VPPA Mechanics

A corporation in Virginia can claim credit for wind power generated in Texas without a single electron crossing state lines.

A virtual power purchase agreement (VPPA) is a purely financial contract for difference between a corporate buyer and a renewable energy generator, in which no physical electricity changes hands and the two parties need not share the same grid region. Both parties settle against a reference wholesale price: if the market price falls below the strike price, the buyer pays the difference; if it rises above, the generator pays. The buyer purchases actual electricity through its normal utility channel. The VPPA acts as a price hedge layered on top, not a replacement.

What the buyer does receive are RECs (renewable energy certificates), one per MWh generated. Those RECs are the legal basis for the buyer's renewable energy claims. This structure resolves a problem that makes physical PPAs impractical for most large corporations: geographic mismatch between their load and the cheapest renewable sites.

Tracing a VPPA settlement. A tech company signs at $30/MWh with a Texas wind farm for 200 MW. In a given month, the farm generates 100,000 MWh and the average day-ahead price at the farm's node is $22/MWh.

Which direction does the settlement payment flow?

Buyer pays the gap. Market price ($22) is below strike ($30), so the buyer owes $8/MWh. Total: $800,000. The wind farm receives $22 from the Texas market plus $8 from the buyer, totaling $30 as contracted. The tech company also receives 100,000 RECs. Its local utility bill is unchanged.

The tradeoff is basis risk: the hedge price is set at the generator's node, but the buyer pays at its own local node. If prices at those locations diverge, the hedge is imperfect. VPPAs are now the dominant form of corporate renewable procurement globally.

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