Virtual power purchase agreements (VPPAs) have become an increasingly popular way for corporate energy buyers with geographically dispersed facilities to meet their renewable energy and GHG emissions reduction targets. In this blog, find out what VPPAs are, how they work, and why you should include a VPPA in your organization’s decarbonization strategy.
What is a power purchase agreement (PPA)?
A power purchase agreement is a contract between an energy buyer (e.g., your organization) and a renewable energy project developer (e.g., Enel North America). The buyer commits to purchasing energy generated by the renewable project at a mutually agreed-upon price. In return, the buyer receives bundled renewable energy credits (RECs). In addition, the buyer supports the addition of new clean energy projects to the grid – this is known as “additionality.” PPAs allow energy buyers to meet their decarbonization targets, while offering long-term pricing stability over the course of the contract, which typically spans 12 to 15 years.
What is a virtual power purchase agreement (VPPA)?
A VPPA is a financial transaction in which the energy buyer receives environmental attributes – renewable energy credits (RECs) – tied to a specific amount of electricity generated by a renewable energy project. However, the buyer does not physically receive the electricity – instead, it flows to the grid, and the buyer continues to power their facilities with electricity from their local utility. This way, the buyer’s electric load doesn’t need to be near the renewable project and can be aggregated across multiple facilities. Decoupling facility load from energy projects makes VPPAs a popular renewable energy solution for organizations with geographically dispersed facilities.
A single VPPA contract can power up to 100% of your facilities with renewable energy, quickly adding significant amounts to the grid. Your organization can use a VPPA to incorporate renewable energy into your sustainability strategy and meet your Scope 2 decarbonization targets. Renewable energy partners, like Enel, who have expertise and projects across North America, can offer VPPAs that ensure additionality and also implement projects in a region where it will have a meaningful impact.
What is the difference between a physical power purchase agreement and a virtual power purchase agreement?
In a traditional or physical PPA, the energy buyer takes physical delivery of the electricity generated by the renewable energy project in the same energy market. In contrast, a VPPA is a purely financial transaction, where the energy buyer receives just the environmental attributes – RECs – associated with energy generated by a renewable energy project. The electricity from the project flows to the grid, and the buyer does not physically receive it. VPPAs enable organizations with geographically dispersed facilities to support renewable energy projects while also meeting their emissions reduction targets, even if their operations are not directly connected to the renewable energy source.
How does a virtual power purchase agreement work?
A VPPA is a financial contract, also known as a Contract for Differences (CFD). With a CFD, the financial flows depend on the difference between a fixed strike price per megawatt hour (MWh) agreed upon by your organization and your renewable energy partner, and the variable market price in the local power market.
The contract for differences guarantees that, in this example, your renewable energy partner (Enel North America) will always receive $30/MWh. If the market is only paying $29/MWh, your organization owes your partner $1/MWh. Conversely, if the market is paying $31/MWh, your partner owes you $1/MWh.
What are the benefits of virtual power purchase agreements?
A VPPA offers a compelling way for your organization to access renewable energy, achieve sustainability goals and decarbonization targets, reduce financial risk, and enhance your reputation, all while supporting local communities.
- Meet sustainability goals and decarbonization targets: Your organization can advance your scope 2 GHG emissions reduction targets (emissions from purchased electricity per GHG Protocol) by pursuing a VPPA. In addition, joining your suppliers in procuring renewable energy via an aggregation (aggregated PPA) can help you address your scope 3 emissions.
- Simplify renewable energy purchasing: VPPAs allow your organization to purchase RECs associated with a specific amount of renewable energy generated and sold by the project. This enables you to claim the environmental benefits of renewable energy without needing physical delivery to your site. Also, just one VPPA contract can help you meet up to 100% of your renewable energy needs by aggregating load across multiple geographically dispersed facilities.
- Mitigate financial risk during volatility: By signing a multi-year contract, your organization can benefit from stable energy costs. You can also work with your renewable energy partner to customize the contract structure in line with your organization’s appetite for risk.
