4 Benefits of Using a Virtual Power Purchase Agreement to Acquire Renewable Energy Certificates

May 27, 2020

In our previous articles in this series, we provided an overview of renewable energy certificates (RECs) and weighed the pros and cons of the four most common ways corporations acquire RECs. In this article, we'll go into more depth on virtual power purchase agreements (VPPAs), and the reasons why corporations are increasingly turning to VPPAs to reach their renewable energy goals. First, here's a brief primer on VPPAs, to make sure we're on the same page.

How Virtual Power Purchase Agreements Work

A virtual power purchase agreement is a bit of a misnomer; you're not actually purchasing any power from the renewable energy project. The renewable energy project sells its power on the wholesale market and delivers the power to the grid, where anyone can use it. The contract is merely a financial transaction known as a fixed-for-floating swap. You're guaranteeing that the project developer will receive a fixed price - the PPA price - for every megawatt hour of energy they sell at the market (floating) price: no more, no less. And in exchange, you get RECs generated by the facility. In some circles it's called a contract-for-differences: either you or the developer pay the difference between the market price and the PPA price, depending on if it was lower or higher, respectively.

How does that work, exactly? A predetermined interval is set, usually every hour, for the developer to calculate the difference between the floating market price and your fixed PPA price. At the end of the settlement period, usually every month or a quarter depending on your contract, developers will add up the difference between the two prices. If the total is positive, the developer will pay you the difference. If the total is negative, you'll pay the developer the difference. This is known as the settlement amount.

In either scenario, you'll still receive one REC for every megawatt hour of energy that the project sells, up to a certain number specified in the agreement. The price you pay for those RECs depends on the settlement amount: it is NOT the PPA price. The net present value of the contract depends on the projected settlement value over the length of the contract, which depends on six key risk factors. That's why it's key to have a PPA advisor like LevelTen to evaluate your options. We process over 1 billion data points daily to analyze the risk and value of nearly every wind and solar PPA available.

VPPAs are typically long-term contracts spanning 12-20 years, which gives the project developer the ability to secure the financing required to build the project. That's key: As a direct result of your investment, a new renewable energy project can come online and supply power to the grid.

Why Corporations Choose VPPAs to Reach Renewable Energy Goals

In the last five years we've seen a 750% increase in corporations entering into renewable PPAs. According to BloombergNEF, some 19.5GW of clean energy contracts were signed by more than 100 corporations in 2019, and in the U.S., more than 80% of those were virtual power purchase agreements. So why are corporations choosing VPPAs? They offer four key benefits:

1. Positive Environmental Impact

Customers, investors, employees and internal stakeholders want corporations to set renewable energy goals because they care about the long-term sustainability of the company. "Greenwashing" isn't going to cut it: they want to see that your corporation is investing in initiatives that will significantly reduce greenhouse gas emissions and improve returns in the long run. A VPPA results in a new project coming online, which ultimately means utility companies will use less fossil fuels on the grid. With a VPPA, your corporation can point to a specific project that is being built thanks to your investment: the impact is clear to stakeholders.

2. Potential Economic Upside

You can meet your renewable energy goals - on paper at least - by buying "unbundled" RECs from a broker. But unlike a VPPA, unbundled RECS will only ever be a cost. If you choose a VPPA wisely, there's potential to get RECs at a very low cost, or even make money on the deal. In addition, if structured appropriately, a VPPA can act as a hedge on energy costs, providing an added financial benefit.

3. No Physical Requirements

Since a VPPA is merely a financial contract, entering into a VPPA requires no changes to your company's operations; you'll still purchase power from your utility company or other electricity provider. Unlike on-site options or physical power purchase agreements, with a VPPA the project does not need to be in the same region as your company's operations. You also have more options to choose from: you can enter into a VPPA with wind, solar or other types of renewable energy generation projects, and you can enter into more than one VPPA to create a portfolio that reduces risk and maximizes the value of their overall investment.

4. A Reliable Source of RECs Over Time

You can sign one - or many - VPPAs and receive enough RECs to cover a high percentage of your purchased energy. These projects are massive in scale, which means with a VPPA you can expect to receive a large amount of RECs each year, for the next 10-20 years. They provide a reliable way to reduce your Scope 2 emissions and meet your renewable energy usage targets.