What are Synthetic PPAs?

As businesses around the world ramp up their commitments to clean energy and carbon reduction, power purchase agreements (PPAs) have become a popular tool for securing renewable energy. Among the different types of PPAs, synthetic PPAs—also known as virtual PPAs—are gaining traction due to their financial flexibility and location independence. But what exactly are synthetic PPAs, and how do they differ from traditional contracts?

We explore the key features of synthetic power purchase agreements, how they work, their benefits, potential risks, and why more companies are adopting them as part of their decarbonisation strategies.

What is a synthetic PPA?

A synthetic PPA, or virtual PPA, is a financial contract between a renewable energy generator and a corporate buyer, in which no physical delivery of electricity takes place. Instead of receiving power directly, the buyer agrees to pay a fixed price for the electricity that the generator produces, while continuing to purchase electricity from their local utility or the wholesale market.

Synthetic PPAs are settled financially rather than physically. This means the energy never flows directly to the buyer. Instead, both parties agree on a fixed “strike price,” and the contract settles the difference between the strike price and the fluctuating market price for electricity.

In essence, a synthetic PPA allows companies to support the development of new renewable energy projects and reduce their carbon footprint without changing their existing energy supply arrangements.

How do synthetic PPAs work?

The typical structure of a synthetic PPA involves three main components:

1. The energy generator produces renewable electricity and sells it into the wholesale market.

2. The corporate buyer agrees to pay the generator a fixed price per megawatt-hour (MWh) of electricity generated.

3. A financial settlement occurs periodically (usually monthly), where the difference between the strike price and the market price is paid by one party to the other.

In a synthetic PPA, if the agreed strike price is €50/MWh and the market price rises to €60/MWh, the generator pays the buyer €10 for each MWh produced. Conversely, if the market price falls to €40/MWh, the buyer pays the generator €10 per MWh. This financial arrangement, known as a contract for difference (CfD), provides both parties with price certainty by hedging against market volatility.

This mechanism is widely used across the EU to support renewable energy development while managing financial risks associated with fluctuating energy prices.

Renewable energy certificates (RECs) or guarantees of origin (GOs) are usually included in the contract, allowing the buyer to claim the environmental attributes of the electricity generated and apply them to their sustainability goals.

Benefits of synthetic PPAs

There are several advantages to using a synthetic PPA for clean energy procurement, especially for companies with global operations or those located in regulated energy markets.

Location independence

One of the biggest advantages of a synthetic PPA is that it decouples energy generation from consumption. This means the renewable project can be located in a region with abundant solar or wind resources, even if the buyer’s operations are elsewhere. This flexibility opens access to competitive pricing and high-impact projects.

Financial hedging

Synthetic PPAs act as a hedging mechanism against energy market volatility. The fixed strike price offers cost predictability and budget stability, which is especially valuable in industries with high or variable energy use.

Support for ESG and net-zero goals

By entering into a synthetic PPA, companies can demonstrate leadership in environmental, social, and governance (ESG) performance. The RECs or GOs associated with the contract can be applied toward carbon reduction and renewable energy targets, supporting science-based climate commitments.

No change to physical energy supply

Since no physical power delivery occurs, the buyer can continue using their existing utility contracts or retail energy suppliers. This reduces operational complexity, especially in regulated or bundled electricity markets.

Risks and considerations

While synthetic PPAs offer many benefits, they also come with certain risks and complexities that must be carefully considered.

Market price exposure

Because the financial settlement depends on market prices, buyers can be exposed to downside risk if prices fall below the strike price for extended periods. It is essential to conduct robust financial modeling and risk analysis before signing a synthetic PPA.

Contract complexity

Synthetic PPAs can be complex to structure and negotiate. They often involve legal, accounting, and regulatory nuances that require input from experienced advisors. Tax treatment and hedge accounting can also add layers of complication.

Regulatory variation

Rules governing renewable energy, RECs, and financial contracts can vary significantly by region. This makes cross-border or multi-state synthetic PPAs more difficult to implement, particularly in markets with evolving energy policy frameworks.

Synthetic PPAs vs physical PPAs

The main difference between a synthetic PPA and a physical PPA is how electricity is delivered and settled.

Both structures help corporates source renewable energy, but synthetic PPAs are especially useful for companies with geographically diverse operations or in regulated energy markets.

Use cases and real-world examples

Large multinational corporations have led the adoption of synthetic PPAs due to their flexibility and scalability. Notable examples include:

• Google and Microsoft, both of which have used synthetic PPAs to meet their renewable energy goals while powering data centres across different regions.

• Nestlé signed a virtual PPA in the U.S. to support solar and wind energy development without altering its operational energy supply.

• HSBC and other financial institutions are now using synthetic PPAs to align with their net-zero finance commitments.

These companies value synthetic PPAs not just for environmental reasons, but also for long-term cost control and risk mitigation.

Why synthetic PPAs are growing in popularity

Several factors are contributing to the growing adoption of synthetic PPAs:

• The increasing availability of high-quality renewable projects in competitive markets.

• Growing investor and stakeholder pressure to disclose and reduce carbon emissions.

• Improvements in financial products and standardisation of virtual PPA contracts.

• Advancements in energy market data and forecasting tools that reduce buyer risk.

As more companies commit to 100% renewable energy and net-zero targets, synthetic PPAs offer a scalable and practical way to decarbonise electricity use without major operational disruptions.

Synthetic PPAs are reshaping the way businesses procure renewable energy. By offering financial flexibility, geographic independence, and direct support for clean energy projects, they have become a valuable tool for achieving sustainability and risk management goals.

While synthetic PPAs require careful structuring and understanding of market dynamics, their benefits—especially for large corporates operating across multiple regions—are substantial. As the clean energy transition accelerates, synthetic PPAs are poised to play a key role in the future of corporate renewable energy procurement.