guide on building-integrated photovoltaics for related on-site generation issues.

The regulatory backdrop

Electricity supply licensing

Under the Electricity Act 1989, it is a criminal offence to generate, transmit, distribute or supply electricity in Great Britain without a licence, unless an exemption applies. Many generators avoid needing their own supply licence by selling wholesale to a licensed supplier, who then sells on to the end user — this is exactly what a sleeved PPA achieves. Others rely on a class exemption under the licence exemptions regime (relevant to smaller-scale and certain private-wire or on-site generation), or obtain a licence of their own. Which route applies depends on the scale, location and structure of the deal, and should always be checked against current GOV.UK and Ofgem guidance before a PPA is signed.

The Contracts for Difference scheme

The Contracts for Difference (CfD) scheme, introduced under Part 2 of the Energy Act 2013, is the government's principal mechanism for supporting low-carbon electricity generation. Under a CfD, a generator contracts directly with the Low Carbon Contracts Company (LCCC) — designated as the CfD counterparty under section 7 of the Energy Act 2013 and the Contracts for Difference (Counterparty Designation) Order 2014 — rather than with a commercial buyer. LCCC pays the generator the shortfall when a market reference price falls below the agreed strike price, and the generator pays back the difference when the market price rises above it, with the scheme funded through a levy on licensed suppliers.

A CfD is not a PPA, and a project can in principle hold both: a CfD for revenue certainty on all or part of its output, and a separate private PPA (or PPAs) for output outside the CfD, or during periods before a CfD starts or after it ends. The two contracts sit alongside one another with different counterparties, different obligations, and different termination and default provisions — always check the current position for how a specific project's arrangements interact, ideally by reading both agreements together rather than assuming one displaces the other.

REGO certificates and green claims

Renewable Energy Guarantees of Origin (REGOs) are certificates administered by Ofgem on behalf of the Department for Energy Security and Net Zero, with one REGO issued per megawatt hour of eligible renewable electricity output. Their principal statutory use is fuel mix disclosure by licensed suppliers, but they are also bought, sold and "redeemed" more widely as evidence of the renewable origin of consumed electricity — including by corporate buyers making sustainability claims. Since 1 January 2021 the EU no longer recognises UK REGOs, and UK schemes do not recognise EU Guarantees of Origin, so any cross-border green-claims analysis needs its own check. A PPA should state expressly whether REGOs transfer with the electricity, are retained by the generator, or are priced and traded under a separate agreement — check the current Ofgem REGO guidance for scheme mechanics before relying on any specific figure or claim.

Balancing and settlement

Electricity generation and supply in Great Britain operates within the Balancing and Settlement Code (BSC) framework, under Ofgem's regulatory oversight, which governs how participants are charged or paid for the difference between contracted and actual electricity volumes. Licensed generators and suppliers must become parties to the BSC, and a PPA will typically specify who takes on balancing responsibility — and who bears the cost of any imbalance charges — for the contracted volumes. This is a distinct question from the commercial price agreed in the PPA itself, and getting it wrong can materially change a deal's economics, particularly for weather-dependent renewable generation.

Key commercial terms to negotiate

A PPA needs to deal squarely with several commercial points, each of which can shift the underlying economics for either party:

• Price mechanism. A flat fixed rate, a floor price with market upside, a discount to a published wholesale index, or a more complex structure involving capture prices and shape adjustments. Confirm whether REGOs and other green attributes are priced in or dealt with separately.
• Term and start date. Contract length varies considerably — commonly ten to fifteen years for corporate PPAs, shorter for rolling merchant arrangements — with lenders financing the generator generally preferring longer terms that match the debt repayment profile. Check current market norms rather than relying on any single benchmark.
• Volume and take-or-pay. Whether the buyer takes whatever is generated (pay-as-produced) or whether expected volumes and tolerances apply, with compensation or replacement power owed on a shortfall. Some corporate PPAs include take-or-pay elements requiring the buyer to pay for an agreed volume even if it is not used.
• Curtailment. What happens, and who bears the cost, if the generator is instructed to reduce output — for example for grid stability reasons — is a frequently negotiated and easily overlooked clause.
• Balancing and imbalance risk. Which party is responsible for balancing costs and BSC obligations for the contracted volume (see above).
• Change in law and grid charges. How the contract responds if regulatory costs, network charging methodology, or licensing requirements change during the term.

Risk allocation, default and termination

Beyond pricing, a PPA needs proper default and termination provisions: what counts as a material breach, how long any cure period runs, and what termination payments apply. Lenders financing the generator will often require step-in rights, allowing them to take over the contract if the developer runs into financial difficulty, and a direct agreement with the buyer to preserve the revenue stream the debt depends on.

Assignment is usually restricted without the other party's consent. If a project is bought or sold partway through its life, the PPA's terms on change of control, novation and consent can materially affect the value of the transaction — these clauses are worth reviewing early, not left until the point of sale.

What to check before signing a PPA

1. Decide what kind of PPA fits the project. Work out whether a physical (sleeved) arrangement, a virtual/synthetic PPA, a corporate offtake deal, or an on-site/private-wire structure is the right fit. The structure affects pricing, risk allocation, accounting treatment and how the electricity actually reaches the end user.
2. Confirm how any CfD interacts with the PPA. If the generator holds, or is applying for, a CfD under the Energy Act 2013, work out precisely how the CfD and the PPA sit together — they have different counterparties and should not be assumed to duplicate or replace one another.
3. Settle the commercial heads of terms early. Volume, price mechanism, contract length, start date, and REGO or other green-certificate arrangements should be agreed in outline before detailed drafting begins.
4. Address risk allocation carefully. Curtailment, balancing costs, imbalance risk, change in law, grid charges, and what happens if generation underperforms or overperforms all materially affect the economics — none of these should be rushed.
5. Build in proper default and termination provisions. Consider what counts as material breach, cure periods, termination payments, and any step-in rights a lender may require.
6. Complete regulatory and licensing checks before signing. Confirm licensing or exemption status under the Electricity Act 1989, check whether the arrangement needs any Ofgem notification, and take a view on VAT, Climate Change Levy and accounting treatment. Signing a PPA without these checks can create problems that are expensive to unwind later.

This guide provides general information about how Power Purchase Agreements work under the law of England and Wales. It is not legal advice and is not a substitute for advice tailored to your specific circumstances. The regulatory position — including how the CfD scheme, REGO certification and licensing exemptions operate — changes from time to time, so always check GOV.UK, legislation.gov.uk and current Ofgem guidance for the up-to-date position before relying on anything in this guide for a live transaction.