Power Purchase Agreements and Shape Risk
A power purchase agreement locks in a price for electricity, but electricity's value changes hour by hour, so the real risk in a PPA is often not the average price but the mismatch between when the generator produces and when the buyer needs power.
Prerequisites: Day-Ahead vs Real-Time Power Markets, Locational Marginal Pricing and FTRs
A power purchase agreement (PPA) looks simple on paper: a buyer agrees to pay a fixed price per megawatt-hour for electricity from a specific generator over a long term, often 10–20 years. But electricity is not a uniform commodity — a megawatt-hour delivered at 2pm on a hot July afternoon is worth far more than one delivered at 3am in April, because market prices swing hour to hour with demand. The risk that a generator's actual production pattern doesn't match the buyer's actual usage pattern, or doesn't match the market's high-value hours, is called shape risk, and for renewable PPAs it is often the single biggest source of financial risk in the whole contract.
A PPA fixes a price per unit of energy, but it can't fix when that energy arrives. Shape risk is the mismatch between a generator's actual hourly output profile and the buyer's load profile (or the market's price profile) — and for wind and solar, whose output follows the weather rather than demand, that mismatch can be large and is priced into the deal.
Why the shape, not just the level, drives value
Solar generation peaks around midday; wind often runs strongest overnight or during storms, neither reliably lining up with when electricity is most valuable (typically late afternoon on hot days, when air conditioning demand peaks). A buyer signing a solar PPA is exposed to the fact that solar output is abundant exactly when many other solar farms also produce, pushing the market price down during those hours — the "duck curve" effect. The PPA's fixed price might look attractive against the average market price, but if output is concentrated in hours when real-time price tends to be low, the buyer is effectively worse off than the average alone suggests.
Most PPAs handle this with a shape adjustment or a "pay-as-produced" structure, where the buyer takes exactly what the generator produces, whenever, at the fixed price — pushing shape risk onto the buyer. Alternative structures shift some of that risk back to the generator or a hedge provider, for a fee reflecting how mismatched the resource's shape is with market value.
Worked example
A solar farm signs a "pay-as-produced" PPA at a fixed $40/MWh with a corporate buyer. Over a year, it produces 200,000 MWh, all concentrated in daylight hours, when the average market price happens to run $32/MWh (because so much other solar is producing at the same time). During the evening peak hours when the buyer's own facility uses the most power and the market price averages $58/MWh, the solar farm produces almost nothing.
The buyer pays a flat $40/MWh × 200,000 MWh = $8,000,000 for solar energy that, valued at the actual market price it displaces, was only worth about $32/MWh × 200,000 MWh = $6,400,000 in wholesale terms. The buyer is paying a $1.6 million premium over the solar's true market value, purely because of its production shape — separate from whatever the buyer's motivation (a renewable energy target, a hedge against future price rises) might be for accepting that.
What this means in practice
Anyone structuring or evaluating a PPA has to model the generator's expected hourly output against expected hourly market prices, not just compare the fixed PPA price to an average — the two can tell very different stories about who's getting the better deal. Shape risk is also why battery storage paired with renewables has become commercially attractive: it lets a generator shift output from low-value hours into high-value hours.
Comparing a PPA's fixed price to the annual average market price is a common and misleading shortcut. A generator whose output is concentrated in low-price hours can have a PPA that looks cheap against the average yet is expensive against the market value actually captured — shape, not just level, is what determines whether a PPA is a good deal.
Further reading
- Levelized Cost of Energy and PPA structuring notes, industry practitioner guides