A Power Purchase Agreement is an agreement between a party which produces or intends to produce power and the utility which controls the transmission and the distribution.
The Agreement stipulates the amount of energy, the price and schedule of delivery, payment terms and penalties and the date of commencement of supply. The Power Purchase agreement has emerged as an important legal document which helps encourage investment in the power industry.
Special power purchase agreements for renewable energy connect the end customer and the renewable energy producer. This ensures the viability of renewable projects.
The Power Purchase Agreement is able to formally define the output of the generating asset. This helps the Independent Power Producers (IPPs - See Article on IPPs) raise capital from banks and other investors for the project.