PPA Financing: How Power Purchase Agreements Fund Energy Projects
For many renewable energy and alternative power developers, the most valuable asset in the project is not the land, the panels, or the turbines. It is the contract that says someone will buy the power. A Power Purchase Agreement (PPA), also called an off-take agreement, turns a future stream of electricity sales into something lenders and investors can underwrite today.
This guide explains how PPA financing works, which types of PPAs investors favor, what lenders look for beyond the contract itself, and how to prepare a request. At Commercial Funding International (CFI), we work on alternative energy and renewable power funding requests of $5M to $500M and higher for projects in the USA and internationally.
What Is PPA Financing?
A Power Purchase Agreement is a long-term contract between a power producer and a buyer, known as the off-taker, who agrees to purchase the electricity (or other output) a project generates at an agreed price for an agreed term. PPA financing uses that contract as the foundation of the funding request: the lender or investor looks at the strength of the buyer and the predictability of the revenue the contract creates.
Financing for wind, solar, and other renewable energy projects can take many forms, including PPAs, feed-in tariff (FIT) contracts, debt, equity, acquisition financing, sale-leaseback financing, and debt/equity combinations. What sets PPA financing apart is that the project can be funded based on the contracts the Client has already secured.
Why the Off-Taker’s Credit Matters Most
In PPA financing, the credit quality of the counterparty often matters more than the project’s own balance sheet. Through our network, CFI has the potential to provide PPA financing for a project or company with investment grade entities worldwide. That entity may be:
- A governmental agency or local municipality
- A utility or other off-taker power purchaser
- A feedstock provider
- A technology provider or contractor
- A joint venture partner
This type of lending is not project specific. It is typically based on the creditworthiness of the investment grade entity involved in the project, generally rated BBB or higher by S&P or Baa or better by Moody’s. A contract with a strong counterparty can make a project financeable that would otherwise struggle to attract capital.
The Four Main Types of PPAs
Generally speaking, there are four types of PPAs or off-take agreements, and investors view each a little differently.
Utility PPAs
Utilities usually have their own form of PPA and normally do not allow modifications. Even so, utility PPAs are normally accepted by an investor’s legal counsel and are typically very bankable.
Feed-in Tariff (FIT) Contracts
FIT contracts are set in stone and not modified. They are generally the most bankable form with investors and their legal counsel. With both utility PPAs and FIT contracts, the off-taker is almost always a good credit risk, so credit is not usually an issue.
Municipal PPAs
PPAs with municipalities, schools, and similar public bodies will normally be fully executed and useful for presentation to the investor. Investors favor these as well, and the credit risk is normally minimal.
Private PPAs
Private PPAs are with private or public companies, and the buyer normally needs investment grade credit to be considered by an investor. In many cases the investor will require its own form of PPA, or a modification of the existing one. For that reason, a developer will often obtain a PPA term sheet first, to be followed by the investor’s own form of PPA that its legal counsel has prepared or approved. Two years of audited financial statements from the buyer are often required for credit evaluation.
What Lenders Look for Beyond the PPA
A strong off-take contract is the starting point, not the whole story. CFI’s sources prefer project finance opportunities that have, or are close to having, the following characteristics:
- Feedstock and off-take agreements in place
- Permits in place
- Proven technology
- An experienced and highly capable management team
Our sources consider the merits of each project on a case-by-case basis. For biomass projects, a feedstock or supply agreement tends to accompany the PPA, because the lender needs confidence that the plant will have the inputs to produce what the contract promises. You can review the range of alternative energy project types our sources consider, from solar and wind to anaerobic digestion and waste-to-energy plants.
Equity in the Project
CFI’s lenders and lender/investor underwriting sources prefer that a Client have at least 10% in cash invested in the project already, or proof that it is available to invest. When that is not possible, our sources may be able to bootstrap the financing with a combination of senior debt, other debt financing and equity capital, sale-leaseback financing, or joint venture financing, or arrange financing based on the PPA and/or the creation of Industrial Development Revenue Bonds.
Monetizing Assets with a Power Purchase Agreement
PPAs are not only for dedicated power developers. Commercial and industrial companies may be overlooking potential sources of revenue. A PPA can be used to lessen costs, fund renewable energy development, lower overall utility costs, and generate needed working capital.
By entering into a long-term contract with an end-buyer, companies can monetize landfills, waste treatment operations, remote pieces of land, roofs, parking lots, and similar assets. A PPA provides a reliable source of revenue for the length of the contract, and it can make the resulting end product more competitively priced on the open market. For companies that want to unlock value from assets they already own, it is worth comparing this approach with an asset-based loan or other forms of unique capitalization.
How PPA Financing Fits Into the Capital Stack
PPA financing rarely stands alone. Funding strategies for energy projects may leverage debt, equity, leasing, and PPA structures together to meet the project’s financial objectives. CFI’s network of sources is versed in programs that include equity fundraising for solar startups, construction financing for power plant development, PPA origination, energy asset acquisitions, and power billing programs. On the equity side, our network includes strategic and financial investors looking for greenfield and developed projects in the energy, power, and infrastructure sectors.
Short-term capital can also play a role while a project moves toward a fully executed contract or permanent financing. Our article on bridge loans vs. hard money loans explains when each short-term tool makes sense. Projects outside the United States can review CFI’s international funding page, and resource-based energy projects may find our guide on how to finance a mining project useful, since both depend heavily on off-take agreements.
How to Prepare a PPA Financing Request
Investors move fastest on requests that are organized and complete. Start with a concise Executive Overview of 1 to 5 pages that covers:
- The amount requested and the use of funds
- The project type, location, capacity, and technology, and whether that technology is proven
- The off-taker, the type of PPA, its term and pricing, and its status (term sheet, draft, or fully executed)
- The off-taker’s credit rating or financial strength
- Feedstock or supply agreements, if applicable
- Permit status
- The cash equity already invested or available
- The experience of the management team
For a step-by-step guide, see our article on how to write a commercial loan executive summary, and review The Process to see how CFI moves a request forward.
Frequently Asked Questions
What is PPA financing?
PPA financing is funding for an energy project or company that is based on a Power Purchase Agreement, a long-term contract under which an off-taker agrees to buy the power the project produces. Lenders and investors underwrite the request largely on the strength of that contract and the creditworthiness of the buyer.
What credit rating does the off-taker need?
CFI’s PPA financing is typically based on the creditworthiness of an investment grade entity involved in the project, generally rated BBB or higher by S&P or Baa or better by Moody’s.
Which types of PPAs are most bankable?
Feed-in tariff contracts are generally the most bankable with investors and their legal counsel, and utility PPAs are normally very bankable as well. Municipal PPAs are also favored. Private PPAs normally require an investment grade buyer and may need to be rewritten on the investor’s own form.
How much equity do I need for a renewable energy project?
CFI’s sources prefer that a Client have at least 10% in cash invested in the project already, or proof that it is available to invest. If not, our sources may be able to combine senior debt, other debt, equity, sale-leaseback, or joint venture financing.
Does CFI finance international energy projects?
Yes. CFI’s sources can potentially provide financing for USA and international alternative energy and renewable power projects, on requests of $5M to $500M and higher.
Do you accept PPA financing requests from brokers?
Yes. Broker inquiries are welcomed and appreciated.
Ready to Discuss Your PPA Financing?
If your project has a signed or pending off-take agreement with a creditworthy buyer, it may be a strong candidate for PPA financing. Email us a 1 to 5 page Executive Overview or call our office to discuss your project. Visit our PPA financing and alternative energy pages or contact Commercial Funding International today.
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