PPA Structure Definitions | Pexapark User Manual

European Term	American Term	Definition
Annual Baseload PPA	Baseload PPA (Annual is usually implied in long-term deals)	This is a volume/contract structure. In an annual baseload PPA, the buyer agrees to buy a determined volume of energy for every hour over the year. Profile and volume risks sit with the seller, because they have to deliver the agreed energy no matter what. If there’s low production and the seller cannot meet its obligations through its plant, the agreed volume will be sourced from the spot market. To learn more on Baseload PPAs, watch our Renewable Assets Under Baseload PPAs webinar.
Arbitrage Revenue (Storage)	Price Spread Arbitrage	Profits earned by charging a battery when electricity prices are low and discharging when prices rise. Storage operators in wholesale electricity markets take advantage of price fluctuations, optimizing when to store and release energy to maximize revenue. This strategy is particularly effective in markets with high renewable penetration, where variability in wind and solar generation creates price volatility.
Balancing Market	Real-Time Market	The balancing market is a crucial component of power systems, allowing grid operators to procure energy in real-time to maintain supply-demand equilibrium when actual generation or consumption deviates from forecasts. Generators and demand-side participants submit balancing offers, and the system operator dispatches the lowest-cost resources to correct any imbalances.
Balancing Mechanism (BM)	Real-Time Dispatch	The Balancing Mechanism is a real-time electricity market operated by grid operators or transmission system operators (TSOs) to ensure that supply and demand remain balanced at all times. Unlike the day-ahead or intraday markets, where participants trade electricity in advance, the Balancing Mechanism allows generators, demand-side providers, and battery storage operators to submit offers to increase or decrease generation (or adjust consumption) in response to real-time fluctuations.
Balancing Risk	Imbalance Risk (More common in U.S. markets)	It’s a risk relevant to the intermittent nature of renewable energy. A plant has production commitments not only to the seller but to the system operator as well. On the one hand, if the buyer doesn’t receive the expected production volume, the energy needs to be acquired elsewhere. On the other hand, when the plant deviates from what the grid expects production volume to be, there are imbalance costs for the project charged by the system operator. The magnitude of the imbalance cost is driven by the actual deviations between scheduled production and real production (“forecast error”), the regulatory design of the balancing market (i.e., punitive design with penalties) and finally, whether portfolio effects may exist. The seller usually has a balancing agreement with a third party for a fee as a mitigation tool.
Bankability	Financeability / Investment-Grade PPA	A term used to describe whether a project is attractive to lenders and investors. Bankability is influenced by contract length, counterparty credit rating, revenue certainty, and regulatory stability. High bankability ensures easier access to tax equity financing and project loans.
Basis Risk = Residual Risk	Basis Risk = Hub/Node	Residual Basis Risk refers to the financial exposure resulting from price differences between nodal prices (where electricity is injected into the grid) and hub prices (used for settlement in financial PPAs). This discrepancy can lead to unpredictable cash flows for renewable generators and offtakers. Managing residual basis risk requires hedging strategies.
Buyer	Market Participant / Load Serving Entity (LSE)	The entity that is purchasing power from a renewables generator. It could be a corporate, a trader or a utility. Also known as off-taker, consumer or purchaser.
Cannibalization Risk	Covariance Risk	The risk of falling renewables revenues due to reduced price following high market growth of renewables assets. When large volumes of solar PV are produced simultaneously, the capture price in the system during their production time will decrease as other, more expensive technologies will not be needed to produce electricity and therefore not set the price in the market.
Capacity Market	Resource Adequacy Market	A capacity market is designed to ensure long-term grid reliability by compensating power plants for their availability to generate electricity when needed, even if they are not actively producing power at all times. Unlike energy markets, where payments are made for actual electricity delivered, capacity markets provide financial incentives for generators to remain operational and ready to dispatch power during peak demand periods. Generators participate in competitive auctions, bidding to provide firm capacity in megawatts, with the grid operator selecting the most cost-efficient providers to maintain system stability. Payments are then made for this guaranteed availability, regardless of actual energy production.
Cap-and-Floor PPA	Collar PPA	A hybrid pricing structure where the seller is guaranteed a minimum price (floor) while the offtaker pays no more than a maximum price (cap). If market prices fall below the floor, the offtaker compensates the seller; if prices exceed the cap, the seller compensates the offtaker. This structure balances revenue security for sellers and cost control for buyers.
Step-Down/Step-Up PPA	Graduated Price PPA	The contract price changes at predetermined intervals, either increasing (step-up) or decreasing (step-down) over time. This structure can be used to match expected cost curves, project financing needs, or regulatory incentives. Step-up pricing is sometimes used when early capital recovery is needed, while step-down pricing may be used for projects benefiting from production tax credits (PTCs).
Virtual PPA/Financial PPA	Contract for Differences (CFD) (More common in U.S. context)	That’s another common term used for a Virtual PPA. It is treated as a financial instrument, often based on the International Swaps and Derivatives Association (ISDA) contract. The agreement doesn’t deal with the physical electricity delivery of electricity but typically includes the Guarantees of Origin. It’s a common structure in the US, but not very advanced in Europe as it is considered a derivative and has a different accounting treatment under the International Financial Reporting Standards (IFRS) than a physical PPA.