VPPA – Virtual Power Purchase Agreements – What´s behind it?

​published on 13th February 2020

With the fair new revised Renewable Energy Directive, Europe faces the challenge to achieve a 27 percent of renewable energy in the final consumption of the EU by 2030, several methods in which sustainability can be achieved are being developed and improved.

 Companies are gradually going green for several reasons:

•  Reducing costs
• Take Advantage of Tax Incentives
• Image and Reputation
• Access to Grants and Loans
• Corporate Social Responsibility

A lot of companies choose Power Purchase Agreements (PPAs) to meet their needs, and its benefits include promoting the renewable energy market, significant impact on reductions of CO2 emissions and securing a constant energy price. There are many types of PPAs for instance Retail/ Direct/ Sleeved, these are used on de-regulated electricity markets, where buyers have retail choice. As the name suggests, a direct PPA – contract is the contractual base for a direct transfer of the clean power from the developer to the buyer through a third party - utility/retailer. Normally the buyer pays to the utility/retailer a fee called “sleeving fee” for transacting the power through the grid. A direct PPA requires that both parties are located in the same grid region.

The difference between the agreements above mentioned is the way that the contract is  constructed, yet does not change the energy flow. On a direct PPA the contract is between the buyer and the renewable energy developer where the price is a sum of the energy produced by the developer, transmission and distribution cost, together with billing, reconciliation and risk management costs from the retailer. On a sleeved PPA the buyer does not have a direct agreement with the developer. It is to be considered very similar to a regular grid power agreement however, the retailer has a contract with a RE developer and delivers green energy to the buyer.

A Virtual Power Purchase (VPPA),  also known as Financial/ Synthetic PPA is a long-term contract –typically 10 to 20 years- between a developer of renewable energy project, and a interested energy buyer. As in a direct PPA, the buyer assures that the developer receives a fixed price for their energy although the power is traded on the particular market by a “contract for differences”.  The “contract for differences” settlement is a comparison between the fixed price and the floating market price. For instance, when  the market price is higher than the fixed VPPA price, the developer pays the positive difference to the buyer. Once the market price is below the fixed VPPA price, the buyer pays the developer the difference. Consequently the contract for difference can make an essential difference in markets, where e.g. volatility of prices are expected or cannibalization of RE prices could be the case in the PPA period. 

Besides, in exchange the developer provides Renewable Energy Credits (RECs (US Market)) or Guarantee Of Origin (GOs; European Market) to the buyer. Consequently the buyer is able to claim their greenhouse gas reduction and purchase of renewable energy for their corporation.

RECs or GOs are tradable green certificates which assures and tracks the power produced by a green source. Every megawatt-hour produced by a renewable energy source is equivalent to one  REC / GOs. In Europe the GOs tracking instrument is defined in article 15 of the European Directive 2009/28/EC and as a REC can be tradable only once.  It helps corporations improve their sustainability and it is an efficient way to reduce carbon foot print. The prices of GOs in 2018 were very high, however  in result of a higher volume of investments and trades the prices have reached lower values. As can be seen on the diagram below.

 

On a VPPA contract there is no direct transfer of clean energy, it is essentially a financial agreement. The buyer continues to purchase their energy through their regular utility at the utility rate, while the developer sells the electricity to the market at market price.
Subsequently the developer calculates the difference -normally every hour for a period of time settled by the 2 parties- between the floating market price and fixed VPP price, known as a fixed-for-floating swap or CfD.

Similar to many arrangements, VPPA has its advantage and disadvantages.

VPPA are attractive to many companies and industries especially which have high energy demand, for example large data centers and manufacturing facilities. Many corporations such as Microsoft, Unilever, Equinix, Mars, Incorporated, and Iron Mountain Information Management already work with VPPAs to achieve their sustainability goals.

In Europe still a new concept, there are only few companies which purchase such contracts, for example, Signify  and AB InBev (10 year contract), but larger demand for such contracts is expected.

One of most recent VPPA signed in Europe is a project between BayWa r.e. and AB InBev. This 10 year contract will supply 250 gigawatts of green energy per year to InBev representing 100 percent renewable electricity for its European brewing operations. The project consists of two solar farms located in Spain. It is expected to be running by 1st of March 2022. Until then BayWa will provide AB InBev with 75 gigawatts hours of Guarantees of Origin from its wind farm “La Muela” in Zaragoza also situated in Spain. 

As a conclusion it can be added, that the coming decade will see changes. The increased environmental awareness, Friday for Future, EU´s Green Deal, etc. – will have impact on the corporative responsibilities and consequently on the products. Renewable Energies are already considered as the “green gold” of the coming times, as any country with abundant resources will be able to generate green fuel, hydrogen, etc. By VPPA contracts capital can flow from a corporation in market A to a IPP in market B and therefore support the development of renewable energy and achieve own sustainability goals. It seems like a win-win-situation.

 

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