The virtual power purchase agreement (vPPA) has a substantial role in enabling off-site clean energy procurement. We wanted to explain to renewable energy buyers how the vPPA works for and what has made it so popular.
Uninsured PPAs:
If you’re looking to procure wholesale energy, you’ll may come across the vPPA as an off-site power purchase agreement (PPA) mechanism:
A virtual power purchase agreement (PPA) is simply a type of PPA where the energy buyer does not own the physical electrons from the power plant. It’s also not responsible for moving the physical electrons that the plant generates. With this mechanism, the energy buyer contracts with a project developer for a fixed energy price and an included set of Renewable Energy Credits (RECs) for every clean megawatt-hour sold. These are typically 5-20 year contracts that lock in the energy price and allow the developer to close project financing to build the project (typically over the next 12-18 months). Then, the developer sells the energy wholesale to the trading hub or node that’s local to the project. The developer collects the local (and sometimes very dynamic) wholesale market price. On an agreed upon interval, typically every month, the developer pays the energy buyer the difference between the wholesale market price and the fixed price agreed to in the vPPA (creating the opportunity for large returns)– and if that difference is negative they request a payment at the end of the settlement period (creating the opportunity for losses). Meanwhile, the buyer pays its utility the standard rates it would usually pay for the physical energy to continue to flow to its buildings. So, in addition to enabling the construction of new clean energy, the buyer now pays the following for energy: [Traditional energy price – vPPA savings] OR [Traditional energy price + vPPA payments].
Remember, vPPAs are financial contracts that swap a fixed-price cash flow stream for a variable-priced cash flow and RECs. They are investments that can end up costing money or creating a financial return, but in either case they drive the construction of new renewables and decarbonize the grid. Smaller energy buyers can use them to participate in the zero-carbon power revolution and companies with distributed buildings or buildings and fleets in regulated markets.
Insured PPAs:
If you’re interested in less volatility in exchange for less upside, a vPPA with a Settlement Guarantee Agreement (SGA) would be an option that’s fast-gaining popularity. A settlement guarantee agreement allows you as an energy buyer to sell the risk of the volatile wholesale market price to an insurer, in exchange for a fixed premium. To put it simply, an insurer like Allianz will pay the project a fixed lump for a defined period that is not related to how much energy the project produces or what the hourly spot market prices are. The project then pays the insurer an amount equal to the proxy revenue, the proxy generation multiplied by each hour. What does this mean for you? You will get a guaranteed positive settlement payment and all of the RECs that come from buying clean energy. If the project goes on to sell energy at a very high energy rate that would’ve led to a nice positive payment stream for you, the insurer will get that. However if the project goes on to sell energy at a low energy rate that would’ve led to you having to make payments to the project, the insurer covers any difference so you pay nothing. So you as the buyer now pay the following for energy: [Traditional energy price – guaranteed vPPA savings]
