Author: 3Degrees Staff

At 3Degrees, we make it possible for businesses and their customers to take urgent action on climate change— providing renewable energy and carbon offset solutions to Fortune 500 companies, utilities, universities, green building firms and other organizations that are working to make their operations more sustainable. And as a certified B Corporation and eight-time winner of the EPA Green Power Supplier of the Year award, we’re primed to deliver custom clean power solutions that will help each organization make an environmental impact. Founded in 2007, 3Degrees is headquartered in San Francisco, California, with offices across the United States.

PPA vs VPPA: similarities and differences

Power purchase agreements (PPAs) and virtual power purchase agreements (VPPAs) have been around for a while. But it can be hard to remember the differences between the two. This infographic provides an overview of the major differences. Need more depth? Check out our article, “Renewable energy power purchase agreements.” 

Want more information? Take a look at our energy and climate consulting services, our content related to renewable energy procurement or contact us.


Renewable energy power purchase agreements

Wind Turbine

This article was updated in February 2018.

Viable procurement options for corporate and industrial buyers

As we discussed in the first article of this series, today’s renewable energy landscape has dramatically changed in recent years in large part because of the increasing pool of potential buyers –commercial and industrial (C&I) organizations. This new buyer pool has wider, easier access to a broad array of large-scale direct renewable energy procurement options and is implementing on-site solar and off-site PPAs at a record-breaking pace. But deciding which option is right for your organization can be complex.  This series helps lay the foundation to answer that conundrum. In the first article, we covered the benefits and challenges to C&I customers looking to use on-site renewable generation. This article will explore the potential of procuring renewable energy through power purchase agreements (PPAs), both physical and financial (defined below). Both types of PPAs can be powerful tools to help C&I customers develop robust clean energy portfolios and achieve sustainability goals. However, they do differ in a number of significant ways, and this article identifies these differences and other factors to consider when evaluating PPA opportunities.  

What is a PPA?

A power purchase agreement, at its core, is a contract between two parties where one party sells both electricity and renewable energy certificates (RECs) to another party. In corporate renewable energy PPAs, the “seller” is often the developer or project owner, the “buyer” (often called the “offtaker”) is the C&I entity. C&I renewable energy PPAs can take two primary forms – physical or financial (the latter often referred to as “virtual”). The best structure depends on the markets where the offtaker and projects are located, as well as the goals, priorities, and risk tolerance of the offtaker. Too often, these deals are framed as money-makers, but the real story is much more complicated. This related article dives deeper into the risks embedded in renewable energy PPAs and how to mitigate them.

Physical PPA

Physical PPAs are most commonly used by organizations that have heavy, concentrated load (e.g. data centers). This is because under a physical PPA, the seller delivers renewable electricity to the offtaker, who actually receives and takes legal title to the energy. Physical PPAs are best suited for competitive retail or direct access energy markets, such as Texas, Illinois, and California. They are possible – but significantly more difficult – in a regulated market. A physical PPA is structured as follows:

  • The offtaker buys renewable energy directly from a seller. In a typical renewable energy PPA, the developer builds, owns, and operates the renewable energy project, and sells the output to the buyer at a specified delivery point.
  • The offtaker takes title to the energy at the delivery point, as well as associated RECs.
  • The offtaker is responsible for moving the energy away from the delivery point to its load, typically done through 3rd-party service providers.

Virtual (or Financial) PPA

Unlike a physical PPA, a virtual PPA (VPPA) is a financial contract rather than a contract for power. The offtaker does not receive, or take legal title to, the electricity and in this way, it is a “virtual” power purchase agreement.

In a VPPA, an offtaker agrees to purchase a project’s output and associated RECs at a set fixed price. The developer then liquidates the energy at market pricing and passes the revenue through to the offtaker.  More specifically:

  • Similar to a physical PPA, the seller in a VPPA is oftentimes a developer who builds, owns, and operates a project and delivers the energy output to the specified point.
  • The offtaker agrees to pay the seller a fixed price for renewable energy delivered to a specific point, typically a market hub or project busbar. This fixed price set by the VPPA is the guaranteed price the developer will receive – no less and no more – irrespective of the floating market price.
  • The seller generates and liquidates a project’s energy at market pricing. When the floating market price exceeds the fixed VPPA price, the developer passes the positive difference to the offtaker. When the converse is true, the market price is below the VPPA fixed price, the offtaker must pay the developer the difference.
  • The offtaker retains all of the RECs associated with the delivered energy, as long as that is specified in the contract.

