Physical PPA vs Virtual PPA: Risks, Accounting and Scope 2 Claims

Physical PPA vs virtual PPA: the short answer

A physical PPA is a supply contract; a virtual PPA is a financial hedge. The US Environmental Protection Agency describes a physical PPA as a contract to buy power and the associated certificates from a specific generator, usually for 10 to 20 years, and notes that buyer and project must sit in the same power market so the electricity can be delivered.

A virtual PPA, also called a financial or synthetic PPA, never moves electrons to the buyer. According to the EPA's guidance on financial PPAs, the buyer can be located anywhere in the United States, including in a traditionally regulated market, which suits groups with sites in several markets.

Feature	Physical PPA	Virtual PPA
What changes hands	Electricity plus certificates	Cash difference plus certificates
Delivery route	Sleeved through a supplier, private wire or on site	None: buyer keeps its existing supply contract
Location	Buyer and project in the same market	Buyer can be in a different market or region
Price exposure	Fixed price for the volume generated, plus balancing and supplier fees	Fixed strike price against a floating market reference
Main residual risks	Shape and volume, supplier fees, change in law	Basis, shape, counterparty credit, change in law
Accounting starting point	Often own use if the buyer is a net purchaser	Usually a derivative measured at fair value unless hedge accounting applies
Typical buyer	Large single-site or concentrated load in one market	Multi-site groups, buyers in regulated markets, consortia

How a physical PPA works: sleeved, private wire and on site

A physical PPA can be delivered in three ways. In a sleeved PPA, a common model for off-site projects, a licensed supplier takes the generator's output into its portfolio, balances it against the buyer's demand and passes it through the buyer's supply contract for a fee. The sleeving agreement, its fees and its term then matter as much as the PPA itself.

A private wire PPA connects the generator directly to the buyer's site without using the public network. It avoids some network charges but raises licensing questions: in Great Britain, section 4 of the Electricity Act 1989 makes it an offence to supply electricity to premises without a licence, so a private wire project normally relies on an exemption and needs careful structuring. On-site PPAs, where a developer operates panels on the buyer's land, add property questions such as leases and access rights.

Whichever route is used, the buyer usually accepts the generator's output profile and must buy top-up power when the project is not generating. Our report on the end of England's de facto onshore wind ban covers the planning change that may bring more projects closer to demand.

How a virtual PPA works: the contract for differences

A virtual PPA works as a contract for differences settled against a market price, usually monthly. The EPA explains that if the wholesale price is above the strike price the generator pays the buyer the difference, and if it is below the strike price the buyer pays the generator, so that the generator in effect always receives the strike price for its output.

That imperfect offset is the whole commercial question. The hedge only works if the market price at the project's settlement point moves with the price the buyer pays for its own supply, a correlation point the EPA guidance stresses. Where the project settles in one zone and the buyer consumes in another, the payments may not match the buyer's actual costs.

Because a virtual PPA is a financially settled contract referencing a commodity price, it can also fall within derivatives regulation in some jurisdictions. That analysis is jurisdiction-specific and is one reason virtual PPAs usually involve banking and finance specialists on the buyer side.

Risk allocation: shape, basis, credit and change in law

The risks are similar under both structures but land in different places. Four matter most.

• Shape and volume risk. Wind and solar output varies hour by hour. In a pay-as-produced physical PPA the buyer takes whatever is generated and must buy or sell the difference against its demand; in a virtual PPA the settlement volume follows the project's output, so the hedge is weakest in exactly the hours when output is low and prices are high.
• Basis risk. This is the gap between the price at the project's settlement point and the price the buyer actually pays. It is the defining risk of a virtual PPA and largely absent from a sleeved PPA within one market.
• Credit risk. Both parties are exposed to each other for 10 years or more. Generators and their lenders often ask for a parent guarantee or letter of credit, and buyers should test the generator's ability to perform.
• Change in law risk. Network charges, balancing rules, market reforms and certificate schemes can all change during the contract. The drafting should say who bears new costs and whether either party can terminate or reprice.

