A physical PPA involves the electricity consumer receiving electricity from the seller through the grid, as opposed to a “virtual” power purchase agreement. In a physical power purchase agreement, the power is delivered to the customer and consumed as it is generated.

In a physical PPA, an organisation enters into a long-term contract with a third-party seller who will construct, maintain, and operate a renewable energy system on or off the customer's premises. Regardless of whether the system is on-site or not, the physical PPA consumer receives electricity through the grid in both cases.

The consumer agrees to purchase power at a certain price for a stated period, and the seller assumes the risks linked with owning and operating the system. 

Many physical PPAs with on-site systems conclude with the consumer having the option of renewing at a lower rate or acquiring the equipment for a fair market price. In this manner, some clients may enjoy immediate savings on their energy bill (through the physical PPA) while eventually owning the system - and gaining all the associated benefits. 

The first major distinction in a physical PPA is whether or not the installation is located on or off-site from the energy consumer. An on-site installation is one where the renewable energy system is built on the same property as where it will be used. The power generated by the system goes directly into powering the home or business, offsetting some or all of the electricity that would otherwise be purchased from the utility company. One of the major benefits of an on-site is a reduction in grid fees.

The first major distinction in a physical PPA is whether or not the installation is located on or off-site from the energy consumer. An on-site installation is one where the renewable energy system is built on the same property as where it will be used. The power generated by the system goes directly into powering the home or business, offsetting some or all of the electricity that would otherwise be purchased from the utility company. One of the major benefits of an on-site is a reduction in grid fees.

A power buyer (consumer) agrees to buy the renewable energy produced by a project for a set price under the terms of a virtual power purchase agreement (VPPA). According to this agreement, the utility-scale solar plant will be paid the going rate for the electricity when it is sold. 

The consumer receives the difference if the market price exceeds the fixed VPPA price

The consumer pays the project the difference if the market price is less than the fixed VPPA price.

A virtual PPA functions in this way as a financial safeguard against fluctuating electricity prices. Usually, the project's Renewable Attributes, or Renewable Energy Certificates, are given to the buyer.

The VPPA is a fantastic option for large electricity users with a fragmented/distributed electric load to support the development of new renewable energy resources because there is no physical delivery of power.

There is no actual physical delivery of power to the buyer's load centers while using a virtual PPA. In actuality, the purchaser will carry on making their regular utility payments. A Virtual PPA is a contract that serves as a price hedge for electricity. Additionally, as part of the VPPA, the buyer receives Renewable Energy Credits (RECs), which enables the buyer to claim that their renewable energy purchase and greenhouse gas reductions were successful. 

It is crucial to highlight that VPPAs demand market liquidity, which allows the project to sell its electricity straight into the grid for the going wholesale rate.

For developers wishing to finance new projects, virtual PPAs are incredibly helpful since it ensures that a project will receive a fixed price for its energy production. The new "additional" renewable energy facility that is supplying the grid with additional clean energy and replacing fossil fuels is directly responsible for the energy bought through a VPPA. 

Businesses interested in virtual PPAs are usually interested in green energy, carbon footprint reduction, and sustainable business practices. The impact of these "green" projects is crucial in determining their actual return on investment, just like it is with any investment. For instance, buying unbundled RECs is a low-impact way to meet your renewable energy targets. 

This enables businesses to assert that the inclusion of a new renewable energy project is directly and significantly impacted by their purchase of renewable energy. Organisations are definitely catching on to this impact's huge marketing and branding opportunities.

The buyer secures a price based on the wholesale market price of power by entering a long-term virtual PPA. The cost of the buyer's traditional energy source will probably increase if wholesale prices go higher. The VPPA sale will probably result in a profit for the buyer, and the earnings might be used to offset rising costs for conventional energy. On the other hand, if the VPPA price is higher than the wholesale market price, the buyer will be compelled to pay the project the net difference in order to secure their necessary fixed revenue stream, albeit they will probably also save money on traditional energy. The VPPA serves as a buffer against growing conventional energy costs in this way.

On the other hand, in a situation where energy costs are extremely high, such as after the Russian invasion of Ukraine, it becomes harder to arrange PPAs because there is greater uncertainty about future energy prices. 

Power Purchase Agreements offer a variety of options for buying and selling electricity, and it is essential to understand the different types available to choose the best fit for your needs. Physical PPAs involve the delivery of electricity through the grid, either on-site or off-site and offer benefits such as reduced grid fees and the option to own the renewable energy system. Virtual PPAs, on the other hand, provide a financial safeguard against fluctuating electricity prices and offer green energy benefits such as renewable energy credits and carbon footprint reduction. Whether you are an energy producer, consumer, or developer, understanding the different types of PPAs and their unique benefits is crucial to making informed decisions in the energy industry.