What is the Difference between an Onsite and Offsite PPA? 

Definition

Until now, the majority of power deliveries have been physical. This means that the power producers feed-in and the consumer's offtake correlate both temporally and in terms of balancing. Other forms of power delivery are referred to as virtual (or less commonly: synthetic (see box)). These can be structured in in various ways. Generally, a distinction is made between onsite and offsite deliveries. 

• Onsite PPA: The power is generated and consumed at the same location, connected through a direct line that bypasses the public grid.  
• Offsite PPA: Generation and consumption are spatially separated; the power is delivered via the public power grid. 

Onsite PPAs are administratively less complex than offsite PPAs and also offer financial advantages. On the other hand, offsite PPAs make it easier to find contract partners and enable the development and marketing of larger, more scalable projects. 

How do onsite and offsite deliveries work? 

Onsite delivery: power from private lines 

With an onsite PPA, the generated power flows directly to the consumer via a private direct line, outside the public grid. The generation asset is therefore located in close proximity to the consumer - or, as is usually the case, directly on the consumer’s premises, i.e., at the same site. Typical onsite PPA configurations include: 

• A PV system installed on the roof of a commercial or industrial building supplying the operation.
• A wind turbine located on a factory’s premises feeding power directly into the facility’s power network. 
• Combined heat and power plant (CHP) or emergency generator in a hospital. 
• Tenant power models where a PV system provides tenants with cost-efficient power. 
• Less common: A wind or solar park supplying a nearby industrial facility via a private direct line.

The key feature is the behind-the-meter structure: The power stays "behind the meter," meaning the metering point to the public grid. This applies at least to the power consumed by the onsite PPA off-taker. 

Any surplus power not consumed is still fed into the public power grid and typically sold "merchant," i.e., without price guarantees via the spot market. If the generation asset delivers too little power, the consumer must source the shortfall from the public grid. 

Offsite PPAs: power deliveries via the public grid 

With an offsite PPA, the producer feeds power into the public grid at one location and the off-taker withdraws it from another. Such deliveries typically take place within one power grid - for example, within the German grid (to which Luxembourg is also connected), the French grid, or the Iberian grid that Spain and Portugal operate jointly. Through interconnectors - the “border crossings” of the power system - cross-grid physical deliveries are also made regularly, although these rarely take place under PPAs and are more common as spot market transactions. 

The locations of power feed-in and withdrawal are therefore irrelevant. That's why offsite PPAs are more flexible and scalable than onsite PPAs. What matters for a physical delivery is the temporal-balance sheet correlation. For this, the balance groups of both sides must always be balanced against each other. In practice this  means: 

• In every 15-minute interval (96 per day), the fed-in volume must exactly match the withdrawn volume on a balancing basis. 
• Over- or underproduction ("residual volumes") must be settled by the relevant balancing responsible party or parties via the spot market. 
• The transport path in the grid is irrelevant - power generated in the North Sea can, from a balancing perspective, be “consumed” simultaneously at the edge of the Alps. 

Business economic aspects of an onsite and offsite PPA

There are significant economic differences between onsite and offsite PPAs. However, one aspect that - contrary to common assumptions - does not represent a major distinction should be mentioned upfront: the handling of residual power volumes. 

Balancing  group management 

In the vast majority of PPAs, it is the exception rather than the rule that a plant’s output precisely matches the offtaker’s load.  Only highly flexible demand-side assets can adjust consumption over longer periods to track the available PPA volume, typically operations where most of the energy demand is tied to producing storable heat or cold. Even in these cases, especially under Offsite PPAs, consumption will generally respond more to market price signals than to the PPA delivery profile. In all other cases, power traders – often specialist external service providers – must balance the difference between contracted delivery and actual load on the spot market.

A key contractual element in almost every PPA is therefore the allocation of operational responsibility and price risk for these residual volumes. The delivery structure itself – onsite, offsite or virtual – does not change this fundamental allocation challenge.

Optimized site utilization 

Many industrial and commercial properties offer attractive locations for generating renewable energy. In particular, roof and other unused areas can be monetised through  PV systems. Leasing these areas or using them directly as generation sites typically provides additional revenue streams or investment opportunities and therefore optimizes site utilization.

Security of supply and image benefits 

Beyond that, such systems can offer an additional level of supply security. If the consumption and production facilities are capable of forming an isolated network, they can - especially in combination with a battery storage system as an "emergency power unit" - supply power to the facility in the event of a public grid outage. 

A visible PV installation on company premises can also enhance a company’s sustainability image. However, these effects are independent of the specific marketing model or the type of power delivery. 

Economic advantages and disadvantages of an onsite PPA

The central economic appeal of onsite PPAs lies in the avoidance of grid charges, levies and certain taxes on the delivered volumes, because the public network is not (directly) used.Depending on the grid operator and current power price, these charges can account for more than 50 percent of the power price. Grid-related charges only apply to residual volumes - that is, any surplus fed into the grid or any grid power required in addition to PPA power. 

The main disadvantage is the high upfront investment costs combined with limited marketing flexibility. Investment costs are relatively high compared to large-scale plants because scalability of the project is limited. In addition, the private direct line, including the necessary converters, are additional costs that arise exclusively in onsite configurations and further increase capital intensity. 

Business economic advantages and disadvantages of an offsite PPA 

Offsite PPAs can be concluded regardless of the size of the generation asset size. Wind and solar power projects can therefore be scaled largely independently of the needs of individual partners. Large-scale projects are often contracted via multiple PPAs with different off-takers, reducing dependence on individual counterparties compared to a typical onsite set-up. For off-takers without suitable areas for their own generation assets, offsite PPAs are effectively the only option fo a physical PPA. 

