In this article, we’ve compiled all the things that corporate sustainability managers should know about PPAs (also known as energy purchase agreements/EPAs) – the different types, including VPPAs, the pros and cons of a PPA, as well as how PPAs and VPPAs work.
Note: PPAs are not specific to renewable energy, but for this article, we are specifically referencing Renewable PPAs.
What is a PPA?
To begin, PPA stands for power purchase agreement. As defined by the United States Environmental Protection Agency (EPA), an energy power purchasing agreement is a ‘contract for the purchase of power and associated RECs from a specific renewable energy generator (the seller) to a purchaser of renewable electricity (the buyer).’
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How does a Power Purchase Agreement (PPA) Work?
For a Physical PPA, an organization or business signs a long-term contract with a third-party seller. This third-party seller will maintain, operate, and build a renewable energy system that can either be on-site (on the customer’s property) or off-site elsewhere. Physical PPA customers will receive physical delivery of electricity through the grid, regardless of if the energy system is on-site or off-site.
When signing onto a physical power purchase agreement, the customer/buyer agrees to purchase the power at a set price over an agreed upon term and the seller assumes the risks associated with operating and owning the energy system.
It’s worth noting that while many PPA contracts include an escalator on the price, these escalation rates are generally below historic price increases associated with default supplier electricity prices.
When a PPA contract term ends, several Physical PPAs with on-site systems offer customers the opportunity to sign again with a new agreement, or the choice to purchase the energy system at a fair market price. So, customers can combine both immediate savings (via a Physical PPA) as well as benefits from eventual system ownership.
VPPA vs. PPA: What’s the difference between regular and virtual power purchase agreements?
Physical PPAs define all of the commercial terms for the sale of renewable electricity between the two parties, including when the project will begin commercial operation, schedule for delivery of electricity, penalties for under delivery, payment terms, and termination.
In other words, the seller in this agreement will help the buyer set up and install the required technology required for the project and the buyer purchases energy on a per kWh basis.
Unlike a PPA, a Virtual Power Purchase Agreement (VPPA) is more like a financial contract in which the company that intends to develop a renewable project receives financing for said project via an offtaker or third party.
Modern VPPAs with generators who are also retailers are often managed by the retailer themselves, taking the trading element away from the organization. In this case, the retailer takes any potential risks.
However, much like a PPA, the seller in a VPPA is often a developer that builds, owns, and operates a project and delivers the energy output of a project to a specific point.
The developer (seller) will receive a fixed price for renewable energy that is set by the VPPA. Additionally, the third party does not take legal title to the electricity generated by the project.
When the floating market price for energy is in excess of the fixed VPPA price, the developer will pass the positive difference to the offtaker or third party. However, when the floating market price is less than the fixed VPPA price, the offtaker will have to pay the developer the difference.
Why choose a VPPA?
Below are a few of the reasons why VPPAs are worth considering:
- Positive Environmental Impact – VPPAs offer tangible results when it comes to companies looking to contribute to a reduced carbon footprint as well as a greener environment. VPPAs result in renewable energy projects coming to life due to a company’s PPA investment and more green energy entering the grid.
- RECs – VPPAs can potentially be a great source of RECs – one renewable energy certificate represents one megawatt-hour that a clean energy project has generated and added to the grid. RECs can serve to show that a company is working towards sustainable energy production and consumption.
- No Physical Restrictions – With VPPAs, the project doesn’t need to be in the same region as the one that your company operates in. Plus, you’ll have more choices when it comes to what kind of energy generation projects you want to invest in, whether it’s wind power, solar power, hydropower or otherwise.
- Protection Against Rising Power Costs – If both the buyer and seller are in Alberta for example, the buyer would be locking in a guaranteed energy price with a VPPA. Any unforeseen market events or world events won’t interfere with your electricity budget.
What are the types of PPAs?
- Virtual PPAs – A virtual power purchase agreement is a long-term contract between a corporation and a developer in which there is no physical exchange of energy. A virtual PPA is also called a financial PPA. As mentioned earlier, this type of contract is purely monetary.
A fixed price is paid for every unit of power produced at the renewable energy facility for the duration of the agreement.
At the end of the settlement period, the developer calculates the difference between the market price and the contract price of electricity. The developer will pay any surplus in money to the buyer if the power project generates more money than the fixed contract price. Conversely, if the project generates less money, the buyer will pay the difference to the developer.
- Sleeved PPAs – A sleeved PPA is where an intermediary utility company handles both the transfer of energy and money to and from the renewable energy project on behalf of the buyer.
- Physical PPAs – A contract between two parties in which one party sells electricity and RECs to another party. In physical PPAs, the seller delivers renewable electricity to the offtaker (purchaser) who receives and takes legal title to the energy.
How to choose a PPA?