This type of structure is called a contract for difference (CFD). See the graphic below for an illustration.

VPPA - how it works

In this way, the seller is guaranteed a fixed price for the output it sells – which is critical for developers that are looking to finance new projects. These projects can be particularly attractive for buyers that want to contribute to the development of new renewable energy resources and that have electricity load that is widely dispersed.

VPPAs are typically only available in organized markets such as a regional transmission organization (RTO) or independent system operator (ISO), which serve as third-party independent operators of the transmission system, ultimately responsible for the flow of electricity within its domain. This is for two important reasons. First, VPPAs require market liquidity – where the developer, an independent power producer (IPP), is permitted to sell its power directly into the grid. This is the case in RTO/ISO regions, but not necessarily so in a vertically integrated market where a single entity is responsible for the generation, transmission, and distribution of electricity. Second, the economics of a VPPA hinge on the difference between the floating market price and the VPPA price. RTO/ISO regions pay a uniform, transparent price (varying based on time and location). The floating market price, therefore, cannot be manipulated by the developer, creating a reliable dynamic for the VPPA financial settlement.

Importantly, because no energy actually changes hands, the VPPA offtaker does not need to make any changes to how it purchases the electricity required for its operations.

Why enter a PPA?

There are four primary benefits to a PPA, regardless of whether it is physical or financial:

  1. Financial: PPAs provide a hedge against future energy fluctuations. In a physical PPA, the hedge value is realized because the buyer’s energy costs are kept flat. In a VPPA, the value is realized when revenues from the VPPA increase because market pricing has risen above the PPA price – offsetting similarly rising retail electric rates. It’s important to remember though, a hedge instrument is not intended to create upside but rather to manage downside exposure. Be wary of VPPAs with hockey stick forward energy price curves promising high net present values (NPVs)!
  2. Environmental: Both physical and virtual PPAs put clean energy into the electric grid, and the offtaker owns all the environmental benefits (RECs or carbon offsets) associated with its portion of the project. Both types of PPA RECs from wind or solar will have zero emissions and apply to WRI’s GHG Protocol Scope 2 market-based reporting methodology. And, if the PPA is with a new project, offtakers can easily and credibly claim “additionality” which, in its mostly widely-accepted definition, means directly causing a new renewable project to be built.
  3. Ability to Transact: Although PPAs are complex, they are well-understood structures. Some form of physical PPAs may even be part of an offtaker’s existing procurement practices. In addition, awareness of renewable energy PPAs has become more common through high-profile press releases by well-known companies (e.g., Google, Walmart, Amazon, etc.). All of this should facilitate internal stakeholder conversations and ultimately leadership buy-in. While VPPAs may face more scrutiny than their physical brethren – due to unfamiliarity as well as their potential accounting impacts (see below) – these barriers are surmountable.
  4. Marketing: PPAs are a well-understood renewable energy story to share with internal and external stakeholders. They also move the needle on a double bottom line – helping to achieve important corporate environmental goals while also (potentially) saving money, which makes for powerful brand and marketing narratives. And because the offtaker owns the RECs, it can make marketing claims and report on greenhouse gas reductions.

PPAs have financial, environmental, transaction, and marketing benefits.

Physical vs. Virtual

Despite these shared benefits, physical and virtual PPAs do differ in some material ways:

  • Regulatory: Physical PPAs require that the offtaker obtain power marketing authority from the Federal Energy Regulatory Commission (FERC) to purchase wholesale power from the power producer. While not insurmountable, doing so may be outside of the offtaker’s core business or simply be too time-consuming. An offtaker can engage a third party already authorized to buy power at wholesale, serving as the market participant. This, of course, has its own risks (see below). Because no power is changing hands in a VPPA, the offtaker does not require FERC authority.
  • Regulatory (again): Although the regulatory requirements for VPPAs are still being formed, the prevailing view is that these contracts are “swap” agreements and therefore bound by Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which includes reporting, recordkeeping and registration requirements for swap transactions. Physical PPAs are not typically considered swaps subject to Dodd-Frank. However, if a physical PPA contains specific terms (e.g., price optionality, buyer curtailment rights, option for financial settlement), it may in fact be deemed a swap and subject to ongoing reporting obligations. See this article for more.
  • Transmission/Delivery: Physical PPA offtakers need to consider what happens with the energy once they receive and take title to it and find a solution to move the purchased energy to its locations, requiring transmission, distribution, and delivery. C&I offtakers would typically contract with third party providers for these services, and perfectly syncing the deal terms of these services (typically limited to a couple to several years) with those of longer-term PPAs is unlikely and can add a compounding layer of risk and complexity to the overall transaction.
  • Location: As mentioned above, physical deal structures where the energy is delivered to an offtaker’s facility are limited to competitive retail markets (i.e., PJM, Northeast, ERCOT and other isolated states in MISO and WECC). Virtual PPAs have broader potential, possible in any RTO or ISO. Further, because VPPAs are financial in nature and don’t involve moving electricity, they are not inherently location-dependent. This means offtakers can find the most attractive project, no longer limited to projects located within its immediate region. It also allows offtakers to consolidate its demand across the country to capture economies of scale.
  • Internal Approvals: PPAs will require learning on multiple levels for an organization, but VPPAs tend to be a new procurement mechanism for most offtakers, requiring education on technical and non-technical topics alike. Not to be under-estimated, VPPAs require new departmental interdependencies within organizations, which can have cascading affects across the company. Processes will need to be developed, building a new ecosystem of collaboration among otherwise distant and unfamiliar stakeholders. All this takes time, effort, and persistence.

