If you are responsible for shrinking your company’s carbon footprint, you may have heard of Virtual Power Purchase Agreements, or VPPAs. For many large organizations, these contracts allow meaningful and relatively quick strides towards their climate goals.
As the renewable energy market has matured, VPPAs have proliferated. But if buyers don’t understand the intricacies of how a VPPA works, they may not get the best deal, or the best alignment with their organization’s goals. Here are a few things to consider as you begin exploring VPPAs as a renewable energy solution.
(Note: PPAs can apply to a variety of offsite and onsite renewable energy solutions, but here we will focus on PPAs for utility-scale offsite projects, or VPPAs.)
What is a VPPA?
A virtual power purchase agreement, also known as a financial power purchase agreement, is a 10- to 15-year financial contract between a large-scale energy buyer and the developer of a renewable energy project such as a wind or solar farm.
The buyer continues to purchase electricity from its local utility as it normally would. This electricity will power the buyer’s facilities.
The buyer also pays a fixed rate to the renewable energy developer. In return, the buyer receives renewable energy certificates (RECs) which allow the buyer to claim emissions reductions. The buyer also receives the floating market rate for the electricity that is generated by the wind or solar farm and sold to the grid.
The difference between the fixed rate paid to the developer and the floating rate received from the sale of clean electricity to the grid is settled monthly.
In favorable market conditions where the floating market rate of the clean electricity is greater than the fixed rate that the buyer pays to the developer, the buyer can save money on its overall electricity spend. In most cases, VPPAs are more cost effective than simply purchasing RECs.
VPPA vs. PPA
Power purchase agreements generally fall into two structural categories: a “virtual PPA,” where the developer manages selling the energy into the market, and the buyer only sees the financial transaction; or a “physical PPA,” where the buyer takes on the responsibility for selling energy into the market (usually with the support of an agent/advisor). Both approaches have their pros and cons, but buyers tend to favor a VPPA for its simplicity.
Benefits of VPPAs
- VPPAs require no capital outlay.
- VPPAs can make huge reductions to a corporation’s scope 2 emissions in a single contract even when its electricity footprint is geographically scattered.
- VPPAs give renewable energy developers the dependable revenue stream they need to attain financing, which puts more clean energy on the grid.
- In favorable market conditions, VPPAs can save buyers money on electricity costs.
Drawbacks of VPPAs
- VPPAs entail financial risk. Without careful, forward-looking economic analysis, VPPAs can create undesirable electricity market price exposure and result in added costs over time.
- The VPPA procurement process is very different than traditional energy procurement, requiring unique expertise and careful internal stakeholder engagement. It is also a longer process and results in a longer commitment.
- In some VPPA markets, buyers must compete for the most attractive projects. Buyers that are internally aligned and able to move quickly will win out.
- Projects in development may face cost increases, delays, supply chain, and timeline issues beyond their control.
Which companies should consider a VPPA
VPPAs can be an excellent option for buyers with very large and/or very distributed energy usage. Buyers must have a good credit rating, some risk tolerance, and an appetite for a long-term contract.
