A Power Purchase Agreement lets a business buy electricity directly from a renewable generator at a fixed or indexed price, bypassing the standard supplier route. Once limited to large corporates, PPAs are increasingly accessible to mid-sized I&C buyers. The contract structure, credit requirements, and accounting treatment under FRS 102 and IFRS 9 all require careful review before signing.
Last reviewed: 12 May 2026
What a Power Purchase Agreement Is
A Power Purchase Agreement (PPA) is a long-term contract between a business electricity buyer and a renewable electricity generator. The buyer commits to purchasing a volume of electricity at an agreed price over a defined term, typically 5 to 15 years. In exchange, the generator receives revenue certainty that supports project financing.
PPAs originated in utility-scale energy procurement and were for many years accessible only to large industrial buyers or public sector bodies with the credit profile, legal resource, and consumption volume to make long-term generator contracts viable. Market development, intermediary services, and aggregation structures have since made PPAs accessible to businesses consuming from around 5 GWh per year, and in some aggregated structures, lower.
The Ofgem regulatory framework requires generators to hold a generation licence and buyers to receive supply through a licensed supplier unless an exemption applies. This separation shapes the structural options available for PPAs in the UK market.
The Three Main PPA Structures
Direct corporate PPAs involve a contract between the buyer and the generator, with a licensed supplier acting as a pass-through intermediary for balancing and grid services. The buyer agrees a strike price with the generator; the licensed supplier takes the electricity onto its licence, handles balancing responsibility, and charges a sleeve fee for the service. The buyer's electricity cost is effectively the generator strike price plus the sleeve fee plus network charges. This structure requires the generator to hold a generation licence and the buyer to have sufficient credit standing to be a viable long-term counterparty.
Sleeved PPAs operate through a licensed supplier who contracts with both the generator and the buyer. The supplier purchases output from the generator under one contract and sells it to the buyer under a separate supply contract. The buyer's PPA is with the supplier, not the generator directly. This reduces counterparty complexity for the buyer but introduces supplier credit risk and may reduce price transparency.
Synthetic PPAs (also called virtual or financial PPAs) involve no physical delivery of electricity. The buyer continues to purchase electricity through a standard supply contract. Separately, the buyer and generator enter a contract-for-difference arrangement referenced to a market price. If the market price is above the strike price, the buyer pays the generator the difference. If below, the generator pays the buyer. The buyer's net electricity cost is stabilised at approximately the strike price regardless of market movements. No generator licence or physical supply arrangement is required. Synthetic PPAs are the most accessible structure for buyers without the consumption profile to support a physical delivery arrangement.
Who PPAs Suit and the Consumption Thresholds
Physical direct PPAs typically require annual consumption of 5 GWh or more to justify the transaction costs, legal fees, and ongoing management obligations. Sleeved PPAs through major suppliers may be accessible from around 2 to 3 GWh annually, depending on the supplier and generator. Synthetic PPAs have lower practical thresholds and have been structured for buyers from around 1 GWh annually in aggregated arrangements.
Credit requirements are a significant barrier for mid-sized businesses. Generators and their lenders need the buyer to demonstrate sufficient financial strength to honour payment obligations over a 10 to 15 year term. For businesses without investment-grade credit ratings, parent company guarantees, bank letters of credit, or cash collateral may be required. The cost of providing these credit support instruments should be factored into the total cost comparison with alternative procurement routes.
PPAs suit businesses with a clear energy price risk management objective, a stable or growing consumption profile, sustainability reporting obligations that require matched renewable energy evidence, and the organisational resource to manage a long-term contract relationship. Businesses with volatile consumption, uncertain long-term premises tenure, or limited treasury resource are less well-suited.
Accounting Treatment Under IFRS 9 and FRS 102
The accounting treatment of a PPA depends on whether it meets the "own use" exemption under IFRS 9 (for businesses reporting under IFRS) or FRS 102 (for UK GAAP reporters). A contract that qualifies as own use, meaning the electricity purchased will be consumed in the buyer's own operations rather than sold, is accounted for as an executory contract and not recognised on the balance sheet until settlement. The electricity cost is expensed as consumed.
A synthetic PPA is a financial instrument rather than a physical supply contract and does not qualify for the own use exemption. Under IFRS 9, it is classified as a derivative and must be recognised at fair value on the balance sheet, with fair value movements taken through profit and loss unless hedge accounting is applied. Applying hedge accounting requires formal hedge designation, documentation, and effectiveness testing. For businesses without treasury accounting infrastructure, the reporting burden of a synthetic PPA treated as a derivative is significant.
Under FRS 102, the treatment broadly follows IFRS 9 principles. Businesses reporting under FRS 102 Section 12 for financial instruments will face similar derivative recognition requirements for synthetic PPAs. Businesses considering a PPA should obtain accounting advice before signing to understand the balance sheet and income statement implications fully.
