There are many similarities between the two structures of PPAs, such as: tenor, basis risk, Energy Attribute Certificates (EACs), project performance, generation profile and credit risk. What differs between the two approaches is that with a VPPA, there is not a physical supply of the energy. The buyer receives the EACs and the buyer pays the producer the difference between the contract price and the wholesale market price for the energy. This is also known as a Contract for Difference. Basically, a VPPA acts as an energy price hedging tool. Customized volume and price structures can be proposed for both physical and financial contracts in order to optimize the value for the PPA partner.
What is a virtual PPA?
Purchase Power Agreements (PPAs) are contracts between energy consumers and energy suppliers that promote the development of renewables. They come in several forms, including the Physical PPA and the Virtual PPA. But what is a Virtual PPA and how does a Virtual PPA work? Essentially, these are multi-year contracts between an energy producer and an energy retailer (not end user) that allow for setting a fixed price for energy over the duration of the contract. The supplier builds, owns and operates the renewable energy projects and finances their development by selling the energy produced to retailers, who then sell and deliver the energy to their customers. The supplier also issues to the buyer Energy Attribute Certificates (EACs), which guarantee that the energy’s origin is from renewable sources.
The end customer – be it business or government – continues to receive power at the price stipulated from their retailer. Virtual PPA contracts do not, therefore, involve physical delivery of energy from the vendor to the end user, who thus does not need to change supplier. Since the power generated is from renewables, this type of PPA enables end customers to help the environment by using only green power.
Other advantages of Virtual PPAs include:
- Protecting the end customer from price volatility in the energy market;
- Obtaining a guaranteed long-term energy price;
- Eliminating limits on load points;
- Reducing “Scope 2” emissions (those generated indirectly by customers when the purchased energy is used. For example, the emissions generated by the production of electric energy used to power electric vehicles);
- Eliminating dispatch costs;
- Issuing of Energy Attribute Certificates (EACs), which guarantee that the energy’s origin is from renewable sources. (Each EAC certifies that 1MWh of energy has been generated, and fed into the grid, from a renewable source, like solar or wind);
- Favoring the energy transition and contributing to the development of additional renewable energy capacity.
What is a physical PPA?
Another form of PPA is called the Physical Purchase Power Agreement. In this situation, an energy buyer – in this case the end user – purchases power from a renewable energy project developer (supplier). As in the case of the Virtual PPA, the supplier builds, owns and operates the renewable energy projects and finances their development by selling the energy produced. The main difference is that with Physical PPAs the power is delivered directly to the end user. The project may be located on the customer’s own property (on-site) or off-site, with the electricity being delivered via the energy grid. As with Virtual PPAs, the supplier issues to the buyer Energy Attribute Certificates (EACs), which guarantee that the purchased power is generated from renewable sources like solar, wind or geothermal. Since the power generated is from renewables, this type of PPA - like in the case of Virtual PPAs - enables end customers to help the environment by using only green power.
Which type of PPA is best suited for my company?
In the context of both energy market price volatility and the need for rapid decarbonization, Purchase Power Agreements are among the most useful tools to enable companies to source energy reliably and in an environmentally friendly manner. But which type of PPA is best suited for one’s company? There are many factors to consider when selecting a PPA. Two significant factors are:
- Should the PPA be on-site? In this case, the energy infrastructure is based on the client’s property, which can be advantageous is the customer has one main facility and is able to manage energy flows, as it means more direct control over the energy supply (at the stipulated price);
- Should the PPA be off-site? In this case, the energy infrastructure is hosted by the energy supplier, who then delivers the energy via the grid. This can be advantageous if the energy customer has several facilities that need to be powered and leaves the customer free from management of the plant.