Virtual Power Purchase Agreements (VPPAs): Powering The Energy Transition

Introduction

The Virtual Power Purchase Agreement (VPPA) is a comparatively new but very fast-growing tool in the world energy market. It is basically a financial arrangement, usually being a Contract-for-Difference (CfD), between a renewable power project developer and an institutional or corporate purchaser. As opposed to classical Power Purchase Agreements (PPAs), which are tied to the physical transmission of power from the generator to the buyer over the grid, a VPPA is a financial-only transaction. Under this structure, the renewable developer sells the electricity produced from its facility directly into the wholesale electricity market at the then-current market price. The corporate purchaser, however, simply keeps on buying its electricity as normal from its current utility or nearby supplier.

The innovative element of a VPPA is the settlement mechanism. The buyer and developer fix a "strike price" for the electricity in the VPPA. When the market price of electricity is above this strike price, the difference goes to the developer from the buyer. However, if the market price dips below the strike price, the difference goes to the developer from the buyer. This design enables the buyer to economically hedge against wholesale electricity price volatility, allowing long-term cost predictability while enabling renewable energy production.

Alongside the financial settlement, the buyer receives Renewable Energy Certificates (RECs) or Energy Attribute Certificates (EACs), which represent the environmental attributes of the renewable energy generated. These certificates are critical because they allow the buyer to legally claim the environmental benefits of renewable electricity, such as reductions in greenhouse gas emissions, even though the physical electricity consumed at its facilities may not be directly sourced from renewable plants. As a result, VPPAs are widely recognized as an effective tool for advancing corporate decarbonization and meeting sustainability targets¹.

This model is especially appealing to geographically diversified multinational companies and firms. Since a VPPA is not physically delivery-based, a firm that has operations in many regions can invest in renewable energy schemes situated anywhere without considering whether its consumption points are situated close to the generation plant. This adaptability not only allows VPPAs to scale internationally but also opens up financing possibilities for developers of renewable energy, facilitating the building of projects that may otherwise find it difficult to get long-term off-takes. In effect, VPPAs fill the gap between the financial markets and the energy markets by creating a way for companies to hedge their energy price risks, showcase environmental leadership, and help drive the global renewable energy transition directly—without the logistical hurdle of physical power delivery.

VPPAs in the Energy Sector

Virtual Power Purchase Agreements (VPPAs) have developed very quickly as a revolutionary tool in the international energy market, combining in a distinctive way financial creativity with sustainability leverage. Their attractiveness rests on the capacity to disentangle renewable energy purchase from the rigidities of physical infrastructure, developing a highly flexible and scalable system. In contrast to standard energy sourcing schemes, VPPAs enable firms to keep on purchasing electricity from their current utility suppliers and, at the same time, fund renewable energy projects elsewhere. This aspect of VPPAs makes them especially beneficial for big business operating in various states or nations, where coordination of on-site renewable generation and actual consumption patterns may be logistically and economically unfeasible.

One of the central contributions of VPPAs to the energy sector is their role in enabling corporate sustainability commitments. By acquiring Renewable Energy Certificates (RECs) or Energy Attribute Certificates (EACs) linked to the renewable power produced under the agreement, companies can credibly claim reductions in their Scope 2 greenhouse gas emissions. This directly supports compliance with frameworks such as the Greenhouse Gas Protocol and bolsters alignment with global climate initiatives, including the Science Based Targets initiative (SBTi) and RE100. For businesses under increasing pressure from investors, regulators, and consumers to demonstrate environmental responsibility, VPPAs provide a credible, market-recognized pathway to decarbonization without requiring capital-intensive infrastructure investments.²

VPPAs also offer a substantial financial benefit in the form of a hedge against the volatility of electricity prices. The contract-for-difference formula enables firms to level out energy costs over the long term, shielding them from volatility of wholesale power markets. The stability is particularly beneficial for power-intensive industries like manufacturing, data centers, and logistics, where electricity prices have a direct effect on operating expenses and profitability. By locking in a strike price, organizations can gain cost certainty and limit exposure to violent market fluctuations and thus enhance financial robustness. Apart from financial and operational advantages, VPPAs also bestow strategic reputational benefits. Stakeholders such as consumers, employees, and shareholders are more sensitive to a business's environmental activities. Companies that implement VPPAs can align themselves with leadership positions in sustainability and innovation, enhancing brand equity while aligning with increasing corporate responsibility expectations. Further, by backing renewable developments across different geographies, VPPAs enable corporations to highlight their contribution towards global energy transition targets, hence advancing their legitimacy in overseas markets.

