PPA: Power Purchase Agreement

Imagine a bank being asked to lend a company several thousand crore rupees to build a power plant, with no guarantee anyone will actually buy the electricity once it is built. No bank would sign that cheque. A Power Purchase Agreement is what turns that impossible pitch into a bankable one.

A PPA is a long term contract, typically running twenty to twenty five years, in which a buyer, usually a state DISCOM, agrees in advance to purchase a fixed quantity of electricity from a generator at a pre agreed tariff or pricing formula. The predictability this creates is the entire foundation of large scale power project financing in India, since lenders can underwrite a project against a known, contracted revenue stream rather than an uncertain spot market.

Whenever you read that a solar or wind developer has signed a new PPA with a state DISCOM at a certain tariff, that tariff, quoted in rupees per unit, is effectively the price at which that project's entire economics are locked in for the next two decades, which is exactly why competitive PPA tariffs have fallen so dramatically as renewable auctions have matured in India.