So, You’re Thinking About a VPPA?
One program that we’ve been exploring for a few of our large portfolio clients (high energy users with multiple sites) is the Virtual Power Purchase Agreement or VPPA. Let’s break this product down:
What is a VPPA?
Instead of your site having a solar system or another form of renewable energy on-site, a Virtual Power Purchase Agreement (VPPA) provides an alternative for companies that may not have the capacity for a generation system or are looking for an option that would benefit multiple locations. With on-site generation, your asset delivers energy directly to you, while with a VPPA (off-site), the asset that supports your program delivers renewable energy into the grid. The VPPA is a purely financial transaction between the developer (asset owner) and the customer, where the customer owns the Renewable Energy Credits (RECs) produced. There are a few versions of the VPPA, today we’re going to focus on the Bundled, Retail PPA.
How does it work?
The agreement for a VPPA is also known as a ‘financial’ PPA or a ‘Fixed-for-Floating Swap’. This structure provides companies with a named renewable energy asset and is settled on a regular basis between the off-taker and the energy producer. The settlement is paid to the off-taker and can be a credit or debit depending on if the fixed PPA price is below the floating price (hourly electricity price) or above it. When the market settles below the fixed PPA price, the off-taker receives the difference – Likewise, when the market settles above the fixed PPA price, the off-taker reimburses the producer.
Here are a few components that make up your cost of the product: Renewable Energy Charges, Demand Charges, and Ancillary Charges.
- Renewable Energy Charges
- Source Price – this is a fixed cost that is determined based on the usage you wish to offset
- Contract Adder- this is also fixed and includes things like administrative fees
- Locational Basis – this varies and is dependent on how far a site is from the asset
- Scenario: The renewable asset is in Ohio. You have a location in Ohio, New Jersey, and Pennsylvania. You will have a lower locational basis cost for your Ohio site verse your sites in New Jersey and Pennsylvania.
- Demand Charges
- Ancillary Charges
- Zero capital outlay
- Sole ownership of the asset’s RECs
- Can generate cash flow when the wholesale market price settles higher than the contracted price
- Can impact carbon reduction claim with a single large transaction and for both deregulated and regulated markets
- Provides marketing rights and additionality claims
- Great for companies that have multiple locations
- Not linked to physical energy usage (VPPA’s are off-site)
- There could be some financial risk if the market price settles below the contract price
- Most attractive price levels are for projects that are generally 24 months out