A power purchase agreement (PPA) priced at €70/MWh may appear to offer a renewable project a clear revenue hedge. But the headline price alone does not show how much risk the contract removes. PPAs with the same nominal price can generate materially different cash flows because their terms allocate risks differently.
Contract terms shape the project’s market exposure
A pay-as-produced PPA typically settles electricity based on the plant’s actual generation. It can remove substantial market-price risk, but the contract must also set out how it treats curtailment, negative prices, imbalances and volumes that cannot be delivered. A baseload PPA creates a different exposure: the generator may commit to supplying a relatively constant volume regardless of renewable output.
If generation falls short of that committed profile, the producer may have to buy replacement electricity from the market. The price risk has not disappeared; it has changed form. Shaped and fixed-volume agreements introduce further variations, while floors and caps can provide partial protection while preserving some upside.
Contracts may also combine merchant pricing with guaranteed minimum revenues. AleaSoft says a PPA’s contribution to project stability depends on the agreed price, contracted volume, delivery profile, duration and obligations assumed by each party. For lenders, those obligations need to be translated into their cash-flow consequences.
Negative prices, curtailment and balancing obligations
Provisions for negative prices are becoming particularly important. A PPA may suspend payments if wholesale prices stay negative for a defined period, continue paying the generator, or require the producer to stop generation. Each option creates a different exposure, even when the headline PPA price is identical.
Curtailment terms also matter. If the transmission system operator restricts production, the contract needs to clarify whether the buyer pays for deemed generation and whether compensation applies only to certain types of curtailment. It should also specify who bears the risk when a plant is technically available but cannot export.
These terms can determine whether a project retains debt-service capacity during periods of grid stress. Balancing responsibility is another major source of variation: a generator that remains financially responsible for deviations between forecast and delivered production may face significant imbalance costs. A PPA that assigns this exposure to the buyer or an aggregator has a fundamentally different economic value.
Credit support and exposure after contract expiry
Counterparty credit should be assessed separately from protection against electricity-market risks. A 15-year contract is useful only if the buyer can continue meeting its obligations, so lenders need to review guarantees, credit support, termination rights and replacement mechanisms alongside the power price.
Termination compensation requires particular scrutiny. If the buyer defaults halfway through the financing period, lenders need to determine whether the protection is sufficient to refinance the project or replace the offtaker. A weak termination structure can leave a project exposed to merchant-market prices when the original PPA fails, despite having been presented as contracted.
Merchant tail risk presents a different concern. A 10-year PPA financing a project with a 15- or 18-year debt life leaves part of the loan exposed to market prices after the contract expires. Even if debt matures before the PPA ends, the asset’s residual value may depend on assumptions about the post-contract period.
Assessing PPA bankability
PPA bankability should therefore be assessed as a matrix rather than a single number. The key questions are: what volume is protected, and during which hours? Which market risks are covered, who pays for imbalance, who bears curtailment, and what happens during negative prices? The assessment also needs to establish what happens if the buyer fails and how much merchant exposure remains.
The headline price answers none of those questions. As Southeast European markets become more volatile and renewable penetration rises, the commercial engineering of a PPA will matter as much as the negotiated €/MWh. The strongest contract will not necessarily have the highest quoted price; it will be the one that continues to protect project cash flow when the electricity system behaves differently from the base case.