Below are some things to consider about each type of PPA in order to decide which is right for your company:
- Sleeved PPAs – If the buyer is not well versed in the power market and its trends, this can be a good option. Although the buyer pays a fee to the intermediary utility company to handle money and energy transfers, the buyer still benefits – if the amount of purchased renewable energy isn’t enough, the intermediary utility is responsible for supplying the buyer with any additional power. Plus, with sleeved PPAs, the utility carries the risks with market price fluctuations and not the buyer. Overall, if risk management is a top priority, sleeved PPAs may be good to consider.
- Virtual PPAs – If the buyer looking to support sustainability on a more widespread level, virtual PPAs could be worth considering. As long as the power from the renewable energy project is being sold to a deregulated market, the corporation does not need to be located in the same geographical location as the electricity market. Plus, corporations will also take credit for carbon reductions, even without directly sourcing renewable energy from renewable power.
- Physical PPAs – If the buyer wants to engage with and monitor the renewable energy project specifically, physical PPAs make that possible since the project must be in the same grid region. If your corporation happens to require large amounts of energy, physical PPAs are also a good choice since large volumes of energy can be purchased with a single transaction and little hassle. Plus, the buyer still benefits from the seller maintaining and operating the project. Lastly, since the renewable energy project is in the same grid region, that lends itself to long-term energy cost and stability – great for if your corporation wants to plan out energy costs ahead of time.
What are some organizations that use Physical PPAs?
Examples of organizations that use physical PPAs are Facebook, Google, Microsoft, Apple and Tesla.
Below is a quick overview of some projects that Google has invested in to power its data centres to help you visualize how much energy is involved in renewable energy projects:
- PPA with NextERA – 114 MW of wind power over 20 years to power the Iowa data centre.
- PPA in Oklahoma – 100.8 MW of wind power to power the Oklahoma data centre.
- PPA wind project in Sweden – 72 MW of wind power to power the Finland data centre.
- PPA in Texas – 240 MW of wind power to power the Oklahoma data centre.
What type of corporations can purchase VPPAs?
In the past, VPPAs may have been limited to tech giants, multinational manufacturers, large corporations, and the like. However, in the present, technically any entity that classifies as a corporation can purchase VPPAs.
As of late, developers now divide up renewable energy projects into parts to attract several corporate buyers – buyers can choose how much energy they want to invest in. In this way, small buyers, as well as large corporations, can come together to develop renewable energy projects.
Can small companies sign PPAs?
Most small companies that sign renewable PPAs do it via aggregators. Aggregators allow small energy consumers to procure renewable energy by selling multiple smaller energy agreements to multiple small buyers. They bring together multiple organizations to purchase a portion of a VPPA. So, instead of a single large company signing a single large renewable PPA, a group of small businesses can divide it up and contract smaller portions of energy.
Small companies can absolutely sign PPAs – however, PPA investment may not be feasible for every company. Smaller organizations may face challenges that larger corporate PPAs do not. According to a Forbes article, smaller companies may lack the financial security to fund a PPA.
Additionally, smaller businesses often do not have dedicated teams to work on the procurement of renewable energy – energy sourcing is likely to be done by individuals who aren’t experts in the field.
So, in summary, while it’s possible for small companies to sign PPAs and VPPAs, it’s riskier for them to do so than it is for larger companies.
Where can virtual power purchase agreements take place in Canada?
Alberta is the best province in Canada for VPPAs and PPAs, as it has the least regulated energy market in Canada – both electricity and natural gas are deregulated.
What are the main PPA risks? Are PPAs risky?
- Profile Risk – This risk refers to the fluctuating nature of renewable energy. For example, think about how there’s no solar energy being produced at night. High production times for such situations could mean a large decrease in power pricing or in other words, revenue.
- Price Risk – Any adverse movements in market price always have a chance of occurring. For example, it’s possible that the spot price on the open market will be lesser than that of the PPA price for extended periods of time.
- Liquidity Risk – This is when electricity cannot be traded away quickly enough to avoid changes in price. Depending on a PPA’s structure, this type of risk can be reduced. Ways risk can be reduced is through getting a validity period or agreeing on a price formula indexed on closing prices.
- Volume Risk – The annual energy production of a renewable asset is an estimate – it’s based on long-term prediction and forecasting. There is the possibility that sufficient amounts of volume are not being produced at some point and thus need to be procured – in such a case, the producer may have to purchase the missing volume at market prices that could potentially be worse than the original fixed price.
- Balance Risk – This refers to the difference between what was scheduled for production and the actual production. This type of risk can be reduced by fixing the imbalance cost via an agreement or via using intraday trading.
If you want to learn more about it or find out more about corporate carbon compliance and sustainability options, go to our Rec & Carbon Offsets guide or contact us at 1-780-628-1857. We have a team of energy industry experts ready to provide you with unbiased, in-depth advice.
Pros and cons: What should corporations look for before entering a PPA?
Below are various considerations as well as pros and cons for different PPA types that corporations should consider before entering a power purchase agreement.
As mentioned above, it’s important to note that while small companies can sign PPAs, they may lack the financial and legal resources that larger corporations have to dedicate to PPAs, putting them at more risk.
