A Power Purchase Agreement is an electricity purchase contract specifying a price or pricing mechanism, a quantity or delivery profile, and a term. In a financial PPA, also called a virtual PPA or VPPA, the parties settle a price difference rather than deliver electricity to the buyer under that arrangement. The PPA label alone proves neither renewable origin nor mining profitability.
Start with a physical PPA. The farm agrees to buy electricity from a generator, while the seller may continue owning and operating the plant. U.S. EPA, the US Environmental Protection Agency, describes delivery or transfer of title to electricity from an on-site or off-site source. Owning panels on the farm is therefore not the only option. Local generation can involve Behind-the-Meter Mining, with mining on the local side of the meter. The contract still needs a delivery point, timing and responsibility if the electricity is not delivered. [1]
A financial PPA, or VPPA, works differently. The generator sells electricity into the market and settles the difference from an agreed price with the buyer. U.S. EPA explicitly states that this arrangement does not physically supply electricity to the buyer. Our farm must therefore purchase its operating supply separately. If it uses Grid-Connected Mining, meaning mining connected to the public grid, the ordinary supply runs alongside the financial contract. A VPPA can change the financial result, but it will not restore power when the grid connection fails. [2]
Prices here are in US dollars (USD); USD/MWh means dollars per megawatt-hour. In our own simplified example, excluding fees, the settlement covers 100 MWh—megawatt-hours of energy—at an agreed price of 50 USD/MWh. If the reference market price reaches 70 USD/MWh, the generator pays the buyer 2000 USD. At a reference price of 30 USD/MWh, the direction reverses: the buyer pays the generator 2000 USD. The price difference is multiplied by the settled quantity. This illustrates the two-way mechanism described by U.S. EPA. It is not a permanent bonus for the miner, and the farm’s ordinary electricity bill has not disappeared. [2]
Imagine that the price used to settle the VPPA rises slowly while the farm’s supplier raises prices sharply. The payment received may not cover the higher bill. U.S. EPA therefore links the hedging effect to how closely prices in the two markets move together. Quantity and timing also matter: contracted generation and actual consumption may have different profiles. A positive settlement does not, by itself, prove a saving. We compare both cash flows over the same period and also consider what happens when they diverge. [2]
A megawatt-hour, MWh, equals 1000 kWh of energy; kWh stands for kilowatt-hour. Matching a plant’s annual output to the farm’s annual consumption still does not match them every hour. A solar plant may generate mainly in daylight, while the operator wants to keep the mining machines running at night too. When preparing on-site contracts, U.S. DOE, the US Department of Energy, compares generation with load and examines peaks and time-dependent rates. Our project therefore needs to know whether it buys actual generation as produced or an agreed delivery schedule, who supplies missing energy, and what happens to surplus. [3]
An offer may highlight an attractive price per MWh. Depending on the arrangement, other items can follow: distribution, supplementary supply, demand or fixed tariff charges, and any financial settlement. U.S. DOE separates energy, demand and fixed charges because they respond differently to changes in consumption. To compare options, we total actual expenses and subtract actual receipts. We do not count the same saving again as another source of income. Only then do we obtain a cost relevant to running the mining machines. [4]
A farm may pay for electricity from a solar project without acquiring the right to claim its renewable attributes. U.S. EPA warns that RECs—renewable energy certificates used in the US system—may be sold to another customer. We must therefore check who owns them and on whose behalf they were retired. Retirement takes the certificates out of further trading to support that claim; the same certificate must not then support the same claim by another customer. If the contract provides replacement certificates from another project, public claims must reflect those certificates. Paying for energy, or showing a photograph of the plant, does not establish that right. [1] [5]
PPAs often bind the parties for a long period. U.S. EPA therefore includes commencement, underdelivery, payments, termination and possible price escalation among their terms. A miner also needs to ask an uncomfortable question: what remains payable if the machines stop or the operator changes? Lower consumption does not automatically cancel contractual obligations. A PPA can form part of Mining Hedging, reducing some of mining’s economic risks, but its value depends on the whole term and the actual conditions. Today’s gap against the market price is not enough. [1]
For the clearest picture, read this entry together with Grid-Connected Mining, Behind-the-Meter Mining, Energy Arbitrage, Mining Hedging. The reverse links also lead from Mining Hedging.