The difference between direct and virtual PPAs

As the market for voluntary renewable energy buyers matures, commercial, industrial and institutional (C&I) buyers need a deeper understanding of how corporate renewable energy procurement differs from traditional energy sourcing strategies. Power purchase agreements (PPAs) are the most impactful route large corporations with clean energy goals use to reduce operational emissions. However, navigating PPA contracting and negotiations comes with a steep learning curve for corporates first entering the field.

The main component of this learning curve is to understand PPA deal structures. There are two main ways that a PPA can be structured: direct (also known as retail-sleeved or physical) or financial (also known as virtual or synthetic). The degree of climate impact and economic favorability of the deal depends on the type of PPA structure an organization chooses.

While these deal structures produce a similar result — a long-term contract between a renewable electricity supplier and a creditworthy off-taker — there are several important differences that corporate buyers should be aware of.

Direct vs. Financial PPAs

A direct PPA is an agreement made between a renewable energy generator and an end user in which electricity produced by a wind or solar facility is physically delivered to power the corporate buyer’s operations. Because the corporate off taker actually takes title to the energy produced in this type of deal, the final price for delivered power is a function of the contracted PPA price plus transmission-related expenses.

In exchange for agreeing to offtake power for a fixed amount of time, corporate buyers of direct PPAs lock in energy rates for the renewable energy purchased over the contract term and earn the straightforward, compelling story of how their company runs on clean electricity. Energy market regulation and differences in markets across the country present drawbacks to this deal structure, though.