- Support your local economy and create jobs: By partnering with a sustainable energy company like Enel North America, you can create jobs and investment opportunities that benefit communities in the region where the renewable energy project is located.
- Enhance your organization’s reputation: VPPAs showcase your organization’s commitment to sustainability, decarbonization, and renewable energy. Embedding these priorities into your energy strategy enhances brand reputation and engagement with your customers, investors, employees, and the public, aligning with their growing demands for sustainability in organizations’ operations.
- Receive proof of impact: With a VPPA, organizations receive RECs equal to their purchased energy, ensuring transparency. As an offtaker for new renewable energy projects, you can benefit from additionality and project-specific marketing rights. To enhance regional impact, add renewables to the local power grid where your facilities are located and support local communities. To maximize emissions reductions, invest in projects targeting regions with fossil-fuel-based grids, instead of adding renewables in regions already rich in renewables.
- Customize your approach: VPPAs can be tailored to suit your organization’s energy needs, sustainability goals, decarbonization targets, and risk tolerance, offering flexibility in contract structures.
How can a VPPA help your organization meet your scope 3 decarbonization targets?
Your organization can address your scope 3 emissions by assisting your suppliers with their decarbonization efforts. This can be achieved by procuring renewable energy together with your suppliers via a renewable energy aggregation.
Renewable energy aggregations allow organizations with smaller loads to collaborate and combine demand to purchase renewable energy at scale. If you are a large organization with an electric load of more than 250,000 MWh/year* and are a strong financial performer, you can serve as anchor buyer for such aggregations, agreeing to purchase most of the energy and sharing your clean energy procurement expertise and experience to help negotiate and execute the contract. In addition to decarbonization and sustainability wins, aggregation enables economies of scale, risk mitigation, simplified procurement process, and flexibility.
What if your organization is small or medium-sized, has a modest electricity load, and so does not have the means to get a VPPA?
Don’t worry, you are not alone! Small and medium-sized organizations consuming 50,000 – 250,000 MWh* each year may face challenges directly accessing renewable energy projects or securing favorable contracts. However, finding other companies looking to procure renewables and collaborating on an aggregation (aggregated PPA) can help. In an aggregation, several organizations can collaborate to procure renewable energy at smaller volumes from a large-scale renewable energy project, taking advantage of economic benefits associated with a high-volume purchase. Each organization signs a separate but similar VPPA with their renewable energy partner and has a different share of the overall amount of the energy purchase.
Being part of a renewable energy aggregation opens access to a broader range of renewable energy options and projects that may have been challenging to access individually. By aggregating your energy demand, you and your partners can achieve economies of scale, leading to potential cost savings in renewable energy procurement. Besides meeting your decarbonization targets, aggregation benefits include risk mitigation – thanks to partners with experience, strong financial standing, expertise, simplified procurement process, and flexibility in structuring to suit participants’ needs and strategies.
What if your organization already has a VPPA? What else can you do to decarbonize?
If your organization has already signed a VPPA, there are several additional strategies and solutions you can consider to further advance your decarbonization efforts. To dive deeper into these strategies and solutions, download our eBook.
What does the process of becoming a renewable energy offtaker via a VPPA look like?
To help your organization achieve its renewable energy and decarbonization goals through a VPPA, both you and your renewable energy partner – the developer providing your VPPA – will follow a series of steps.
- Your organization will evaluate your energy consumption patterns and set your decarbonization targets, determining how much renewable energy you’d like to procure through the VPPA, and the timeframe of the agreement.
- Your organization will select a renewable energy partner and project that align with your goals. To make your selection, you need to assess their project portfolio, experience, expertise, financial standing, reputation, location, technology, and pricing.
- Your renewable energy partner will begin project development, including obtaining permits, requesting interconnection, etc.
- You will establish contract terms, negotiate with your renewable energy partner, and sign the VPPA.
- Your renewable energy partner will begin project construction. As the project begins to generate renewable energy, the energy is fed into the grid.
- Your organization and your partner will settle, ensuring that they get the price you both agreed upon in the contract. If the market price is higher than the settlement price agreed upon, your energy partner covers the difference. If the market price is lower than the settlement price, you pay the difference.
