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This paper serves as an introduction to the virtual power purchase agreement (VPPA)—its place in the off-site renewable energy procurement market, how the VPPA works, and why VPPAs have been a popular instrument in the United States thus far. This paper is aimed at renewable energy buyers who are seeking to understand the VPPA mechanism.
There are two types of off-site power purchase agreements (PPAs) in the market:
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Physical PPA—Within a physical PPA contract, the corporate buyer takes ownership of the electrons produced by the renewable energy project. This transaction places responsibility on the buyer for monetizing/selling the electrons, which is typically achieved by selling them into the wholesale electricity market. Depending on the contract structure, the buyer could also pay for transmission charges.
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Virtual PPA—Within a VPPA contract, the corporate buyer does not own and is not responsible for the physical electrons generated by the project. The VPPA is purely a financial transaction, exchanging a fixed-price cash flow for a variable-priced cash flow and renewable energy certificates (RECs). Because the VPPA is purely financial, the buyer still needs to meet its electricity load through traditional channels—therefore, the VPPA means the buyer’s relationship with its utility at the retail level remains unchanged.
For background, the physical PPA was the dominant form of transaction in the early years of the corporate renewable energy market, as the companies procuring energy then typically had very large energy needs and were sophisticated energy managers in their own rights. The virtual PPA has gained prominence in the past few years and is the fastest-growing transaction structure today, allowing smaller buyers and those companies without energy trading expertise to participate. The VPPA has enabled many companies to make quick and significant progress toward ambitious renewable energy goals.
VPPAs are easily scalable and enable buyers to satisfy a large portion of their sustainability goals with a relatively small number of deals. For example, Fifth Third Bank was able to meet its 100% renewable energy goal with just one VPPA. Also, because VPPAs are purely financial transactions, they allow buyers that have highly distributed electricity load—or load in regulated markets—to meet their renewable energy goals quickly and efficiently.
