Virtual Power Purchase Agreements (VPPAs)

What is a VPPA?

A Virtual Power Purchase Agreement (VPPA) is an instrument that closely follows the financial settlement terms of a Contract for Difference (CFD). In a traditional PPA, the generation and delivery points must be specified and agreed upon by both parties. Under a VPPA, there is more flexibility, which has led to increased popularity for these agreements in the broader market. At the start of a VPPA, both parties agree on a price per MWh. However, under this arrangement, the generator sells the energy into their local market, where the price fluctuates. If the local value exceeds the set price, the generator transfers the profits to the VPPA buyer; if the local value is lower, the buyer pays the generator the difference. As such, this closely replicates a typical OTC derivative CFD.