This article provides a general overview of on-site versus offsite power and physical versus virtual power purchase agreements, also known as PPAs.

On-Site Versus Offsite Power

Put simply, on-site power and off-site power refer to where your energy comes from and how it’s delivered to you.

On-Site Power

• The energy is generated right where it’s used—like having solar panels on the roof of your building or a wind turbine in your backyard.
• It’s local, which means no need for a long grid connection.
• You control the system, which can reduce costs over time, but you’re responsible for installation and maintenance.

Example: A factory installing its own solar panels to power its operations.

Off-Site Power

• The energy is generated somewhere else and delivered to you through the electricity grid.
• You buy the power from a generator, often through agreements like Power Purchase Agreements (PPAs).
• This allows you to support renewable energy (like wind or solar farms) without having to build or maintain your own system.

Example: A company signs a contract to buy wind power from a large wind farm miles away, or even in a different state.

In short:

• On-site power = generated at your location, like DIY (do-it-yourself) energy.
• Off-site power = bought from elsewhere, like purchasing a clean energy “subscription”.

Power Purchase Agreements

In business, when a buyer purchases something from a seller, a contract is created called a purchase agreement. When this ‘thing’ is energy, it’s called a Power Purchase Agreement — or PPA.

In essence, a PPA is an arrangement in which a third-party developer installs, owns, and operates an energy system on a customer’s property.  The customer then purchases the system’s electric output for a predetermined period. A PPA allows the customer to receive stable and often low-cost electricity with no upfront cost, while also enabling the owner of the system to take advantage of tax credits and receive income from the sale of electricity. This is most often attributed to renewable energy systems like solar and wind.

There are two types of off-site power purchase agreements (PPAs) in the market: physical and virtual. Let’s dive in.

Physical PPA

Electricity is comprised of electrons, which move through power lines to their destination. With a Physical Power Purchase Agreement (PPA), the corporate buyer takes ownership of the actual physical electrons produced by a given energy project — let’s say a solar farm. Since a Physical PPA delivers the electrons directly to the buyer, they are often referred to as Direct PPAs.

Virtual PPA

Unlike with a physical PPA, with a Virtual Power Purchase Agreement (VPPA) there is no physical delivery of power from the seller to the customer. With a VPPA contract, the corporate buyer does not own and is not responsible for the physical electrons generated by the project. Since a VPPA is a financial transaction, exchanging a fixed-price cash flow for a variable-priced cash flow and renewable energy certificates (RECs), they are often referred to as Financial PPAs.

How it Works for Your Company

To be eligible for a PPA, a project must be located in a state or jurisdiction where third-party ownership of energy generation equipment is allowed. Some state regulations limit or restrict non-utility providers in regulated markets from selling electric power. For more information on where PPAs are available, see this map from Database of State Incentives for Renewable Energy (DSIRE).