Each of these factors should be considered when evaluating PPA opportunities.

 PPAs and VPPAs have important regulatory differences. 

Risky business?

Although PPAs are increasingly common among the C&I segment, they are not risk-free. There will be tradeoffs in every deal structure, and special attention should be paid to the following risks and potential mitigation measures.

  • Market risk:  Although offtakers have market exposure without a PPA, there is market risk within these transactions, especially VPPAs. Because a VPPA relies on a floating market price, the importance of understanding the forces which can affect that floating price – and drive it up or down – can’t be overstated. Factors that can impact future electricity pricing include renewable energy penetration, natural gas pricing, transmission and distribution upgrades, energy capacity additions and retirements (renewable and conventional), the regulatory environment, carbon pricing, severe weather occurrences, etc. Offtakers should have clear visibility into the market risks embedded in the transaction so they can make informed decisions about what risks they are, and are not, willing to take, ultimately structuring a transaction in line with their specific risk tolerance.
  • Accounting treatment: For many C&I offtakers, the accounting treatment of a VPPA is the first make-or-break decision regarding a potential transaction. In many cases, the offtaker will obtain initial approval to explore offsite renewables only if they can keep the PPA off of the balance sheet. They ask, will the deal trigger mark-to-market accounting? Fortunately, there are well understood ways to manage this risk through careful deal structuring and specific PPA language. For example, one way for an offtaker to manage a developer’s performance is to include an output guarantee – a minimum amount of generation the developer will deliver. However, an output guarantee is considered a notional value to the contract, thus triggering derivative accounting. As a result, contracts are often structured with an availability guarantee which accomplishes similar assurances of developer performance but avoids the risk related to accounting treatment of the VPPA. The bottom line here is that VPPAs will require the deal champion – and an advisor – to work extensively with your organization’s various accounting stakeholders and an experienced energy accountant.

The importance of a trusted advisor

Both physical and virtual PPAs offer strong financial and environmental opportunities to C&I organizations, but they can come with material complexity and risk. VPPAs are most common in today’s market but they are not right for every organization. We recommend working closely with a trusted advisor to determine which option is best for your organization.

Interested in learning more about PPAs and VPPAs? Check out our consulting services or contact us.

The do’s and don’ts of marketing your renewable energy purchase


For a variety of reasons, companies are increasingly buying renewable energy as a way to reduce their carbon footprint. After making this investment, many companies want to share the news of their environmental commitment with interesting stakeholders including customers, employees, investors, and environmental organizations. Done well this can help a company improve employee and customer satisfaction, garner positive press and enhance their brand value. Done poorly, a company runs the risk of brand damage, accusations of greenwashing, and may be subject to fines if in violation of federal or local regulation.

This white paper shows you how to avoid those pitfalls and provides clear, concise guidance to all organizations that want to accurately communicate their actions to support renewable energy.

Download the white paper to learn:

  • What is an environmental claim?
  • Who regulates market claims around renewable energy?
  • Guidelines for making an accurate claim.
  • Examples of potentially troublesome marketing claims.
  • Common areas of confusion.

The source of this white paper is a webinar series for the EDF Climate Corps fellows.  EDF Climate Corps is a summer fellowship program that embeds trained graduate students inside leading organizations to accelerate clean energy projects. We thank EDF for allowing us to share this content with a wider audience. 

Learn more about renewable energy certificates and power purchase agreements.

