The contract
A buyer and a generator set a contract price, often called a strike price, and a market reference, which is the wholesale price the contract compares against. Cash settlement reflects the difference. Renewable energy certificates, which record that a unit of renewable electricity was generated and give the holder the right to claim it, can also be part of the terms.
The settlement
At the end of each settlement period, one side pays the other the difference between the contract price and the market reference. A hedge limits exposure to market price swings. Depending on the market, settlement pays or costs the buyer.
The physical electricity
The buyer's electricity supply stays a separate arrangement, with no dedicated electrical connection to the generation project.
A different idea from a VPP
A virtual power plant coordinates distributed resources such as solar and batteries at homes and sites. Elastic works on that side, with the Energy Router at each site. See what a virtual power plant is.
Category reference: U.S. Environmental Protection Agency.