Virtual Power Purchase Agreements (vPPAs): A Viable Method to Decarbonize your Footprint.
As we mentioned in previous articles, vPPAs can be insured or uninsured depending on your level of risk tolerance. They allow you to guarantee that a project developer will have a fixed stream of cash flows so that they can get their project financed and built. In turn, they guarantee Renewable Energy Certificates for every MWh the project produces during your contract period, giving you a simple way to own green energy (though you still use the mixed energy from the utility local to your buildings). Here we will go into the difference between a physical PPA and a virtual PPA (vPPA).
A direct, or physical, PPA is a contract that allows you to own the electrons, not just the RECs, produced by a project or projects that are in the same electrical grid network as your buildings. These contracts are executable if your buildings are in deregulated electricity markets where there is the freedom to choose energy suppliers. The physical PPA gives you the responsibility of selling the electrons (and sometimes the transmission charges) typically into the wholesale power market, or moving and scheduling the energy to your load once the project delivers the energy to the agreed-upon delivery point.
Whether or not you guarantee the settlement amount (the difference between the floating market price and the fixed PPA price you agree to with the developer), you will find that signing vPPAs offer the following benefits relative to physical PPAs:
Physical PPAs lock in your energy price and thus your energy savings, while vPPAs give you the ability to make potentially larger (yet volatile) savings in the uninsured vPPA case or a steady stream of stable settlement payments in the insured vPPA case. The potential for economic upside is a draw for some clean energy buyers.
A vPPA helps bring a new clean energy project online, even if your buildings aren’t in a deregulated electricity market. By using a financial product to connect a buyer and a project developer, participants in vPPAs can point to the fact that they enabled the injection of additional, new green electricity into the electric grid somewhere in the contiguous US. More green electricity coming online slowly tips the balance in favor of renewables and away from fossil fuel-based projects. What’s more, you can support new additional green electricity in regions or states where that renewable generation source is most active, so even if your buildings are in areas with poor sunlight or wind corridors, they ultimately help projects get built where there is rich sun, wind or other clean fuel.
Further, a vPPA is an easy contract to execute since it allows you to continue operating your buildings and locations as you normally would, and your utility will continue to schedule delivery of its standard mix of electrons and take care of the logistics as it always has. You need not sell the electrons from the power project or worry about scheduling the energy to your buildings. You let the energy transmission experts do their job.