Adoption of Financial VPPAs

Why VPPAs are entering the Treasury Function

In recent years, energy-intensive industrial companies — particularly in the manufacturing sector — have shown growing interest in long-term energy procurement instruments such as Power Purchase Agreements (PPAs) and, more notably, Virtual Power Purchase Agreements (VPPAs). The motivation is threefold: a strategy to contain energy costs in volatile markets, the desire to actively support the energy transition, and, not least, the need to enhance their sustainability profile and ESG disclosures — especially with regard to Scope 2 emissions.

Among the various contractual options available, VPPAs are particularly attractive to companies that wish to maintain their existing physical procurement arrangements while adding price hedging exposure linked to a renewable asset — whether solar or wind. Unlike physical PPAs, which involve the physical delivery of electricity and grid interaction, VPPAs are purely financial contracts. They operate as contracts for difference, settling the difference between a fixed contractual price and a market-based energy price at a specific geographical zone and time.

It is precisely this financial nature that makes them directly relevant to the Treasury function, which — even if not initially involved in the project (often initiated by ESG or industrial teams) — becomes responsible for the instrument’s accounting, regulatory compliance, and valuation. In most cases, VPPAs meet the definition of a derivative under IFRS 9, with few exceptions, and therefore fall squarely within the governance responsibilities of the CFO and Treasurer.

This article focuses exclusively on VPPAs that qualify as derivatives, and are therefore subject to periodic fair value measurement and potentially eligible for hedge accounting treatment. Physically delivered PPAs will be referenced only incidentally, specifically in borderline scenarios where such contracts may fail to qualify for the Own Use Exemption and must be treated in the same way as a derivative.

What follows is a walkthrough of the entire VPPA lifecycle from a Treasury perspective — from contractual structure, mark-to-market (MtM) valuation, and IFRS 9 accounting treatment, to disclosure and governance considerations. The discussion remains operationally focused, without compromising technical rigor.

When the Contract Falls Under IFRS 9

When a company enters into a VPPA structured as a contract for difference (CfD), it will, in nearly all cases, be classified as a derivative instrument under IFRS 9.

The Own Use Exemption, which allows companies to exclude certain contracts from fair value accounting if they are for physical self-use, is generally not applicable in the case of VPPAs, because:

• There is no physical delivery of energy;
  
• The economic purpose is not tied to operational supply;
  
• The contract settles in cash based on the difference between a fixed and floating price.

As such, the VPPA:

• Falls within the scope of IFRS 9 from the outset;
  
• Must be measured at fair value;
  
• Requires appropriate documentation, ongoing monitoring, and — if applicable — designation as a hedge.

Whether hedge accounting is available, and under what conditions, depends on the version of the IFRS 9 standard in force at the time of designation.

For a detailed discussion of the December 2024 amendment to IFRS 9 and its implications, see the next section: “A Paradigm Shift: What Has Changed Under the IASB”.