A physical PPA allows an external utility or distributor to integrate electricity quantities into a company`s existing energy contract. Being commissioned with this method means that a company has to deal with the variability of electricity generation from renewable power plants and how it matches their electricity consumption. This risk is usually transferred to an electricity marketer whose negotiating teams are responsible for balancing the amounts of electricity. With a synthetic PPA, there is no physical power supply at the buyer`s loading centers. In fact, the buyer will continue to pay their utility bills as they always do. A virtual PPA is a purely financial agreement that serves as a hedge for electricity prices. In addition, the buyer receives renewable energy credits (RECs) under the VPPA, which allow them to make claims regarding their greenhouse gas reductions and the purchase of renewable energy. Those with a financial history will recognize this structure as a contract for differences (CFD) or a fixed-versus-float financial swap. As a result, the demand for virtual power purchase agreements comes mainly from companies with less experience in selling renewable energy. The argument about which PPA to choose can be difficult, as it can be difficult to see the pros and cons of each option.
The following table lists the key considerations for physical and virtual PPP agreements. The company will accept a fixed price to pay for the electricity produced and then take a risk for exit from the wholesale market. If the market price they get for electricity is higher than their fixed price, they have a net benefit from the contract. If it is lower, they will be cowardly because they are tied to a higher fixed price of electricity. PPAs can be physical or virtual (also known as financial or synthetic). Although the customer and generator may be located in different power grids, the production of cross-border virtual PPAs can be adapted to local consumption using software tools. These tools allow companies to assess the effectiveness of the PPA for energy adaptation and, ultimately, its overall impact on CO2. Under a virtual PPA or “VPPA”, the project is usually in a different network, often in a different state, and the customer never takes over the physical delivery of the energy. On the contrary, the electricity produced by the project is routed to the grid, where it is indistinguishable from electricity from other sources (including non-renewable sources) and is sold to others at the current market price. The customer is entitled to a share of the profit or loss from the sale of electricity and generally receives the rights to the renewable energy allowances (or RECs) associated with the VPPA by granting the customer a credit rating for the use of renewable energy. Unlike a traditional unbundled REC purchase, which always costs money, the VPPA swap offers RECs at a price that results from the net difference between the fixed price of the VPPA and the wholesale market price. A positive difference between the market price and the fixed price of the VPPA can lead to significant positive cash flows.
In many previous PPVs, the fixed price of PPVs was equal to or higher than the market price, and the buyer had to review the price forecasts to determine whether the project would ultimately produce a positive NPV. Now, there are markets and projects where it is possible to get a fixed VPPA price lower than the current market price, which means that the virtual PPA will generate positive cash flows from day one. As renewable energy technology continues to improve, it has become more cost-effective to buy and increasingly popular. Renewable energy – mainly solar and wind – is usually obtained through a power purchase agreement or PPA. Customers can enter into contracts to purchase all the electricity produced by a project (as would be the case with a behind-the-meter installation), a fixed amount of electricity or a percentage of the project`s output. The APP may require a fixed monthly payment or a fixed, increasing or variable (indexed) price per kWh. Variable prices can also be limited by collars that set minimum and maximum prices. Larger projects, in which multiple clients may be involved, may be established in the form of joint ventures or syndications. PPA incentives, such as REBs and tax credits, may be passed on to clients or retained by the project proponent or owner.
Power purchase agreements, especially VPPAS, can raise internal accounting issues. While we can`t provide accounting advice on this blog, many VPAPs have been structured and executed by all types of organizations. We recommend that you discuss the impact on accounting with your accountant from the beginning to ensure proper management of internal accounting. A virtual PPP is simply a monetary agreement, as opposed to a physical power purchase agreement. That is why it is also called a purchase contract for financial strength. It is essentially a “financial exchange” contract that is not tied to the physical power supply. As a rule, the terms of the contract are established as a contract for difference. Another important regulatory consideration you understand when evaluating a VPPA is the impact of the Dodd-Frank Act.
Since a VPPA is a fixed floating swap, it is subject to dodd-frank, which requires the registration and reporting of transactions. In most cases, the owner of the renewable energy project will perform these tasks on your behalf, but it is important to confirm this when negotiating the VPPA. If you are a financial services company, you may be subject to additional filing obligations under Dodd-Frank. Again, we recommend that you involve your in-house legal and accounting team early in the process to answer these questions. A good VPPA partner can help you understand the structure of the contract and how its unique terms can affect your business. Currently, almost all companies classified as a company can acquire a VPPA. However, this is not always the case. Previously, developers preferred to sell these contracts to a large company or service company. Once the primary buyer is secured, the remaining watts are sold to a secondary (and usually smaller) player.
Of course, this approach limits the use of PPAs at the highest level. Over the years, this state of affairs has calmed down. Developers are now separating projects to attract more commercial buyers to increase investment in renewable energy. These buyers have the opportunity to decide how much energy they want to invest. The basis of such an idea is aggregation. This allows small buyers to form alliances with large companies, conclude purchasing power agreements and thus carry out renewable energy projects. But is aggregation a logistical challenge? Yes, although this can be offset by a clear focus on digitization. Managing many buyers, their contracts, donations, and payments can be simplified by using a robust cloud platform. There are many good reasons to enter into a PPA to meet some or all of your electricity needs: financial, environmental, social, regulatory and improving your public profile, to name a few. .