- The energy you contract will be tracked virtually, and you will receive RECs to prove your renewable energy consumption.
- Your renewable energy partner will fulfill reporting requirements stipulated in the VPPA agreement. This might include periodic updates on energy generation, emissions reductions, and sustainability achievements.
- You will keep track of the renewable energy generated and consumed and evaluate the project’s performance against the agreed-upon terms to ensure you are receiving the anticipated benefits.
- You will communicate and promote your organization’s clean energy and decarbonization initiatives and contributions to reducing carbon emissions.
How do you select the right team to execute your first VPPA?
Effectively executing your initial and subsequent VPPAs demands a range of skills, brought together by a diverse team. Here are the essential business functions that should be included in your team:
- Sustainability: Whether or not you have a Chief Sustainability Officer (CSO), the most senior sustainability person in the organization needs to be intimately involved.
- Finance: Typically, the go/no-go decision sits with the finance team or even the Chief Financial Officer (CFO), because decarbonization and energy solutions often include sophisticated financial contracts.
- Legal and compliance: Decarbonization and energy solutions often include long-term contractual agreements. The legal team is critical to understanding, quantifying, and mitigating potential risks that these arrangements may involve.
- Real estate, facilities management, or energy management: Titles vary, but involving someone who can audit and understand the corporation’s current and future energy needs is important.
- Investor relations and corporate communications: Sustainability and decarbonization strategies and initiatives are impacted by stakeholder pressure. Therefore, formulating a plan to communicate sustainability, decarbonization, and renewable energy progress to investors, customers, employees, suppliers, and the general public is paramount.
- Procurement: This function can be involved to help with the execution of contracts.
When selecting a renewable energy project, what should your organization focus on beyond quantity and price of electricity?
Organizations are increasingly realizing the importance of ensuring that the energy transition is inclusive and maximizing the positive effects of clean power for a wide range of stakeholders. When evaluating renewable energy projects, try to be holistic in your approach and address the full connection between economic, community, and biodiversity impacts. Select those projects delivering solutions that overcome a wide range of challenges beyond producing clean electricity, including land use and wildlife protection, economic development, circularity of project materials, air and water quality, and more.
It is helpful to work with a renewable energy partner with a history of sustainable operations that strongly supports local communities and offers an additional advantage for your organization’s decarbonization and sustainability goals. For instance, Enel’s unique business model, Creating Shared Value (CSV), translates into enduring environmental, social, and economic value for our host communities. Enel’s CSV projects in the U.S. focus on STEM education and job training, land use and biodiversity protection, health, environmental sustainability, and more. Enel offers programs that enable your organization to support your local economy. We also invite our customers to co-develop new projects aligned with your sustainability strategy and goals and a community of your interest.
Are there any nuances associated with VPPAs? What if your organization has no appetite for financial risk?
While VPPAs offer many important benefits, they may require significant effort to execute and involve financial risk. Luckily, choosing the right partner can make renewable energy purchases less complicated. Experienced energy partners, like Enel North America, can help you customize the contract structure to suit your needs and, together with our in-house trading desk (ETNA), we will help you manage financial risk.
Is a VPPA right for my organization?
Absolutely. As the momentum grows for decarbonizing operations, a diverse range of organizations across industries are embracing renewable energy solutions, often turning to VPPAs to achieve their sustainability goals. In the past, tech giants with energy-consuming data centers were the primary buyers. Today, companies in the food and beverage, pharmaceuticals, manufacturing, retail, finance, and fashion sectors have all taken advantage of the VPPA approach. To assess whether a VPPA will work for your organization, evaluate your energy consumption, geographic presence, decarbonization targets, and risk tolerance.
Contact our team today for a tailored VPPA strategy and to assess the potential value that procuring off-site renewables can bring your organization. We can provide insights and guidance to help you navigate this complex landscape and make informed decisions aligned with your organization’s energy and decarbonization objectives.
*These numbers are approximate and are based on Enel’s customer data.