Or contact us.

Climate change year in review 2017

Infographic hero poster image

2017 was a year of climate advances and set backs. Check out our infographic for some of our favorite (and least favorite) headlines.


Read what other businesses are doing to address climate change.

Insights from European sustainability conferences


3Degrees has been spanning the globe in recent weeks to connect with organizations that are at the forefront of sustainability and climate change action.

We attended several conferences across Europe and wanted to share some of our key takeaways and common themes that we have been hearing.

We attended the following conferences:

  • Sustainable Aviation Summit, October 3-5, Geneva
  • Companies vs Climate Change, October 4-6, Brussels
  • Responsible Supply Chain Summit, October 17-18, London

Here is what we heard:

  • Supply chain is seen as the next area of opportunity. At both the Supply Chain Summit (obviously) and at Companies vs Climate Change, there was a clear recognition that Scope 3 (supply chain) emissions are the most challenging to address. While more companies are reporting, training, and auditing, there was a lot of interest in implementing initiatives that achieve measurable results. We have seen this desire for ideas on how to make real progress from both clients and prospects. As a result, we have partnered with CDP, Smithfield Foods, and Akamai on a webinar focused on concrete actions that can be taken today around supply chain emissions. The webinar is October 26, but if you miss it, you can can still get a copy of the recording.  
  • European firms are very focused on Sustainable Development Goals. One of our key takeaways from all of these conferences is how central Sustainable Development Goals (SDGs) are for European companies – in a way that is not the case for most U.S. based companies as of yet. As a reminder, SDGs are a set of 17 goals, created by the United Nations in 2015, that tackle a range of issues from hunger, to gender inequality, to climate change. Many companies are using these goals as a guidepost for their sustainability strategies. 
  • Carbon offsets are a hot topic. At both the Aviation Summit and Companies vs Climate Change there was a lot of talk about carbon projects. By and large, the companies that were investing in carbon offsets were focused on projects that support communities in the developing world and offer storytelling opportunities. An open question remains on if there will be enough charismatic projects to meet demand when the airline industry carbon offset requirements go in effect (voluntary starting in 2021, required after 2026). This is something that our own carbon markets team is working on as they look to bring more boutique projects into our portfolio.

Overall, across all the conferences, it became clear that European companies are very focused on carbon neutrality (as opposed to just a percent emission reduction) and the opportunities this creates for improvements in their operations and supply chains. This momentum in Europe should drive companies in other parts of the world to become fast followers, learning from their counterparts on how to make material progress on climate change.  

Three key takeaways from VERGE 2017


VERGE 2017 took place last week. As a conference that promotes itself as where “technology meets sustainability” it had a wide mandate with topics ranging from smart infrastructure and circular economy, to connected transportation and mobility, to renewable energy procurement. About half the schedule was dedicated to large plenary presentations, with the balance of the time in multi-track breakout sessions. And many times, it was difficult to decide what breakouts to attend – a good problem to have.

I was fortunate enough to attend the conference, along with several of my colleagues. Not surprisingly, I was most focused on attending sessions related to renewable energy. So, with that in mind, here are a few of my key takeaways from the conference:

  • The market needs education about renewable energy procurement options I saw and heard considerable interest in corporates buying renewable energy – it was one of the most popular sessions I attended. And because the Renewable Energy Buyers Alliance (REBA) was meeting in the days ahead of VERGE, there were many sophisticated companies in the room. But there is a gulf between the handful of market players actively making long term investments in renewable energy and the vast majority that don’t have the necessary load, or balance sheet, or internal knowledge needed to do so. There is clearly opportunity to innovate and educate.
  • It’s very early days in discussions about blockchain technology: The break out sessions on this topic were packed, but the panelists and the audience represented a very wide range of understanding about how and where blockchain technology might be relevant. One panelist stated: “Just because you could use blockchain doesn’t mean you should. Maybe you just need a spreadsheet.” With use cases still far and few between, the key question for now seems to be how to know what you need.
  • We need a positive message about our environmental challenges. Jon Foley, executive director of California Academy of Sciences spoke passionately about the need to change the conversation about climate change. We need to speak about hope not fear; solutions, not problems; collaboration not conflict. To help reframe the conversation, the museum is launch Planet Vision in January. The goal is to paint a clear and optimistic vision about how we can tackle some of the most pressing environmental problems we have including food, water and energy. 

Overall, I left the conference energized and excited to be part of defining what is next at the intersection of technology and sustainability.