Grid fees, taxes, and levies are a clear financial disadvantage compared to onsite PPAs. In terms of public perception, Offsite PPAs are also less visible; the associated sustainability narrative is therefore more complex to communicate, even though – as will be discussed – the overall sustainability impact can be greater than that of onsite PPAs. 

Macroeconomic dimensions of onsite and offsite PPAs

PPAs are generally associated with positive macroeconomic effects. As hedging instruments, they enhance investment security for wind and solar projects, which in turn lowers the cost of capital and supports the expansion of renewables. Long-term power purchase contracts also have a stabilising effect on power prices, making energy costs more predictable for the wider economy. 

By enabling more reliable commercialization, PPAs also support the system integration of renewable energies. However, this doesn't apply to all PPAs types equally. Onsite assets, for instance, are only partially exposed to the wholesale market. Their distinct cost structure creates macroeconomic distortions and, almost inevitably, misallocations of resources. 

Misallocation of energy resources 

The behind-the-meter construction does not normally separate onsite assets from the public grid technically. True island systems are absolute exceptions. To avoid curtailing output and accepting production losses during periods of oversupply, onsite plants are usually connected to the grid so that surplus power can be exported rather than wasted. 

The root of the misallocation problem lies in the cost structure, not in the physical set-up. Price signals to the onsite consumer are distorted relative to general retail tariffs, creating strong incentives that almost guarantee inefficient allocation of energy. Because onsite offtakers face a lower effective marginal price than standard consumers, they tend to use more electricity than they would if they had to pay the full set of charges and levies 

Effects on the power market and grid stability 

Because of their cost structure, the power supplied by these onsite generation assets sends a distorted price signal to the other market participants, particularly on the spot market. Under certain circumstances - for example when there is a local shortfall in supply  - this can even put unnecessary pressure on the power grid, as consumption patterns no longer reflect the true system cost of power. 

The argument that onsite assets relieve the power grid is only partially convincing. It is true that more transmission capacity remains available to the grid because onsite power doesn't flow through it. However, onsite plants do not necessarily ease conditions in the local distribution network when there is local scarcity or surplus; in some cases they may even exacerbate it. The prevailing price incentives make genuinely grid-supportive behaviour less likely, despite the technical potential of onsite generation to contribute positively to system stability. 

The supposed relief that onsite systems provide to the grid is often cited as the main reason why consumers of onsite power do not have to pay grid fees.. 

However, the extent to which the grid is used is merely a proxy for the actual costs of grid maintenance. Large consumers, who don't behave in a grid-friendly way due to cost incentives, generate higher grid operating costs with the same level of consumption without contributing to them appropriately. 

Example of misallocation caused by an onsite PPA 

A large cold storage facility sources part of its power from a PV installed on the hall’s roof. This makes sense because the load profiles align well: cooling demand tends to be higher during periods of solar production than at night or under cloudy conditions. 

On a cloudy day, however, PV systems in Germany may repeatedly produce a lot of power, then very little again. Across Germany, this results in an overall medium but volatile PV feed-in. Since wind is blowing quite reliably, the power price remains relatively low. The price for a megawatt-hour (MWh) on the spot market fluctuates between 50 and 60 euros (EUR) over the course of the day. 

Including all charges, the cold storage operator would therefore pay around 110 EUR/MWh for power from the public grid. At this price, the operator would reduce the cooling output. Because strong winds are still expected during the night. Combined with low demand, this leads to an power price of around 45 EUR/MWh from 10 p.m. on the spot market. For maintaining the temperature inside the cold storage, it would be sufficient to increase cooling output only at that time. 

From a macroeconomic and grid perspective, this behavior would be sensible because it means that available power is allocated to consumers willing to pay 110 EUR/MWh. The PV system on the cold storage roof would even help cover the needs of those consumers and could marginally lower the power price. 

From a business perspective, however, the calculation looks completely different. A constant power price of 70 EUR/MWh is agreed in the PPA. And this also corresponds to the cold storage operator's costs, since they pay no charges on it. As a result, they will therefore use the sunny periods to cool down the cold storage as much as possible. Otherwise, they would have to pay about 90 EUR/MWh at night including charges. 

With an offsite PPA, the situation would be different:  the off-taker would pay a final price of 140 EUR/MWh with a PPA price of 70 EUR/MWh and would adopt grid-friendly consumption behavior. They would namely resell the power during the day and accept a small loss to recoup the margin at night. Their calculation would be: 

– 140 EUR (to the PPA counterparty) 

+110 EUR (from selling power on the spot market during the day) 

 – 90 EUR (power procurement at night (from the public grid)) ────────────────────────────────────────────────── 

= 100 EUR (effective power price) 

100 EUR < 140 EUR (final price for PPA power) 

Conclusion: the regulatory difference is more important than the technical one 

By definition, onsite and offsite PPAs are distinguished by the delivery route: in the former, power is supplied via a private direct line, in the latter via the public grid.  Both contract types are suitable for hedging market risks, reducing capital costs for generation assets, and ultimately supporting the expansion of renewable energies. 

However, the different incentive structure regarding taxes, levies, and grid fees creates a market distortion in favor of onsite asset operators and at the expense of the community of grid users. This is where the real difference lies, from both a business and economic perspective, whereas the technical difference affects usage options and grid friendliness only marginally. 

A reform of the surcharge regime could help make both types of power supply contracts equally attractive for investors while also being beneficial for grid operation and the overall economy.