Power Purchase Agreement (PPA)
A long-term contract in which a third-party funder installs, owns, and maintains a solar PV system on a business's premises, and the business pays only for the electricity it generates at a fixed, below-grid rate.
A power purchase agreement (PPA) is a long-term contract in which a third-party funder installs, owns, and maintains a solar PV system on a business's roof or land, and the business buys the electricity generated at a fixed, pre-agreed rate for the full term - typically 15 to 25 years. The business pays no capital cost upfront. Instead of purchasing equipment, it purchases cheaper energy.
In the UK in 2026, commercial PPA rates typically run from 8p to 14p per kWh, compared with grid import costs of roughly 22p to 30p per kWh. Because the funder's return depends on the system generating, they carry all maintenance, monitoring, repair, and insurance obligations for the duration of the contract.
How a PPA Works in Practice
The funder covers the full cost of survey, design, equipment, and installation. Once the system is live, the business pays only for the electricity it consumes from those panels at the agreed strike price. Most agreements include an annual price escalator - typically 2 to 3%, or indexed to RPI/CPI - to protect the funder's return over time. Because grid prices have historically risen faster than these escalators, the gap between the PPA rate and grid price tends to widen as the contract matures.
Self-consumption drives value. A PPA works best when a business has high daytime electricity demand and can consume the majority of what the panels generate. When a large share of generation is exported rather than consumed on-site, the savings reduce - because export income typically belongs to the funder, not the business.
Three PPA structures
The on-site (private wire) PPA is the most common - panels connect directly to your distribution board, bypassing grid distribution charges. A sleeved PPA channels renewable power across the National Grid to businesses with multiple sites but only one suitable roof. A virtual PPA is a purely financial arrangement used by large corporations to hedge energy costs without physically receiving power from a specific site.
PPA vs Buying the System Outright
The main alternative to a PPA is a capital expenditure (CapEx) purchase: the business funds the system and owns it from installation onwards. CapEx typically delivers a stronger return over the full asset life. The business avoids the full grid rate on all self-consumed power, can claim the 100% Annual Investment Allowance in year one, and owns decades of effectively free power once the system is paid off.
A PPA trades that long-term return for zero upfront cost and zero performance risk. For a business consuming 200,000 kWh per year, switching from a 27p grid rate to an 11p PPA rate saves around £32,000 per year with no capital investment. For organisations that cannot use capital allowances - charities, schools, NHS bodies, or businesses in a loss-making position - or those that want to keep capital free for core operations, a PPA is often the more practical structure despite the lower headline return over 25 years.
Commercial solar businesses and energy consultants that present both routes to a client can manage quote versions and track the resulting agreement through a contracts workflow, keeping both options documented before either is committed.
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