Risk	Who usually bears it in a physical PPA	Who usually bears it in a virtual PPA	Contract tools
Shape and volume	Buyer, with the sleeving supplier balancing for a fee	Buyer, through settlement on actual output	Baseload or firmed products, volume caps, hybrid projects
Basis	Limited within one market	Buyer	Choose a settlement point close to demand, hub settlement
Price below strike	Buyer pays the fixed price regardless	Buyer pays the difference	Floors, collars, price review clauses
Counterparty credit	Both parties	Both parties	Guarantees, letters of credit, collateral thresholds
Change in law	Negotiated; often shared	Negotiated; often shared	Change in law clauses, renegotiation and termination rights

Termination is where these risks crystallise. Early termination payments are often calculated on a mark-to-market basis, so exiting when forward prices sit below the strike price can be costly. When those calculations are disputed, the forum chosen in the contract matters, as our guide to arbitration vs litigation for cross-border contracts explains.

Accounting: IFRS 9 own use, derivatives and the 2026 amendments

Accounting has historically favoured physical PPAs. A contract to buy a non-financial item that is entered into and held for the entity's own use falls outside IFRS 9, so a physical PPA could be treated as an ordinary purchase contract. A virtual PPA, settled net in cash, has generally been accounted for as a derivative at fair value through profit or loss, bringing earnings volatility unless hedge accounting can be applied.

The IASB's December 2024 amendments, Contracts Referencing Nature-dependent Electricity, address both problems for contracts where the source of generation depends on uncontrollable natural conditions such as the weather. Three points matter for buyers, all drawn from the amendment text:

• Own use for physical PPAs. A buyer that must take delivery when power is generated, and has to sell unused electricity because of how the market works, can still meet the own-use requirement if it has been, and expects to be, a net purchaser of electricity for the contract period. When assessing whether it has been a net purchaser, the reasonable period it looks back over may not exceed 12 months.
• Hedge accounting for virtual PPAs. A buyer using a virtual PPA to hedge forecast electricity purchases may designate as the hedged item a variable nominal amount of forecast purchases aligned with the project's expected output, and in defined cases that forecast is presumed to be highly probable.
• Disclosure. Amendments to IFRS 7 add disclosures about these contracts, including information the entity used to assess whether it is a net purchaser.

The amendments must not be applied by analogy to other contracts, and groups reporting under US GAAP need separate analysis. Finance teams will want input from accounting advisers before the board signs a long-dated contract, and from tax specialists on how settlement payments are treated locally.

Certificates and Scope 2 claims: REGOs, guarantees of origin and cross-border deals

Under both structures the buyer's green claim rests on certificates, not on the contract alone. The GHG Protocol Scope 2 Guidance requires companies operating in markets with contractual instruments to report Scope 2 emissions twice, under a location-based method and a market-based method. The market-based figure can reflect energy attribute certificates and direct contracts such as PPAs, but only where the instruments meet the guidance's Scope 2 Quality Criteria.

In Great Britain the relevant certificate is the REGO. Ofgem issues one REGO per megawatt hour of eligible renewable output and administers the scheme on behalf of the Department for Energy Security and Net Zero; REGOs are used mainly for suppliers' fuel mix disclosure. In the EU the equivalent is the guarantee of origin, which Member States must issue on request under Article 19 of the Renewable Energy Directive to show final customers the share of energy from renewable sources, as the Association of Issuing Bodies explains.

The two systems no longer connect. Ofgem notes that the EU stopped recognising UK REGOs from 1 January 2021, and that EU guarantees of origin have not been recognised for GB fuel mix disclosure since the period beginning 1 April 2023. A group with UK and EU sites therefore needs certificates from the right scheme for each market. Multi-buyer deals, where several companies share one project, add rules allocating volumes, certificates and credit support.

The rules may tighten. The GHG Protocol held a public consultation on Scope 2 revisions between 20 October 2025 and 31 January 2026, with hourly matching and deliverability among the themes it flagged, and says the feedback will inform a revision of the 2015 guidance. Claims also carry consumer-law risk: our explainer on the Empowering Consumers Directive covers the EU's restrictions on generic environmental claims, and our report on the Omnibus I agreement covers which companies remain in scope of CSRD reporting.

Physical PPA vs virtual PPA: which should you choose, and when to bring in energy lawyers

Choose a physical PPA when demand is concentrated in one market, a supplier willing to sleeve is available on acceptable terms, the finance team wants own-use treatment and the business values a direct link between its supply and a named project. Choose a virtual PPA when sites are spread across markets or regions, when local rules make physical supply hard, when the buyer wants to keep its existing supply contracts, or when several buyers are combining demand. Policy direction supports long-term contracting generally: the European Commission says the reformed EU electricity market design, in force since 16 July 2024, aims to make bills less dependent on short-term prices through long-term contracts such as PPAs.

