What Is a Virtual Power Purchase Agreement (VPPA) and How Does It Work?

The shift toward renewable energy isn’t just about putting up solar panels or wind turbines. It’s also about creating financial structures that make clean energy projects bankable while meeting sustainability requirements of the Off-takers. Globally, One of the most important of these structures is the Virtual Power Purchase Agreement (VPPA).

A VPPA renewable energy is often described as a “contract for differences.” It allows companies to financially support renewable energy projects, reduce their carbon footprint, and claim renewable energy credits, all without physically taking delivery of the electricity.

What is the VPPA concept?

A Virtual Power Purchase Agreement is a long-term financial contract between a corporate buyer (say, a tech company or manufacturer) and a renewable energy developer (the one building solar or wind farms).

Unlike a traditional Power Purchase Agreement (PPA), where electricity is physically delivered to the buyer’s facilities, a VPPA is purely financial. The renewable project sells its generated electricity into the wholesale power market at market price. The corporate buyer, instead of receiving power, agrees to pay or receive the difference between that market price and a pre-agreed strike price.

In return, the buyer receives Renewable Energy Certificates (RECs) or their equivalent, which prove that clean VPPA energy was produced and allow the buyer to claim sustainability benefits.

Core Components of a VPPA

To really understand how VPPAs function, let’s break down the technical pieces:

• Strike Price: A fixed price agreed in the contract for each unit of electricity generated. This price creates predictability for the developer.
• Market Price: The real-time price at which the electricity is sold in the wholesale electricity market.
• Contract for Differences: If the market price is higher than the strike price, the developer pays the buyer the difference. If the market price is lower, the buyer pays the developer the difference.
• RECs (Renewable Energy Certificates): Digital tokens representing 1 MWh of renewable energy generated. These are the real “asset” for corporates, as they help meet sustainability and carbon reduction targets.
• Settlement Mechanism: Usually done on a monthly basis, involving financial transfers between buyer and developer depending on price fluctuations.

How Does a VPPA Actually Work?

Let’s run through a practical example:

• A solar developer signs a VPPA with a multinational corporation at a strike price of ₹4/kWh.
• The developer sells the power into the wholesale market at ₹3.5/kWh.
• Since the market price is lower, the corporate buyer pays the developer ₹0.5/kWh as compensation.
• Alongside this, the corporate buyer receives RECs equivalent to the total renewable energy generated, which they can use for sustainability reporting.

If, in the next month, the market price rises to ₹4.5/kWh, the developer must now pay the corporate buyer ₹0.5/kWh.

This two-way cash flow ensures developers have financial security to build renewable projects, while buyers get a hedge against volatile energy prices plus green credentials.

Why Do Corporations Use VPPAs?

Corporations, especially those with large, distributed energy consumption across geographies, find VPPAs useful for several reasons:

Decarbonisation & ESG Commitments: Multinationals can meet sustainability goals without directly procuring electricity through onsite or open access projects. Further, VPPA essestially allows Companies to obtain Renewable Energy credits free from any risk of double accounting or green washing (as economics of the project is being controlled by Offtaker under VPPA)
Price Hedge: A VPPA locks in a notional power price for 15-20 years, acting as a hedge against volatile energy markets.
Scalability: Unlike rooftop solar (which is capped by space), VPPAs can be tied to large utility-scale projects (100–300 MW+).
Global Procurement Strategy: Since physical power isn’t delivered, a US-based firm can sign a VPPA for a project in India or Europe and still claim renewable offsets.

Segments Where VPPAs Are Used

• Technology Companies: Cloud providers and data centre operators (who consume huge amounts of electricity).
• Manufacturing & Industrial Giants: Looking to reduce Scope 2 emissions across multiple facilities.
• Retail Chains & FMCG: With scattered outlets, where on-site renewable deployment isn’t practical.
• Financial Institutions: Banks and insurers increasingly use VPPAs to meet their green investment mandates.

Benefits and Risks of VPPAs

Benefits

• Enables New Renewable Projects: Provides developers with long-term revenue certainty.
• Meets Net-Zero Targets: Helps corporates claim carbon neutrality with RECs.
• Financial Hedge: Reduces exposure to future electricity price spikes.
• Geographic Flexibility: Buyers aren’t tied to a specific grid location.
• No capital expenditure: Unlike group captive projects, VPPA provides opportunity to meet sustainability targets without any capex;

Risks

• Market Price Risk: If wholesale market prices remain significantly below the strike price, corporates may pay more over time.
• Accounting Complexity: VPPAs often fall under “derivatives” in accounting, requiring mark-to-market reporting.
• Regulatory Uncertainty: Policies around RECs and renewable energy trading can change, impacting VPPA economics.

The Future of VPPAs in India

Globally, VPPAs are already common in the U.S. and Europe, with tech companies like Google, Microsoft, and Amazon leading adoption.

In India, the concept is still emerging but rapidly gaining traction. The Central Electricity Regulatory Commission (CERC) has initiated frameworks to allow corporate buyers to access such models. As India pushes toward 500 GW of renewable capacity by 2030, VPPAs will play a crucial role in giving corporates a structured pathway to clean energy procurement.

Partnering for VPPA Success

Navigating the legal, financial, and regulatory layers of a VPPA can be complex. Companies often need partners who understand both renewable project development and corporate energy procurement strategies.

AMPIN Energy Transition, for instance, has been enabling businesses to align their growth with sustainability by offering structured renewable energy solutions, including advisory and execution support for mechanisms like VPPAs. With our expertise in both utility-scale and C&I renewable projects, we help corporates transition toward greener, more reliable energy strategies. Contact us today to get started!