Virtual Power Purchase Agreement Considerations
- Location – In order to achieve most certifications (e.g Ecologo), the organization must purchase renewable electricity from the regional electricity grid. The project must settle using the energy market they inputting into i.e. an Alberta-based electricity project must settle their price using the AESO, whereas an Ontario-based project must settle their price using the IESO. Contracting with a renewable project on the same electricity grid or in the same state as one’s electric load is often desirable – however, with companies that have wider dispersed loads, it may not matter as much. Open access markets or nodal markets are best since physical power can be liquidated without transmission rights.
- Location basis risk – This refers to the difference between the prices of power at two differing points of sale. This occurs when the buyer wants to settle its VPPA at a trading hub that could be a long distance away from the renewable energy project’s location.
Because prices in these two separate locations may not move in the same direction or together, there is a financial risk where the settlement price may not be equal to the physical power sales price.
- Additionality – When wanting to enter a VPPA, it’s important to remember to consider additionality. Additionality is adding a new facility to the electricity system such that a claim can be made that new sustainable energy generation was added to the grid directly as a result of the signed VPPA.
- Length of agreement – These agreements are often 15 to 20 years in length and the value of VPPAs are measured against long-term power price forecasts. Consultants and advisory services are available to provide such long-term power price forecasts of which you can consider before entering any agreements.
- Performance Security – Both the buyer and seller in a VPPA typically want some form of security regarding the project. The buyer wants security in the case the project fails or is delayed. The seller usually requires some form of security or backup for if a buyer fails to pay for the power produced.
Ask our experts for a VPPA/renewable energy consultation on the button below or by contacting [email protected]:
Pros and Cons for Physical Power Purchase Agreements
Below are some advantages and disadvantages of physical power purchase agreements as noted by the United States Environmental Protection Agency.
|The seller is responsible for project operations and maintenance.||The customer needs to ensure REC ownership to make green power claims.|
|Long-term electricity cost stability and predictability.||May not have the financial benefit of outright ownership.|
|Non-profit organizations can take advantage of tax credits through third parties.||Requirement of a long-term contract.|
|Potential naming rights to renewable electricity project.||Customers need to be located in the same grid region as the generation facility.|
|The customer can negotiate specific terms of the contract.||Mostly restricted to customers located in competitive electricity markets.|
|Customer engages directly with a specific project.||Availability of off-site PPAs is limited to customers with large electricity loads as well as investment-grade credit.|
|Ability to purchase large volumes of electricity with a single transaction.|
|Enables new renewable electricity projects to be developed.|
|Potential electricity cost savings without up front capital costs.|
Solar Power Purchase Agreement Pros and Cons
Below are some pros and cons associated with solar power purchase agreements as per the United States Environmental Protection Agency.
|Increase in property value.||Complex negotiations and high transaction costs.|
|Solar power claims if RECs are retained.||Potential increase in property taxes if property value is reassessed.|
|Potentially reduced carbon footprint if RECs are retained.||Administrative costs of paying 2 separate electricity bills if the system does not meet 100 percent of the site’s electric load.|
|Support for the local economy.||Limited ability to make changes to property that would affect photovoltaic system performance or access to the system.|
|Demonstration of environmental commitment.||Tradeoffs with REC ownership and sale.|
|No upfront capital costs.|
|Predictable energy pricing.|
|No system performance or operating risk.|
How corporations can benefit from power purchase agreements?
Below is a summary of how corporations can benefit from power purchase agreements:
- Long-term price predictability – A power purchase agreement can help corporations secure energy at a fixed cost and protect against increases in electricity prices.
- Contributions towards RECs and corporate sustainability – Corporations can improve their carbon footprint by signing onto PPAs since the end result will be renewable energy entering the grid rather than power generated by fossil fuels. As such, corporations will receive RECs which can be used to offset carbon emissions.
- No Operation or Maintenance costs – Corporate power purchase agreements can be attractive since corporations won’t need to pay for the project’s maintenance or operation costs since that’s the responsibility of the developer/seller.
- Large Variety of Options – Corporations can shop around and take their time in deciding what private energy partner will suit their needs the best and will provide the best power purchase agreement rates. After all, PPA electrical rates are negotiable and will vary from contract to contract as well with every developer.
- Improved brand image – Being a sustainable business can improve your brand image and boost your marketing opportunities. According to IBM’s report “Meet the consumers driving change“, 57% of consumers are willing to change their shopping habits to reduce their environmental impact. And 70% of them would pay a premium of 35%, on average, for brands that are sustainable and environmentally responsible.
With utilities and electricity costs rising over time, PPAs are one of the options available to help make corporate energy costs more manageable. You can learn more about large commercial and industrial energy options here at EnergyRates.ca – our team can give you unbiased, personalized advice for the best way to reduce energy costs as well as what the best options are for renewable energy agreements.
If you still have questions about PPAs and VPPAs or just want to know more about your corporate energy options, you can contact us at 1-855-635-9608.