Physical vs Virtual PPA
Definition
A physical PPA is a contract in which the buyer receives the project's electricity, delivered through the grid, at an agreed price. A virtual PPA, also called a financial or synthetic PPA, delivers no electricity: the project sells its power into the wholesale market, and the two parties settle the difference between a fixed strike price and the market price. The EPA describes a financial PPA as 'a hedge arrangement' and notes it is also known as 'a contract for differences, or a fixed-for-floating swap.'
Why it matters
For an investor in the project, a virtual PPA can fix revenue just as a physical PPA does, as long as the project produces and the settlement price tracks what it actually earns. For the buyer, it is a long-dated financial contract that can produce large payments when market prices fall. Knowing which kind of PPA a project has tells an investor which price risks remain with the project.
Common misconceptions
- •A virtual PPA is not a power supply contract. The buyer still needs a supplier for its actual electricity.
- •A virtual PPA does not remove all price risk for the project; differences between the settlement point and the project's own node remain.
- •Signing a PPA does not by itself give the buyer green power claims; certificate ownership does.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
Side by side
Delivery: physical PPA delivers power through the grid; virtual PPA delivers none.
Location: physical PPA buyer and project must be in the same power market; virtual PPA buyer can be anywhere.
Settlement: physical PPA pays the contract price for delivered energy; virtual PPA pays or receives the difference from a market price.
Where allowed: physical PPAs by non-utility buyers are generally limited to competitive markets; virtual PPAs are also used in regulated markets.
Worked example: a corporate buyer
KLA, January 2025: a long-term virtual PPA 'to purchase a portion of the output generated from a solar energy project for a fixed price,' with renewable energy credits 'commensurate with the power we acquire.'
If the market price is below the fixed price, KLA pays the project the difference; above it, the project pays KLA.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- How does a virtual PPA settle?
- The EPA's example: with a strike price of 10 cents per kWh, 'the renewable electricity generator owes the customer the difference when the wholesale price is above 10 cents/kWh, and the customer owes the renewable electricity generator the difference when the wholesale price is below 10 cents/kWh,' typically settled monthly. The project thus earns the strike price on the power it sells.
- Why would a company choose a virtual PPA?
- Because it can be signed anywhere the project's market is, without the buyer's own load being in the same grid region, and it works in regulated markets where physical PPAs by non-utility buyers are generally not allowed. The buyer keeps buying its own power from its usual supplier.
- Who gets the renewable certificates?
- Whoever the contract says. The EPA notes certificates are 'typically' conveyed to the buyer in a financial PPA, but in some contracts they are sold separately; a buyer can only claim the project's green power if it owns or retires the certificates.
- What risk does each side keep?
- In a virtual PPA the project keeps volume risk and the risk that its own selling price differs from the settlement price; the buyer takes the risk that market prices fall below the strike price, which turns the hedge into a cost, and the risk that its own power costs do not move with the project's market.