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the asset will create a certain profit margin . The fixed price will reduce exposure to the market and its volatility ( Exhibit 3 ). The cost of electricity per megawatt hour ( MWh ) from PPAs tends to be more expensive than electricity generated from a company ’ s own asset , but no capital spending is required
There are two main types of PPA : physical and virtual . Physical PPAs are based on delivery of produced electricity and any green certificates . They are generally signed in the market where both the off-taker and the producer are located . Virtual PPAs are financial instruments that don ’ t involve the physical delivery of energy . These PPAs can be signed with the off-taker and producer located in different markets — for example , a producer is typically located in a country with a more attractive levelized cost of energy . Generally , though , most off-takers and producers are located within the same economic zone to facilitate the transfer of any green certificates .
Moreover , compared with classic markettraded products , PPAs can cover much longer
Exhibit 3 : Power purchase agreements allow companies to hedge against risk from energy volatility .
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