The Ofgem Framework and Generator-Supplier Separation
Ofgem's licensing framework requires that electricity supplied to premises in Great Britain is provided through a licensed supplier. A generator cannot supply a customer directly unless an exemption applies under the Electricity (Class Exemptions from the Requirement for a Licence) Order 2001. The most common exemption relevant to on-site generation is the private wire exemption, which permits direct supply across privately owned infrastructure without a supplier licence.
For off-site PPAs, the separation requirement means a licensed supplier must be involved in every physical delivery structure. The sleeve fee charged by the supplier for this role is a transaction cost that buyers should quantify explicitly when comparing PPA costs against standard supply alternatives.
The Contracts for Difference (CfD) scheme, established under the Energy Act 2013, provides separate revenue support for new renewable generation and is administered by the Low Carbon Contracts Company (LCCC). CfD-supported generators can still enter PPAs for their output, but the interaction between CfD payments and PPA strike prices affects the economics and should be reviewed in any generator-specific negotiation.
Common Pitfalls for Mid-Sized Buyers
Volume mismatch is the most common operational risk. A PPA commits the buyer to a volume based on projected consumption. If actual consumption falls significantly below contracted volume, the buyer may be paying for electricity they cannot use, or must sell surplus output at market prices that may be below the strike price. Forecasting accuracy over a 10-year horizon is genuinely difficult for most businesses.
Exit provisions in PPAs are typically very limited. Early termination triggers breakage costs calculated on the net present value of the remaining contracted cash flows. For a 15-year contract with 10 years remaining, breakage costs can be material. Buyers should model termination scenarios before signing and ensure legal advisers review the exit terms in detail.
Renewable energy certificate arrangements should be confirmed explicitly. For a PPA to support a market-based Scope 2 emissions claim, the associated Renewable Energy Guarantees of Origin (REGOs) must be contractually assigned to the buyer. Not all PPA structures include REGO transfer as a default. Without matched REGOs, the electricity purchased under a PPA does not support a zero-carbon market-based claim under the GHG Protocol Scope 2 Guidance.
How we verified this
This article draws on the Ofgem licensing framework documentation, the Energy Act 2013 as published on legislation.gov.uk, the Electricity (Class Exemptions from the Requirement for a Licence) Order 2001, and IFRS 9 and FRS 102 standards as published by the relevant accounting bodies. Consumption thresholds and credit requirement descriptions reflect market practice documented in publicly available industry guidance rather than any individual supplier's commercial terms.
Frequently asked questions
Editorial disclaimer: The following questions address common points of uncertainty about corporate PPAs for UK business buyers. They do not constitute financial, legal, or energy procurement advice. Businesses should obtain independent professional advice before entering any long-term energy contract.
What is the minimum consumption needed for a corporate PPA in the UK?
Physical direct PPAs typically require annual consumption of 5 GWh or more to cover transaction costs and legal complexity. Sleeved PPAs through licensed suppliers may be accessible from around 2 to 3 GWh. Synthetic PPAs, which involve no physical delivery, have been structured for buyers from approximately 1 GWh in some aggregated arrangements. These are indicative thresholds and vary by supplier, generator, and market conditions at the time of negotiation.
Does a PPA guarantee renewable electricity supply?
A physical PPA contracts for electricity from a named renewable generator, but the electricity delivered to the buyer's premises through the grid is not physically traceable to that generator. What the PPA provides is a contractual and financial link to a specific renewable source. For the supply to support a zero-carbon market-based Scope 2 claim, the associated REGOs must be explicitly assigned to the buyer under the contract. Buyers should confirm REGO transfer terms before signing.
Is a synthetic PPA treated as a derivative on the balance sheet?
Under IFRS 9 and broadly under FRS 102 Section 12, a synthetic PPA is a financial instrument that does not qualify for the own-use exemption because no physical electricity is delivered. It is classified as a derivative and recognised at fair value on the balance sheet, with fair value movements through profit and loss unless hedge accounting designation is applied. Businesses should obtain accounting advice specific to their reporting framework before entering a synthetic PPA.
What happens if my business consumption falls below the PPA contracted volume?
Volume shortfall against contracted quantities means the buyer is paying for electricity above their actual consumption. The options depend on contract terms: some PPAs allow volume flexibility within a tolerance band; others require the buyer to take or pay for the full contracted volume. Surplus electricity may be on-sold at market prices, which may be below the PPA strike price, creating a net cost. Buyers should model downside consumption scenarios carefully before contracting.
Can a business exit a PPA early?
Early termination of a PPA is possible in principle but typically triggers breakage costs calculated on the net present value of remaining contracted cash flows discounted at an agreed rate. For contracts with many years remaining, these costs can be very significant. PPAs are not designed as short-term instruments. Exit provisions, force majeure definitions, and change-of-control clauses should all be reviewed by specialist legal advisers before a contract is signed.
Sources
- Ofgem - Licensing framework for electricity supply
- Energy Act 2013 - legislation.gov.uk
- Electricity (Class Exemptions from the Requirement for a Licence) Order 2001 - legislation.gov.uk
- Contracts for Difference scheme - gov.uk
For further reading on energy contract structures and half-hourly metering implications, see Half-Hourly Meters for Business UK and Business Energy Suppliers UK.
