How to Calculate Virtual PPA Carbon Avoidance Cost
Virtual power purchase agreements (VPPAs) allow corporations to procure renewable energy financially rather than physically. The counterparty sells renewable electricity into the wholesale market, while the buyer pays the strike price and receives renewable energy certificates. Boards increasingly demand a single carbon avoidance cost that captures both the financial settlement and the emissions benefit, enabling comparisons with alternative decarbonisation levers.
This walkthrough explains how to derive that cost per tonne: define variables, map formulas, and execute a five-step workflow that aligns with Scope 2 market-based reporting. We reference the market-based emissions guide and the battery arbitrage margin calculator to show how procurement teams can evaluate VPPAs alongside other energy strategies. The embedded VPPA carbon avoidance calculator automates the math once your inputs are validated.
Definition of carbon avoidance cost
Carbon avoidance cost for a VPPA equals the net financial cost of the contract divided by the tonnes of CO₂ equivalent (CO₂e) avoided due to the renewable energy supplied. The numerator reflects the strike price minus the market settlement price, multiplied by the settled volume and adjusted for risk reserves. The denominator reflects the avoided emissions factor, which compares grid residual intensity with the project’s lifecycle intensity.
Executives use the resulting $/t CO₂e figure to rank procurement options against on-site solar, renewable energy credits, or efficiency retrofits. A negative value indicates the VPPA generates net revenue while still providing renewable attributes—a valuable data point when prioritising sustainability investments.
Variables and units
Gather these variables before running the calculation. Ensure volumes are measured over the same time horizon (typically one contract year) and document the data source for audit trails.
- V – Annual settled volume (MWh). Derived from VPPA forecasts or actual production statements.
- Ps – Strike price ($/MWh). The fixed price committed to the project owner.
- Pm – Market settlement price ($/MWh). Forecast hub price or average realised settlement for the contract year.
- EFavoided – Avoided emissions factor (t CO₂e/MWh). Equals residual grid intensity minus the project’s lifecycle intensity.
- d% – Optional basis-risk discount (percent). Represents reserves for congestion, profile, or imbalance risk retained by treasury.
Supplement the variables with qualitative context: contract tenor, hub basis history, balancing authority, and whether renewable energy certificates are retired or resold. This ensures sustainability teams can reconcile VPPA impacts with carbon accounting systems.
Formulas for VPPA cost attribution
Net price spread ΔP = Ps − Pm
Gross net cost Cgross = ΔP × V
Risk-adjusted net cost Cadj = Cgross × (1 − d% ÷ 100)
Avoided emissions Eavoided = V × EFavoided
Carbon avoidance cost CAC = Cadj ÷ Eavoided
The formulas assume that avoided emissions factor already accounts for transmission losses. If grid authorities publish zonal residual factors, match the factor to the load zone where your consumption occurs.
When settlement prices exceed the strike, ΔP becomes negative. The formulas naturally return a negative avoidance cost, signifying a profitable hedge plus environmental benefit.
Workflow for calculating CAC
1. Validate energy volume forecasts
Start with the project’s expected annual production. Adjust for curtailment, availability guarantees, and balancing authority congestion. Align the timeline with how your finance team recognises VPPA settlements.
2. Model market settlements
Use forward curves, analyst consensus, or internal hedging models to estimate Pm. Scenario analysis is encouraged: run high, base, and low cases to illustrate CAC variability.
3. Determine avoided emissions factor
Source residual emission factors from the relevant regional transmission organisation or national inventory. Subtract the project’s lifecycle emissions, including upstream manufacturing and transportation. Coordinate with sustainability teams to keep factors consistent with the energy reuse effectiveness methodology used in other reports.
4. Apply risk discounts
Treasury often sets aside reserves for basis or imbalance risk. Translate those reserves into a percentage reduction of net benefit so the CAC reflects available cash after risk provisioning.
5. Calculate and communicate CAC
Run the formulas or the embedded calculator to produce Cadj, avoided tonnes, and CAC. Present the results with a bridge chart showing how price spread, volume, and discounts contribute to the final number. Compare against internal carbon price benchmarks to inform procurement decisions.
Validation and controls
Reconcile VPPA settlements against treasury records each month. Confirm renewable energy certificates are retired in the same reporting year; otherwise, subtract any resale proceeds from the net cost. Align avoided emissions factors with those used in Scope 2 reporting to avoid inconsistencies across disclosures.
Maintain a documentation pack containing the contract, forecast assumptions, risk policy memos, and emission factor sources. Update the pack after each true-up or contract amendment so auditors can trace how CAC evolved.
Limits and scenario considerations
VPPAs introduce exposure to wholesale market volatility. The CAC metric assumes volumes and prices settle as forecast; real-world deviations can materially alter results. Consider running Monte Carlo simulations or stress cases alongside the deterministic calculation.
The method also focuses on Scope 2 avoided emissions. If you wish to capture broader social cost of carbon or reputational value, supplement the CAC with qualitative scorecards. For hybrid renewable portfolios that mix on-site and virtual procurement, calculate CAC per instrument and communicate a weighted average.
Embed: VPPA carbon avoidance calculator
Provide annual energy volume, strike and market prices, avoided emissions factor, and optional risk discounts to derive net cost, avoided tonnes, and the resulting carbon avoidance cost.