Another distinctive advantage of VPPAs is their borderless scalability. Because the arrangement does not depend on physical delivery, companies can engage in renewable energy procurement across jurisdictions and markets, even if their facilities are far from the generation site. For example, a corporation headquartered in Europe with operations in Asia can still enter into a VPPA with a wind or solar project in the United States, receiving the associated RECs and thereby strengthening its global renewable portfolio. This flexibility greatly enhances the demand base for renewable developers, creating financing certainty and accelerating project deployment.³

Taken together, these attributes position VPPAs as a game-changer in the energy sector, enabling corporations to simultaneously pursue sustainability, financial prudence, and reputational leadership. By bridging the gap between renewable energy supply and global corporate demand, VPPAs are reshaping how energy is financed, consumed, and perceived in the era of climate-conscious business practices.

Global and Indian VPPA Landscape

At the international level, Virtual Power Purchase Agreements (VPPAs) have quickly emerged as one of the leading instruments for corporate renewable energy procurement. In the last decade, multinational corporations with aggressive sustainability goals have addressed their ambitions through VPPAs as a consistent way of fulfilling their promises. Technology companies like Microsoft, Google, Amazon, and Meta (Facebook) have led the way with this trend, using VPPAs to purchase enormous quantities of renewable electricity and speed the move toward net-zero commitments. Consumer brands like PepsiCo, McDonald's, and Kellogg's have similarly adopted the approach, seeing not just its role in driving environmental benefits but also its value in enhancing corporate reputation and stakeholder confidence. In 2021, for example, McDonald's signed three milestone VPPA transactions adding up to 1,130 MW of clean capacity, a deal that highlighted the increasing size and sway of such deals in traditional corporate planning.

The momentum is not limited to individual companies; entire regional markets are being reshaped by VPPA adoption. In North America, VPPAs dominate corporate renewable transactions, with the U.S. emerging as a hub for large-scale wind and solar projects financed through such agreements. Europe has also witnessed a surge in VPPA activity, particularly in countries like Spain, the U.K., and the Nordics, where supportive regulatory environments and mature energy markets have enabled corporations to engage in cross-border renewable procurement. The cumulative effect has been significant: VPPAs have not only helped multinational corporations meet their sustainability targets but have also catalyzed billions of dollars in renewable energy investment, driving the deployment of clean energy infrastructure worldwide.⁴

In emerging markets, however, the adoption of VPPAs has been more gradual due to regulatory uncertainties, underdeveloped power markets, and legal complexities associated with derivative contracts. Yet, change is underway, particularly in regions such as Latin America, Southeast Asia, and India, where rising energy demand and climate commitments are creating fertile ground for innovative energy procurement models.

In India, the VPPA model is beginning to receive serious policy attention. Historically, renewable energy procurement in India has been dominated by physical power purchase agreements and open-access models, which require direct transmission of electricity to industrial or commercial users. While effective, these mechanisms are often limited by state-level regulatory restrictions, cross-subsidy surcharges, and transmission bottlenecks. Recognizing these limitations, the Central Electricity Regulatory Commission (CERC) in 2025 proposed amendments to the country's Power Market Regulations to formally integrate VPPAs into the Indian electricity market. This policy shift represents a progressive step in regulatory thinking, as it acknowledges the need for flexible, market-based instruments to accelerate renewable energy adoption.⁵

If implemented successfully, VPPAs can offer Indian industry and commercial actors an unprecedented chance to procure renewable energy qualities without having to consume it physically. For companies with geographically scattered facilities—like IT firms, manufacturing groups, and data centres—this model could be especially beneficial. In addition, VPPAs may unlock a new source of finance for developers by providing them with long-term revenue certainty from corporate off-takers, drawing in private capital into India's renewable space. This would not only have India's domestic energy policies follow international trends but also improve India's ability to deliver its ambitious Nationally Determined Contributions (NDCs) under the Paris Agreement.