• Choose physical if basis risk is unacceptable, the board wants delivered renewable power and the IFRS own-use test is likely to be met.
• Choose virtual if flexibility across markets matters more than delivery, and the treasury function can manage a cash-settled hedge and its accounting.

Bring in energy lawyers before term sheet, not at signing. The term sheet fixes the strike price, settlement point, volume shape, credit support and change in law allocation, and these are hard to reopen later. Specialists in the energy, environment and resources practice can negotiate sleeving terms, certificate transfer and termination mechanics, while projects lawyers are useful where the deal is tied to a new build. For country-specific advice, start with advisers in the United Kingdom, energy lawyers in Germany, Spain or energy lawyers in the USA, depending on where the project and the load sit.

Frequently asked questions

What is the main difference between a physical PPA and a virtual PPA?

A physical PPA delivers electricity to the buyer, usually through a licensed supplier, at an agreed price. A virtual PPA is a financial contract for differences: the generator sells into the market and the parties exchange the difference between the market price and a fixed strike price, while the buyer keeps its existing supply.

Is a virtual PPA a derivative?

Under IFRS a virtual PPA is generally accounted for as a derivative at fair value, because it settles net in cash. The 2024 amendments to IFRS 9 let buyers designate a variable nominal amount of forecast electricity purchases as the hedged item, which can make hedge accounting achievable.

What is basis risk in a virtual PPA?

Basis risk is the difference between the market price at the project's settlement point and the price the buyer pays for its own electricity. If the two diverge, the virtual PPA payments no longer offset the buyer's costs.

What is a sleeved PPA?

A sleeved PPA is a physical PPA in which a licensed supplier takes the generator's output, balances it against the buyer's demand and delivers it through the buyer's supply contract for a fee. It is the usual route for off-site physical PPAs where the buyer is not itself a licensed supplier.

Can a UK company use a virtual PPA for an EU project?

It can sign one, but the certificates must suit the market where the claim is made. The EU stopped recognising UK REGOs from 1 January 2021, and EU guarantees of origin are no longer recognised for GB fuel mix disclosure, so cross-border buyers need certificates from the right scheme.

Does a PPA reduce Scope 2 emissions?

A PPA can reduce market-based Scope 2 emissions if the buyer receives and retains certificates or contractual instruments that meet the GHG Protocol's Scope 2 Quality Criteria. Location-based Scope 2 emissions, which reflect average grid intensity, still have to be reported alongside.

How long does a corporate PPA last?

The EPA says physical PPAs usually run for 10 to 20 years. Virtual PPAs are also long-term contracts, and their length is negotiated alongside price, volume and credit support.

Sources

1. IASB, Amendments to IFRS 9 and IFRS 7: Contracts Referencing Nature-dependent Electricity, December 2024: ifrs.org
2. GHG Protocol, Scope 2 Guidance (2015): ghgprotocol.org
3. GHG Protocol, public consultations (Scope 2, 20 October 2025 to 31 January 2026): ghgprotocol.org
4. Ofgem, Renewable Energy Guarantees of Origin (REGO): ofgem.gov.uk
5. Association of Issuing Bodies, Renewable energy guarantees of origin: aib-net.org
6. US Environmental Protection Agency, Physical Power Purchase Agreements: epa.gov
7. US Environmental Protection Agency, Financial Power Purchase Agreements: epa.gov
8. European Commission, Electricity market design: energy.ec.europa.eu
9. Electricity Act 1989, section 4: legislation.gov.uk

About this article

This guide was researched and written by The Corporate INTL Newsroom, which covers cross-border legal, regulatory and business developments for lawyers, professional advisers and financiers in over 150 jurisdictions. It has been checked against the IASB's amendment text, GHG Protocol guidance, Ofgem and EPA guidance and UK legislation. It is general information, not legal, accounting or tax advice; for advice on a specific transaction, consult a qualified adviser. Last reviewed 2 November 2026. For more analysis like this, visit the Corporate INTL newsroom or subscribe to Corporate INTL.