Morningstar DBRS expects the virtual power purchase agreement market to grow substantially in the coming years, it said in a recent report.
“In the quest to transition toward renewable energy, virtual power purchase agreements have emerged as a key tool, capturing about 60% of the global PPA market share in 2024,” the report said. “These agreements offer significant benefits to both electricity buyers and sellers. For corporate energy buyers, Virtual PPAs help them meet sustainability goals, while renewable energy developers can expand their market.”
But virtual PPAs “also present certain challenges to developers and lenders, such as basis risk -- a concern not typically associated with physical delivery PPAs,” the report said.
“We expect the Virtual PPA market to grow substantially in the coming years, given the flexibility of these agreements and the declining market of Physical PPAs,” Morningstar DBRS, a global credit rating agency, said.
From a credit risk perspective, “we believe virtual PPAs are generally riskier than physical PPAs because of basis risk and the complexity of some contracts, which can increase cash flow volatility. Conservative debt sizing criteria and additional transaction enhancements (i.e., contractual protections such as true-up mechanisms and favorable force majeure provisions) can mitigate these risks to a degree.”
The report notes that one of the key advantages of Virtual PPAs is their lack of geographic constraints. “This simplifies the energy purchasing process for corporate buyers, allowing them to meet up to 100% of their renewable energy needs through one or multiple projects, regardless of location.”
Small or medium-size corporate buyers can also collaborate through virtual PPAs to collectively procure renewable energy. For project developers, Virtual PPAs can expand their market reach by enabling energy sales to buyers in regions where physical delivery is not feasible, the report noted.
