A power purchase agreement (PPA) is a contract with the developer of an energy project in which a buyer agrees to purchase the energy produced by the project over a set period of time at a predetermined price per unit of energy, such as a megawatt-hour (MWh).
A virtual PPA (VPPA), is a financial arrangement between a developer and the buyer which guarantees a cash flow for the renewable energy project based on output. The electricity generated from the project is sold into the local wholesale electricity market; the revenue from this sale, which varies depending on local electricity prices, is then returned to the buyer. This is unlike a physical PPA, in which the buyer takes ownership of the produced energy.
Because of the structure of a VPPA, such deals are also known as “contracts for differences,” or “fixed-for-floating swaps,” since the buyer is effectively paying a fixed $/MWh rate and receiving a floating market $/MWh rate in return. The buyer in a VPPA typically also receives the renewable energy certificates (RECs) associated with the project’s renewable energy.