Challenges in VPPA Adoption

Even with their increasing popularity and potential, the take-up of Virtual Power Purchase Agreements (VPPAs) is not without serious challenges. The most important of these is in their characterization as being legal and financial. Since VPPAs are essentially financial products fashioned as contracts-for-difference, they are typically characterized by many jurisdictions as being derivative instruments. Such categorization places them within the purview of intricate financial regulations, subjecting purchasers and developers to compliance that is at times unprecedented for entities whose principal business is outside of the financial arena. For example, according to International Financial Reporting Standards (IFRS) as well as U.S. Generally Accepted Accounting Principles (US GAAP), VPPAs might have to be disclosed as derivatives on the balance sheet, initiating mark-to-market accounting. This implies that price volatility in the electricity market can have a direct effect on the buyer's balance sheet, and hence result in earnings volatility and extra disclosure requirements.

Another element of complexity comes from taxation and regulatory compliance. In jurisdictions like India, where derivatives are closely regulated under legislation like the Securities Contracts (Regulation) Act, 1956, the regulatory permissibility of VPPAs is a gray area unless specifically acknowledged by the authorities. Without well-defined legal structures, contracting parties in VPPAs risk exposure to challenges in regulations, challenges of enforceability disputes, or retrospective compliance obligations. This makes potential corporate purchasers, especially with low risk tolerance in terms of legal uncertainty, hesitant to act.

The intricateness of negotiating contracts is also an impediment. VPPAs necessitate highly tailored contracts that deal with strike prices, settlement mechanisms, credit risk, and Renewable Energy Certificates (RECs) treatment. The negotiation of such contracts tends to involve numerous stakeholders, including sustainability teams, developers, financial advisors, and legal advisers. For companies with little experience in the energy market, such a learning curve can be resource-grabbing and daunting.

Market-related risks are additional hurdles. Since the VPPA settlement relies on the spread between the strike price and the wholesale market price, buyers stand the risk of paying more than expected when market prices stay persistently below the contracted value. Under such circumstances, what was meant as a financial hedge would end up being a liability, especially where there is volatility or immaturity in electricity markets. This uncertainty requires sophisticated risk modelling and scenario planning, which not every corporation might have the resources to undertake.

In addition, VPPAs require some creditworthiness and long-term commitment that may discourage small businesses. Renewable developers usually prefer corporate offtakes with robust balance sheets to ensure revenue stability for 10–15 years. This constrains the supply of eligible buyers, focusing VPPA activity among multinational companies while small businesses rely on more primitive green energy procurement practices.

Lastly, there are reputation and additionality issues. Not every VPPA leads to the development of new renewable energy projects; rather, they could be associated with existing assets. This challenges whether such transactions actually help increase renewable capacity or simply allow companies to "greenwash" their energy use. For companies interested in demonstrating real climate leadership, securing project additionality that is, enabling the development of new capacity is crucial.

Recommendations

To unlock the full potential of Virtual Power Purchase Agreements (VPPAs) and ensure their long-term success, several strategic recommendations can be made for corporations, developers, and policymakers alike.

1. Engage Specialized Advisors: Due to the intricacy of VPPA structures—ranging from energy markets, finance, law, to sustainability—companies need to collaborate closely with specialty legal, accounting, and energy consultants. These professionals can assist in negotiating strong contracts, review derivative ramifications, and foresee regulatory hazards. In the absence of such professional advice, companies face risk from compliance breaches, adverse contract provisions, or disalignment with sustainability goals.
2. Clarify Accounting and Regulatory Treatment: Corporations need to proactively assess whether VPPAs qualify as derivatives under applicable accounting standards such as IFRS 9 or US GAAP ASC 815. Early clarity ensures proper balance sheet treatment, transparent disclosures, and internal preparedness for mark-to-market volatility.⁶ In parallel, businesses must remain vigilant about the regulatory classification of VPPAs in their jurisdictions, particularly in emerging markets like India, where the legal framework is still evolving. Pre-emptive compliance planning will avoid costly surprises.⁷
3. Structure Strike Prices with Precision: The strike price is central to VPPA economics. If set too high relative to expected market prices, buyers risk consistent negative settlements, undermining the deal's financial rationale. Conversely, a strike price too low may weaken the project's bankability for developers. Corporations should use sophisticated risk modeling and scenario analysis to structure balanced strike prices that hedge against volatility while minimizing downside exposure.⁸
4. Prioritize Additionality: To avoid accusations of "greenwashing," buyers should focus on VPPAs that lead to the development of new renewable energy projects, rather than simply contracting from existing capacity. This ensures genuine additionality, where corporate participation directly enables new clean energy generation. Demonstrating measurable carbon reduction not only enhances environmental integrity but also strengthens a company's sustainability reporting, brand reputation, and alignment with global frameworks like the Science Based Targets initiative (SBTi).
5. Monitor Evolving Market and Policy Landscapes: The policy landscape around VPPAs is active. For example, India's Central Electricity Regulatory Commission (CERC) is in the process of developing frameworks to officially acknowledge VPPAs. Active tracking of such reforms, as well as shifts in international policy, enables companies to detect first-mover benefits, adjust to compliance needs in a timely manner, and gain beneficial terms of the deal before market or regulatory saturation. Active participation in industry coalitions and platforms for knowledge sharing can also enhance readiness.
6. Expand Access Beyond Multinationals: Currently, VPPAs are dominated by large corporations with strong balance sheets. To democratize access, innovative models such as aggregated VPPAs—where smaller buyers pool demand—should be encouraged. This would broaden participation, allowing medium-sized businesses to benefit from renewable procurement and enhancing overall market depth.
7. Integrate VPPAs into Broader ESG Strategy: Finally, corporations should not treat VPPAs as standalone tools but as integral components of a comprehensive Environmental, Social, and Governance (ESG) strategy. Linking VPPAs with internal energy efficiency initiatives, Scope 2 emissions reduction goals, and global net-zero commitments will maximize their strategic value and credibility.

