As renewable energy becomes an increasingly important aspect of corporate sustainability strategies, businesses are looking for ways to invest in clean energy without traditional power purchase agreements (PPAs) constraints. One of the most innovative solutions to this challenge is the Virtual Power Purchase Agreement (VPPA). This blog article will explain VPPAs, how they work, and why they are an attractive option for companies aiming to meet their renewable energy and sustainability goals. Contact the Dohrwardt Law Firm to discuss how a VPPA might be an attractive option for your business.

What is a Virtual Power Purchase Agreement (VPPA)?

A VPPA is a financial contract between a company (buyer) and a renewable energy project developer (seller). Unlike traditional PPAs, where the buyer directly purchases physical electricity from a specific renewable energy project, a VPPA is purely a financial transaction. It does not involve delivering electricity to the buyer's facilities. Instead, the VPPA allows the buyer to support renewable energy generation financially while receiving credits for the renewable energy produced. This arrangement enables companies to meet their sustainability and carbon reduction goals, even if the renewable energy project is not geographically close to their operations.

How Do VPPAs Work?

VPPAs are complex financial instruments, but their workings can be understood by breaking down the key elements of the contract and the process:

Contract for Differences (CFD):

A VPPA is structured as a Contract for Differences. In this financial derivative, the buyer agrees to pay the renewable energy developer a fixed price (called the strike price) for the power generated by the project.

The developer then sells the physical electricity generated by the renewable project into the local energy market (wholesale market) at the market price. The buyer and seller settle the difference between the market and strike prices.

Settlement and Payments:

• If Market Price > Strike Price: The developer pays the buyer the difference when the wholesale market price exceeds the strike price. This scenario benefits the buyer because it earns a profit.
• If Market Price < Strike Price: When the market price falls below the strike price, the buyer pays the developer the difference. In this case, the buyer incurs a cost offset by the fact that they support renewable energy production and can claim environmental benefits.

Renewable Energy Certificates (RECs):

A critical component of VPPAs is the transfer of Renewable Energy Certificates (RECs) from the developer to the buyer. RECs prove that a renewable energy source generates one megawatt-hour (MWh) of electricity.

By acquiring RECs, the buyer can claim the environmental benefits of renewable energy generation, even though they do not directly consume the electricity.

Energy Market Independence: One of the main advantages of VPPAs is that they are not tied to the physical delivery of electricity. Companies can enter VPPAs with renewable energy projects anywhere, regardless of their physical location or regional energy market.

The flexibility of VPPAs allows companies to support renewable energy projects in areas with better renewable resources (e.g., solar in the Southwest U.S. or wind in the Midwest), which often results in more cost-effective renewable energy generation.

Why Choose a VPPA?

VPPAs offer several benefits for companies looking to meet their renewable energy goals:

Meeting Sustainability Targets:

VPPAs enable companies to support renewable energy projects and claim the associated RECs, helping them achieve their sustainability and carbon reduction targets. This is especially beneficial for companies with a distributed footprint or facilities in regions with limited local renewable energy options.

Financial Predictability:

By locking in a fixed strike price, companies can hedge against market volatility and benefit financially if prices rise. This financial predictability makes VPPAs an attractive option for companies looking to stabilize their energy costs while investing in renewable energy.

Risk Management:

VPPAs offer companies a way to support renewable energy without the risks and complexities of physically integrating a renewable energy project into their operations. This financial mechanism allows companies to invest in clean energy without needing to manage physical infrastructure or navigate regulatory hurdles related to energy markets.

Corporate Branding and Social Responsibility:

Participating in a VPPA is a way for companies to demonstrate their commitment to sustainability and social responsibility. By supporting renewable energy projects, companies can showcase their dedication to reducing greenhouse gas emissions and promoting environmental stewardship.

Challenges and Considerations

While VPPAs present numerous advantages, there are some challenges and considerations that companies must keep in mind:

Market Volatility:

Because VPPAs involve financial settlements based on market prices, companies are exposed to market price fluctuations. While a fixed strike price provides some predictability, shifts in the wholesale energy market can impact the financial outcomes of a VPPA.

Accounting and Reporting:

VPPAs are financial instruments that may involve complex accounting and reporting requirements. Companies must understand how to report the economic aspects of VPPAs on their balance sheets, which can vary depending on local regulations and accounting standards.

Contract Length:

VPPAs often involve long-term contracts (typically 10-20 years), which may align differently from the strategic planning horizons of all companies. Before entering a VPPA, companies should assess their long-term energy needs and financial capacity to commit to such an arrangement.

Conclusion

Virtual Power Purchase Agreements (VPPAs) provide an innovative way for companies to support renewable energy generation and meet their sustainability goals without the physical limitations of traditional power purchase agreements. By entering a VPPA, companies can benefit from financial predictability, receive renewable energy credits, and enhance their corporate social responsibility profile. However, VPPAs have complexities and risks, such as market volatility and long-term contractual commitments. Therefore, companies must evaluate their energy needs, financial position, and sustainability objectives before committing to a VPPA. In an era where sustainability is increasingly becoming a business imperative, VPPAs offer a compelling tool for businesses to contribute to the renewable energy transition while managing financial risks and showcasing their commitment to environmental responsibility. Contact the Dohrwardt Law Firm to discuss how a VPPA might be an attractive option for your business.

To learn more about virtual power purchase agreements, check out these helpful links:

Renewable Energy Buyers Alliance (REBA) - A leading resource for businesses interested in renewable energy, REBA offers guidance on PPAs and VPPAs, providing valuable insights for companies considering these agreements.

EPA Green Power Partnership - The U.S. Environmental Protection Agency provides resources and information on renewable energy options for businesses, including guides on power purchase agreements.

Rocky Mountain Institute (RMI) – Business Renewables Center -RMI's Business Renewables Center offers tools, case studies, and guidance on renewable energy procurement, including virtual power purchase agreements information.

Renewable Energy Certificates (RECs) Guide by the U.S. Department of Energy - This guide provides a detailed overview of Renewable Energy Certificates (RECs), which are crucial to the functioning of VPPAs.

CDP – Corporate Renewable Energy Reporting - CDP offers guidance on how companies can report their renewable energy purchases and the impact of VPPAs on their carbon footprints.

Guide to Virtual Power Purchase Agreements (VPPAs) by BloombergNEF - BloombergNEF provides market insights and analyses on renewable energy markets, including detailed reports on how VPPAs work and market trends.

The information provided is only for general information and is not meant to be legal advice.  Information on this website, including third-party links, may not include the most up-to-date information, so you should contact your attorney to discuss your particular matter. Third-party links are provided for convenience only and are not an endorsement by the Dohrwardt Law Firm.