The Basics of Virtual Power Purchase Agreements

The Basics of Virtual Power Purchase Agreements
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BY:
Loren Henry

Broker

October 7, 2020

Virtual power purchase agreements (VPPAs) are fast becoming a way for corporations to meet their renewable energy objectives. However, it can be difficult for your clients to explore the benefits of VPPAs if they don’t understand what these types of contracts are and the basics of how they work.

A Physical PPA Agreement
A physical PPA is a contract between an energy buyer and the developer of a renewable energy project that is scheduled to be built. The contract essentially guarantees that the developer will receive a fixed price for their energy. In exchange, the buyer receives renewable energy credits (RECs) for every megawatt hour of clean energy that is generated and sold. In general, these long-term contracts range anywhere from 12 to 20 years, allowing the developer to secure the necessary financing to begin the project. Today, corporations are engaging more with these types of contracts because they allow the company to take advantage of renewable energy claims, generate more clean energy and hedge against rising energy prices.

PPAs Versus VPPAs
A physical PPA is when the company or a third party takes the title to the physical energy at a specified delivery point on the grid. A virtual PPA is similar, but instead of the energy physically flowing from the project to the buyer, it takes the form of a financial contract that allows the energy to be sold on the wholesale market where anyone can use it. Simply put, a VPPA contract is a financial transaction (commonly referred to as a fixed-for-floating swap) that guarantees that the project developer will receive the fixed PPA for every megawatt hour of energy sold at market and in return, the company receives RECs generated by the facility.

In general, the VPPA process involves five steps:

  1. The project is kicked off by the developer.
  2. The VPPA is signed by the buyer and developer as per the contract terms.
  3. The developer obtains financing and construction begins.
  4. The project, once it becomes operational, permits the developer to sell the energy on the wholesale power market at the current price (aka the floating price).
  5. At the close of the settlement period, the floating market price versus the fixed VPPA price is calculated, and the developer or buyer pays the difference. At that time, the developer receives one REC for every megawatt hour sold, and in most instances, the RECs are immediately transferred to the buyer.

Today’s VPPAs have opened up doors for a wide variety of companies (including smaller organizations), universities and institutions to finance renewable energy projects. In fact, in 2019, nearly 19.5 GW of clean energy contracts were signed by more than 100 companies, with more than 80% of those contracts being VPPAs.

At Worldwide Facilities, we’re helping renewable energy businesses nationwide meet the specialized insurance challenges of the rapidly growing renewable energy sector.

To learn about our unique insurance solutions to problems that arise in this ever-changing industry, contact Loren Henry at lhenry@wwfi.com or 619-541-4265. 

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