Breaking Down fPPA Structures: Fixed-for-Floating, Market-Following & More
There is no one-size fits all
Introduction
Financial or virtual PPAs (fPPAs or vPPAs) don’t all come in one size. It’s true that the majority, particularly those with corporates, follow the more “vanilla” fixed-for-floating swap, otherwise known as a Contract for Difference (CfD).
That said, there are other structures gaining traction, including some more exotic variants, worth considering depending on risk appetite and cashflow considerations. In this post, I set out the various structures and why you might consider using them instead of a CfD.
It’s interesting to see that the new ISDA fPPA template has incorporated (as options) a wide range of structures, signaling that ISDA expects market participants will take advantage of the full menu.
Core Structures of fPPAs
Fixed-for-Floating (CfD Model)
n the most popular structure, the PPA defines the Fixed Price (say, €60/MWh), while the Floating Price is linked to the relevant Day-Ahead Market (zonal or national).
When the Floating Price is above the Fixed Price, the seller (floating price payer) pays the difference to the buyer.
When the Floating Price is below the Fixed Price, the buyer pays the difference to the seller.
If the Floating Price equals the Fixed Price, no cash is exchanged.
For renewables (see below for “baseload” PPAs), settlement is typically monthly.
In my recent post on curtailment and negative pricing (see here) I discussed how it’s now common to include a floor price to address negative pricing.
In short: if the market price is negative, the settlement is adjusted so that the buyer only pays the difference between the Fixed Price and €0/MWh.
Revenue Certainty and Bankability (case for)
The seller always receives the Fixed Price; the buyer always pays the Fixed Price.
This provides high revenue and purchase predictability, attractive to shareholders, financiers, and rating agencies.
Fixed-price PPAs often improve project finance ratios and may even be required under financing agreements.
Cashflow disruptions (case against)
Locks parties into a price that may become misaligned with the market over time (risking one-sided outcomes).
Continuous cash settlements can add administrative burden.
Significant divergence between fixed and market prices can trigger large settlement amounts, creating accounting and treasury complexity—especially for listed companies under strict derivative accounting rules.
Cap and Floor
Another structure gaining traction is the cap-and-floor (or collar).
A floor protects the seller against extreme downside prices.
A cap protects the buyer against extreme upside prices.
Example:
Floor at €30/MWh, Cap at €60/MWh.
If the market is between €30 and €60, no cash flows.
If the market falls below €30 or rises above €60, settlement payments are triggered.
Cashflow advantages (case for)
Reduces the number and size of settlements, reducing cashlflow exchanges.
Offers each party a defined worst-case outcome, facilitating better forecasting.
Volatility (case against)
Agreeing on cap and floor levels is complex and subjective.
Greater price volatility between the cap and floor introduces revenue unpredictability.
Bankability can suffer unless the floor is high enough to satisfy lenders.
Accounting hedge effectiveness can be harder to achieve compared to standard fixed-price PPAs, which can more easily qualify for cash flow hedge accounting than cap and floor PPAs as the latter may create partial hedges, making it harder to align the hedge with physical consumption. Settlement amounts in cap and floors also vary, which adds treasury complexity and may create P&L volatility.
Market-Following (Floating-for-Floating)
This structure is common for physical Pay-as-Produced PPAs (i.e. where there is no minimum volume guarantee, but the offtaker takes all your output) but relatively uncommon for financial PPAs.
It works by indexing the PPA price to the market price minus a discount.
Example:
Discount = €2/MWh (or a %).
Market price = €80/MWh.
Cash Flows:
Seller receives €80/MWh from the market operator.
Seller pays €2/MWh to the buyer under the PPA.
Structurally, the seller is always paying the buyer the agreed discount.
Typically, parties also negotiate a floor to protect the seller against negative pricing risks.
Market upside and cashflow advantages (case for)
Seller retains upside if market prices rise (no fixed cap on earnings).
Buyer benefits from a consistent discount to market prices without making payments; depending on the size of the discount it may also act as a sufficient cushion in case market price materially rise.
Simpler cashflows for buyers: no settlement outflows, only inflows.
Market downside and bankability (case against)
Seller bears full exposure to falling market prices.
Difficult to finance projects based solely on market-following PPAs unless supplemented with a floor or subsidy.
More suited to shorter-term PPAs or operational assets rather than greenfield financings.
Baseload PPAs
Baseload PPAs are a variation of the standard fixed-for-floating structure, but instead of settling against the variable renewable generation profile (i.e., Pay-as-Produced), the PPA settles against a pre-agreed constant volume, typically the same quantity for every hour over the settlement period (often daily, weekly, or monthly).
In other words:
The buyer agrees to purchase, and the seller agrees to deliver or hedge, a flat "baseload" profile (e.g., 1 MW every hour).
The settlement is independent of actual production.
How Baseload PPAs Work in Practice
The seller commits to deliver or hedge a fixed number of megawatt-hours each hour, regardless of what their wind/solar asset is physically producing.
If the actual renewable output is less than the baseload obligation, the seller buys the shortfall from the market (or through their RtM provider).
If the output is more than the baseload, the seller sells the excess into the market separately.
This is much closer to how classic commodity hedging works and it's also why baseload PPAs are often negotiated by utilities and traders with sophisticated generation companies with a diversified portfolio capable of managing the inherent profile and volume risk. As settlement occurs on a granular level it is very challenging for standalone renewable energy projects, espeially wind (which is less predictable than solar) to sign baseload PPAs. , and sophisticated corporates rather than typical greenfield renewable projects.
Predictability and Standardization (Case For)
Buyers get a fixed, predictable offtake profile, easier for internal risk management and hedge accounting.
Sellers may command a premium price for offering a firm profile.
Easier to integrate with standard commodity hedging books.
Operational Risk and Complexity (Case Against)
Sellers must actively manage intermittency risk (especially with pure renewable portfolios).
Potential high balancing costs if generation and obligation diverge (e.g., low wind days or overcast solar periods).
Difficult for single asset projects (like standalone wind or solar) to offer true baseload without storage or third-party balancing arrangements.
Hybrid Structures
Many PPAs today combine elements of the above:
Market-following with a floor: Seller has downside protection, retains upside while the buyer has an inbuilt protection against excessively high priced periods such as those we saw in 2022 in Europe..
Floor-only PPAs: The buyer guarantees a minimum price but leaves the upside to the seller (like a revenue put option).
Cap-and-floor hybrids: Protect both parties from extreme price volatility while allowing moderate market participation.
Why Structuring Matters: Revenue Certainty, Risk Allocation & Cash Flow Impacts
At its core, the structure of a financial PPA governs how price risk is shared between the generator and the offtaker, and as such, it directly impacts cash flow predictability, hedging effectiveness, and even bankability of a renewables project.
Each structure represents a different way to split risk between the generator and the offtaker:
Fixed-for-floating: Buyer takes on market risk; seller gets stable income.
Market-following: Seller shares in the market upside/downside.
Floor or cap-and-floor ("collar"): Seller receives minimum protection, buyer limits their exposure. Both parties hedge their worst-case outcomes.
Negotiating the structure is ultimately about risk tolerance, expectations about volatility, cashflow management, and commercial leverage.
