On a napkin
The short version
A virtual PPA (VPPA) is a financial contract — not a physical electricity contract. The developer sells power into the wholesale market at the prevailing LMP. Separately, the corporate buyer continues to purchase power from its retail utility. Between them sits a contract for differences: if the LMP exceeds the fixed VPPA price, the buyer pays the developer the spread; if the LMP falls below the fixed price, the developer pays the buyer. The RECs generated by the project transfer to the corporate buyer, enabling market-based Scope 2 accounting.
VPPAs have become the dominant corporate renewable procurement mechanism because they can be executed anywhere in the country — a tech company in Boston can execute a VPPA with a Texas wind farm — without requiring physical power delivery to the buyer's location.
The VPPA is not a hedge against your electricity bill: A VPPA settled against a Texas wind node provides no protection against the electricity price your facility pays in Connecticut. This is the most common misunderstanding among corporate buyers entering their first VPPA — it is a renewable energy procurement and financial instrument, not a retail electricity hedge.
How the settlement works
At each settlement interval, the VPPA cash flows are calculated as: (Fixed VPPA price − Floating LMP) × Volume. If the fixed price is $35/MWh and the LMP averages $50/MWh, the buyer pays the developer $15/MWh — the project is profitable but the buyer pays more than the fixed price in total. If the LMP averages $20/MWh, the developer pays the buyer $15/MWh — providing a financial offset against the buyer's retail electricity costs.
Additionality and Scope 2 accounting
Additionality is the principle that a corporate renewable purchase should fund new clean energy generation that would not otherwise have been built. VPPAs executed with new projects under development satisfy the additionality test preferred by frameworks like RE100 and the GHG Protocol's Scope 2 guidance. Purchasing existing RECs in the secondary market — without a long-term contract with a specific project — does not satisfy additionality requirements under stricter accounting standards.
For Scope 2 greenhouse gas accounting, the market-based method allows corporations to claim zero-carbon electricity consumption when they hold RECs from matching generation. VPPAs generate RECs that transfer to the buyer, enabling market-based Scope 2 claims that are distinct from the location-based method (which uses the average grid emission factor regardless of REC purchases).
Key risks for corporate buyers
Price risk: If the LMP consistently exceeds the fixed VPPA price, the buyer pays more than anticipated — a financial loss even as the renewable energy goal is achieved. Volume risk: The project's actual generation may differ significantly from forecast, exposing the buyer to more or less financial exposure than modeled. Basis risk: The LMP at the project's node may diverge from the hub price used in financial models, particularly during congestion events. Counterparty risk: A developer default or project underperformance affects both the financial settlement and the REC delivery.
Common questions
Related reading on The Outlet
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