In essence, the success of VPPAs will depend on the ability of corporations to adopt a well-informed, risk-aware, and sustainability-driven approach. With careful structuring, regulatory adaptation, and a focus on additionality, VPPAs can evolve into a cornerstone of corporate decarbonization strategies worldwide.

Conclusion

In conclusion, Virtual Power Purchase Agreements (VPPAs) are a revolutionary innovation in the global energy market that closes the link between finance strategy and sustainability leadership. They provide corporations with an adaptable, scalable, and cost-effective way of fulfilling renewable energy obligations without having to revamp their current procurement infrastructure or excessively invest in physical infrastructure. Such easy integration makes VPPAs especially appealing to firms working across varied geographies and energy markets.

In addition to their ease of operation, VPPAs are also a two-birds-one-stone tool: they provide a hedge against electricity price risk in their contract-for-difference format, while also allowing companies to meet their decarbonization objectives. By financing new renewable plants and the buying of RECs, VPPAs allow corporations to assign tangible reductions in their carbon footprint—a rapidly important metric for sustainability reporting, ESG assessments, and investor choices.

In parallel, difficulties relating to accounting classification, legal recognition, and regulatory compliance reinforce the significance of well-informed structuring and professional advice. Other jurisdictions, such as India, are actively seeking to develop frameworks to formally include VPPAs in their energy markets, an evolution that could have a profound impact on extending the involvement of business in the green transition. As regulatory certainty strengthens, the VPPA model will become more mainstream and accessible.

Looking forward, the path of VPPAs emphasizes their ability to become a pillar of corporate renewable energy policies. For multinationals, they provide cross-border adaptability; for developing economies, they provide mechanisms for leveraging private capital into clean energy infrastructure. Crucially, they are not merely a financial instrument, but an emblem of corporate responsibility and innovation, marrying profitability with purpose.

For companies looking to bolster resistance to market fluctuations, build brand reputation, and show environmental stewardship, VPPAs offer a strong, future-proofed solution. As the international movement toward decarbonization gains pace, those that embrace VPPAs sooner rather than later and strategically will gain not only competitive edge but also play an important role in the collective action of moving toward a more sustainable energy future.

Footnotes

1. 3Degrees. (2023). What is a VPPA and what are the benefits? Available at: https://3degreesinc.com

2. PwC. (2022). Virtual Power Purchase Agreements (VPPAs) - Accounting and Reporting. Available at: https://www.pwc.nl

3. Urban Grid Solar. (2024). Quick Guide to VPPAs. Available at: https://www.urbangridsolar.com

4. S&P Global Market Intelligence. (2025). Corporate PPA leaderboard: Microsoft leap cuts into Amazon lead. Available at: https://www.spglobal.com

5. Reuters. (2025). India proposes Virtual Power Agreements to boost renewable energy trading. Available at: https://www.reuters.com

6. S&R Law. (2025). Draft Guidelines for Virtual Power Purchase Agreements in India. Available at: https://www.snrlaw.in

7. IFRS Foundation. (2024). IFRS 9 Financial Instruments. Available at: https://www.ifrs.org

8. Ember. (2025). Response to Draft VPPA Guidelines in India. Available at: https://ember-energy.org