A synthetic PPA is an agreement between a Generator and Buyer which primarily sets a Strike Price for energy  created by the Generator. The Buyer guarantees the Generator will receive this Strike Price for energy generated.

When the Generator goes to the wholesale power market if the price they receive is less than the Strike Price then the Buyer pays to the Generator the short- fall. If the wholesale price is higher than the Strike Price then the Buyer receives the profit from the Generator. A synthetic PPA is purely a financial instrument separate from a PPA. 

A synthetic PPA between the generator and the authority is similar to a contract for difference with payments between the generator and the authority adjusted as wholesale power prices change.

Benefits

• Length of Term – can be a long term contract
•  The financial instrument element of the Synthetic PPA serves to smooth changes in the electricity price for a Buyer in respect of electricity price fluctuations.
• More flexibility in allowing other generation and buyers to be incorporated not restricted to particular sites or MPANs.
•  Price to be negotiated can include additional social value elements to tie in with wholesale electricity pricing due to the fact that the financial instrument can account for social value
•  No requirement for procurement of the financial instrument part of the contracting arrangements (procurement is still required for the agreement with the supplier)

Considerations

• Requirement for Supplier involvement/settlement means negotiation will be required with more than just a single party
•  A number of contracts are required to be entered into which increases complexity and risk.
•  The Authority will need to trust the pricing forecast as it may be that during the early years of the contract, the market price for electricity is lower than the strike price and so it is making payment to the Generator, whereas in later years the market price increases significantly, but in that time the Generator will have suffered financial difficulties.
• In order for Authorities to become comfortable with the pricing a financial institution will need to involve to hedge the pricing.
• Professional guidance on pricing levels is required and the cost of this needs to be factored into the project costings.
• More fees in dealing with the contracts (legal and financial).