Serbian exporters using renewable electricity contracts must distinguish between physical power purchase agreements (PPAs) and virtual arrangements when assessing whether their electricity procurement can support specific emissions claims under the EU’s Carbon Border Adjustment Mechanism (CBAM). Both structures can support renewable energy strategies, but they differ in how electricity is delivered, how financial risks are managed and what evidence they provide.
A virtual PPA is primarily a financial contract between a corporate buyer and a renewable generator. The parties settle the difference between an agreed strike price and a market reference price, while physical electricity is sold and purchased separately. Environmental attributes may also be transferred, but the electricity consumed by the factory does not necessarily come from the generator covered by the agreement.
Serbian law recognises physical PPAs and financial arrangements for managing price exposure. However, a financial hedge can stabilise electricity costs without establishing physical delivery from a named generator to an industrial consumer. Companies therefore need to separate their price-risk strategy from claims requiring a qualifying physical electricity arrangement.
Physical Delivery Determines the Evidence Requirements
A physical PPA links a generator’s output to an industrial consumer through an electricity-delivery arrangement. Depending on national market rules, a licensed supplier or intermediary may be needed to manage delivery and balancing.
Under the current CBAM framework for actual indirect electricity emissions, the physical and contractual relationship matters alongside records matching electricity generation and consumption over the relevant periods. Exporters should establish whether their proposed arrangement meets the applicable conditions before signing a contract or relying on it for emissions reporting.
A physical PPA should define access to generator meter data, scheduling and settlement records, replacement electricity arrangements, outage procedures and verified emissions information. Virtual PPAs require clear documentation of environmental attribute ownership and financial settlements. Internal reporting systems should classify the instruments separately so that a financial hedge is not mistakenly used as proof of physical electricity delivery.
Contract Structures Serve Different Commercial Objectives
The distinction does not mean that virtual PPAs are inherently unsuitable. They can provide long-term price exposure and support financing for additional renewable generation when physical contracting is difficult because of a factory’s location or market rules.
Physical PPAs can create a closer connection between generation and consumption, but they also introduce delivery, balancing, generation-profile and credit risks that must be assessed and priced. Finance teams may prefer virtual contracts for their operational simplicity, while sustainability teams may value the associated renewable attributes. Where an export strategy depends on a CBAM actual-electricity claim, legal and technical teams must confirm that the selected structure satisfies the relevant requirements.
Companies can also combine instruments within one procurement portfolio. A physical renewable arrangement may cover the share of consumption for which verified production evidence is most valuable, while virtual PPAs or other contracts manage electricity-price exposure across the wider load. This allows different instruments to address separate objectives rather than requiring one agreement to serve every purpose.
Banks and Customers Need Clear Instrument Classification
The function of each PPA should be explicit in financing documents and customer reporting. If a borrower presents a virtual PPA as evidence of lower CBAM embedded emissions, the claim requires scrutiny. The same agreement may nevertheless be appropriate for a corporate renewable target or electricity-price hedge.
Regional electricity-market integration could expand opportunities for physical and virtual arrangements through cross-border PPAs, market coupling and recognition of guarantees of origin. These developments do not remove the distinction between financial exposure, renewable attributes and physical electricity, which remain separate elements of the procurement and reporting process.
Tax and accounting treatment may also differ between physical and virtual contracts. Treasury, legal, trading, operations and monitoring, reporting and verification (MRV) teams should therefore assess the structure together, ensuring that it fits the company’s risk appetite and supports the intended claims.
Internal Policies Separate Financial and Physical Evidence
Accounting teams should maintain separate classifications for physical and virtual PPAs, including where both arrangements transfer renewable attributes. The classification determines which documentation and verification procedures apply and reduces the risk of using the wrong instrument in a regulatory calculation.
An internal policy can specify that contract names do not determine emissions treatment. Each agreement should instead be assessed according to its actual physical delivery, contractual structure and environmental attributes. This is particularly relevant where broad labels such as “green PPA” cover arrangements with materially different characteristics.
For corporate reporting, both structures can form part of a single renewable energy strategy if their functions are identified accurately. A company can disclose that a virtual PPA supports price management and renewable attribute objectives, while a physical arrangement follows a different electricity-evidence route. The contract structure should be selected according to the intended commercial and reporting purpose, with each resulting claim labelled accordingly.
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