VPPAs will only be operational if it is a wholesale market, and the power producer does not physically deliver the energy to the customer
What is a Virtual Power Purchase Agreement?
A Power Purchase Agreement (PPA) is a long-term electricity supply agreement concluded directly (bilateral) between a buyer (electricity consumer) and a seller (plant operator). This agreement ensures electricity supply at a defined price or equivalent financial compensation. It has emerged as a method for honoring these commitments in all sorts of situations- including the economic disarray followed by the Covid-19 pandemic.
Within a VPPA contract, the corporate buyer does not own and is not responsible for the physical electrons generated by the project. The VPPA by all means is a purely financial transaction, exchanging a fixed price for each unit of power produced by a renewable energy plant.
How do they work?
A virtual PPA is a multi-annual, bilateral contract for renewable energy from a specific power plant. VPPAs will only be operational if it is a wholesale market, and the power producer does not physically deliver the energy to the customer. The power produced is sold to the reference electricity market. The customer does not physically receive energy from the power but continues to receive it from its retailer. The spot market price is variable and different from the price agreed by the customer and the supplier in the PPA. If the PPA price fluctuates lower below the market price, the customer will receive the difference for the energy produced by the plant from the supplier. If the PPA price is higher than the market price, the customer will pay the difference to the supplier. The customer receives the certificates that guarantee the green origin of the energy.
The manifold advantages
Reduction in emissions
VPPAs facilitate the chances of a clean electricity generating company to secure renewable energy certificates (RECs), as per megawatt-hour (MWh) of power supplied to the wholesale market. This also helps in substantiating the claims of corporate environmental responsibility. Moreover, the firms involved in PPAs can make the claim that they are actually helping in greening the grid.
Since it is a virtual scenario, there is no actual transmission of electricity between the renewable energy generating party and the electricity buying party, hence the generation site does not need to be at the same location, or even in close proximity. Also, VPPAs facilitate the companies to choose from various energy sources like wind, solar, or another type of renewable energy source. Then there is convenience in the terms that the companies can enter into multiple VPPAs to create a portfolio which will help in reducing the risk and securing more returns on the investment.
PPAs are contractual agreements that ensure buyers are hedged against the volatility in energy prices. In case the market price of energy is greater than the price agreed in the PPA, there are clauses that ensure additional financial compensation to the buyer. On contrary, when the market price is greater than the contracted price in the VPPA, buyers gain the benefit of lower electricity bills and share the surplus with developers. These agreements are signed for a period of 20 years or more. Hence any long-term price fluctuations are taken care of through such financial structures. For example, in an unprecedented event like the onset of Covid-19, energy prices became very volatile. Such agreements and clauses therein provide long-term stability to the buyers and attract continued investment.
Which type of companies should adopt VPPAs?
In the present scenario, VPPAs are increasingly getting adopted among different types of industries and businesses. Not just technology companies with large energy consumption, but companies in sectors like healthcare, retail, manufacturing, entertainment, F&B, and oil and gas are witnessing greater applicability of VPPAs. Traditionally, companies in manufacturing and with large data centers were considered to be a use case but recently retail stores and franchise models with multiple stores can pool the energy consumption across different facilities and connect them with renewable energy through a VPPA. Generally, companies with strong credit profiles are well suited to get easier access to the VPPA model. Other companies with sub-optimal credit profiles need to present a huge amount of collateral to secure VPPA access.
Why VPPAs are gaining momentum?
Multiple growth drivers are paving the way for big corporations to utilize renewable energy via VPPAs especially the C&I sector. There is a huge volume of untapped C&I electricity demand which can be met through VPPAs. With an increased focus by corporations to commit to renewable energy targets this could be fast-tracked. Moreover, companies are facing increasing pressure from their investors to improve their sustainability performance. All this demand met with the supply by renewable energy sources of which the cost is falling with each passing year could contribute to the demand of VPPAs.
One of the recent VPPAs signed is by Novartis to procure electricity from newly established solar plants in Spain. It is expected to add around 275MW of clean energy to the wholesale electricity market. Another example to be quoted here is of a VPPA signed between BayWa r.e. and AB InBev. This is a 10-year agreement that guarantees to supply a huge volume of 250GWh electricity will go for Budweiser maker’s 14 breweries making it a 100 percent renewable energy for its European brewing operations. This is expected to commission by 1st March 2022 which will consist of two solar farms located in Spain.
To conclude, we can rightly say that the forthcoming decade will see innovations towards a cleaner grid. This increased motivation to contribute positively will push corporative responsibilities. With the help of VPPA contracts capital can flow from a corporation in market A to an IPP in market B and therefore support the development of renewable energy and achieve its own sustainability goals. It proves to be a well-balanced situation for all the players involved in the renewable energy value chain.