Virtual Power Purchase Agreements (VPPAs) are a type of contract structure for renewable energy projects. Alongside Physical Power Purchase Agreements (PPPAs), they are the dominant transaction mechanism in corporate renewable energy procurement markets. Virtual PPAs and Physical PPAs are the two types of PPA dominating this sector. Combined, they greatly outweigh any of the other transaction mechanisms.
- The corporate buyer is responsible for the electrons produced and the monetization/sale of those electrons.
- Depending on the contract involved, the buyer may also have to pay transmission charges.
- The corporate buyer is not responsible for the electrons produced.
- A VPPA is a purely financial transaction.
- A fixed-price cash flow is exchanged for a variable-priced cash flow and renewable energy certificates (RECs).
- Owing to the purely financial nature, a buyer's relationship with the utility, at retail level, remains unchanged.
In the early years of the corporate renewable energy market, Physical was the dominant PPA. Now, Virtual is much faster-growing, as it allows for the participation of smaller companies and those without energy trading experiences.
The Benefits of a VPPA
- Simplifies and opens up the process for smaller buyers.
- Easily scalable, allowing buyers to meet a large portion of sustainability goals with fewer deals.
- Gives buyers a highly-distributed electricity load, allowing buyers to easier meet renewable energy goals.
- The procurement of bundled RECs is, arguably, the best way for a corporation to meet renewable energy goals.
- The purchase of a VPPA is a clearly demonstrable long-term commitment which has a clear impact on new renewable energy projects.
- A VPPA makes it possible to generate a positive cash flow right from the outset.
- A Virtual Power Purchase Agreement is a way to safeguard oneself against the increase of conventional energy costs.
- For corporate buyers, a VPPA reduces carbon footprint and, at the same time, offers marketing and financial opportunities.
How Does a VPPA Work?
- A buyer agrees to purchase a project's renewable energy at a VPPA Price agreed in the contract.
- The project receives Market Price at the time the energy is sold.
- If Market Price > Agreed VPPA Price, the buyer receives the difference
- If Market Price < Agreed VPPA Price, the buyer pays the difference.
- The buyer generally receives the project's Renewable Energy Certificates (RECs).
- It is a purely financial transaction, there is no physical delivery of power.
- The buyer continues their retail relationship with the utility, unchanged.
The image below, courtesy of Rocky Mountain Institute's Introduction to the Virtual Power Purchase Agreement, illustrates the relationships between various components of a VPPA.
By Shane Croghan