What is a vPPA, and why are so many corporations using them to meet their sustainability goals? A virtual power purchase agreement is one of the most powerful tools available to corporate energy buyers, enabling organizations to support new renewable energy development, manage energy cost risk, and make credible claims toward Scope 2 decarbonization targets.
This video answers the question “what is a vPPA” in plain terms, walking through how a virtual power purchase agreement works, how money flows between parties, and what role RECs play in the process.
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Welcome. This video offers a high-level answer to the question: what is a vPPA, and how does it work?
A virtual power purchase agreement is a financial contract between a renewable energy generator — the seller — and an organization or corporation — the buyer. Understanding what is a vPPA starts with understanding why it’s “virtual” — the energy generated by the renewable resource is not delivered directly to the buyer, but rather sold into the local wholesale electricity market.
In a virtual power purchase agreement, the buyer and seller agree upon a fixed price for electricity generated by the renewable resource, known as the strike price. Here’s how the cash flows work:
Because the wholesale market is always moving, the market price and strike price often differ. When that happens, the seller may owe the buyer money — or vice versa. The two parties settle the difference every month through what is known as a settlement payment.
For instance, if the seller receives $36 per megawatt-hour from the wholesale market but has a strike price of $44 per megawatt-hour with the buyer, the buyer would send the seller an $8 per megawatt-hour settlement payment.
Conversely, if the market price is $54 per megawatt-hour and the strike price is $44 per megawatt-hour, the seller would send the buyer a $10 per megawatt-hour settlement payment — as illustrated in the diagram above.
This is one of the most important mechanics to understand when asking what is a vPPA: the settlement payment is what creates the financial hedge for the buyer, while ensuring the seller receives a predictable revenue stream.
In addition to the cash flows, there is a flow of renewable energy credits — RECs — associated with the renewable generation. REC transfers are a core component of what makes a virtual power purchase agreement valuable for corporate sustainability goals.
So what is a vPPA in practice? It’s a structure that allows corporations and organizations to support renewable energy development, achieve sustainability goals, and manage energy cost risk — while giving renewable energy developers the predictable revenue streams they need to finance and build new clean energy projects.