I-REC: A renewable energy option in international markets

china at night

In 2015, the World Resources Institute (WRI) unveiled new guidance for Scope 2 emissions accounting within the Greenhouse Gas Protocol Corporate Standard. This update introduced a market-based accounting mechanism that gives companies the opportunity to reduce their Scope 2 emissions through the purchase of renewable energy certificates, PPAs, and other contractual instruments. This provision has driven a new focus on global energy purchasing, with more organizations looking for options across the globe.

Product Profile

The I-REC, an international renewable energy certificate, represents proof that one MWh of electricity was produced from renewable energy sources and added to the grid. It embodies all of the environmental attributes of renewable generation.  The source can be wind, solar, ocean energy, biomass, hydropower, landfill gas, aerothermal, geothermal and landfill gas. 3Degrees only transacts in I-RECs issued in countries authorized by the 2016 International REC Standard and traded on the I-REC international registry. This standard establishes rules and regulations for a transparent system that simplifies claims and eliminates double counting issues, making products compliant with Scope 2 reporting guidelines.

IRECs chart

Regulatory Considerations

In some cases, I-REC has country specific restrictions on technology or other criteria. In addition, individual countries many have their own specific regulations and protocols above and beyond the I-REC standards.

IRECs map

IRECs map in 2017

For more information on renewable energy options across the globe, contact us.

Guarantees of Origin: An option for renewable energy in Europe

europe street

In 2015, the World Resources Institute (WRI) unveiled new guidance for Scope 2 emissions accounting within the Greenhouse Gas Protocol Corporate Standard. This update introduced a market-based accounting mechanism that gives companies the opportunity to reduce their Scope 2 emissions through the purchase of renewable energy certificates, PPAs, etc. This provision has driven a new focus on global energy purchasing, with more organizations looking for options across the globe.  

Product profile

The Guarantee of Origin is a voluntary renewable energy product, currently available within 20 European countries. Similar to a REC in the U.S., a GO represents the environmental attributes (but not the power) associated with renewable energy.

A GO represents one megawatt hour of electricity from a renewable resource. The European Energy Certificate System (EECS) certifies and registers each GO, preventing double counting and identifying the source of the GO and the method of production. GOs , include a wider set of technologies than US RECs do, including hydropower, biomass, and combined heat and power (CHP).

GO certificates are viable for 12 months from the date of issue.   

GOs details


Regulatory considerations

The European voluntary market is well defined with clear norms of transparency and accountability. However, there are some complexities to the market that are important to understand. Although the EECS system creates rules around the creation and transfer of GOs, there are some country specific rules that can impact customers, specifically around project eligibility and GO retirement.

GOs map

Note: As of September 2017, Lithuania and Greece are in the process of applying to participate. Portugal and Britain are in active discussions.

Hydrodec oil recycling

Map showing location of Hydrodec carbon offset project in Canton, Ohio

Hydrodec oil recycling

Industry first: Transformer oil reclamation and recycling project

Transformer oil is used in equipment needed to run the U.S. electric grid. Over time, the oil becomes contaminated, performance degrades and the oil must be replaced. Typically, when this happens, the spent oil is incinerated, creating carbon dioxide and other pollutants such as dioxins.

Hydrodec has developed a process where they re-refine the oil into new, virgin quality oil. The project is the first of its kind, revolutionizing a process that typically creates significant environmental pollution. Re-refining is the EPA’s preferred method of oil recycling because it closes the recycling loop and returns the product to its original condition. Used oil can be re-refined many times, thereby by avoiding both incineration (and associated pollution) and the use of new oil.

The importance of carbon offsets for this project

The emission reductions quantified and verified are from the avoidance of CO2 created by incineration of the waste oil. For every ton of carbon emissions avoided, a carbon offset is created. The sale of the carbon offsets is an important source of revenue because this process costs more than incinerating the oil and buying new. Hydrodec will use the sale of carbon credits to pay for improvements it made to its re-refining plant, to compete against virgin crude refiners and to expand its waste oil collection efforts.

Environmental and social benefits

In addition to the GHG impact the project also provides additional benefits:

+ Reduced demand for new crude oil

+ 67% reduction in energy use in the re-refining process (compared to virgin crude)

+ Reduction in dioxins (highly toxic to humans) that result from incineration

+ Creation of 30 full-time jobs in Canton, Ohio, an area with an unemployment rate 30% above the national average

3Degrees + Carbon Offsets

At 3Degrees, we are committed to bringing high quality carbon offset projects to the market, providing our customers with unique and meaningful projects.