Types of Power Purchase Agreements For Offsite Renewable Energy Projects
The increased attention to carbon footprint and adoption of sustainability commitments have led to massive increases in demand for renewables among commercial, industrial and institutional customers. Innovations in the structuring of renewable energy power purchase agreements have drastically increased the accessibility of renewable energy projects to large energy users. The main advancement in large scale renewable energy procurement has been the creation of new and creative structures known as Power Purchase Agreements (PPAs), that allow for renewable energy purchases from large, off-site projects. This article will focus on the most common types of PPA, the Virtual Power Purchase Agreement and the Direct Power Purchase Agreement, including the Retail Power Purchase Agreement, and the Green Tariff Power Purchase Agreement, identifying their differences and factors to consider when evaluating each.
What is A Renewable Energy PPA?
The PPA is a long-term contract between a renewable energy project and a power buyer, in which the buyer agrees to purchase renewable energy for a fixed price during the contract tenor. In the past, contracts have been typically 20-25 years in duration, but we are seeing shorter and shorter tenors to meet the buyer demands. Under the PPA structure, a third party provides the upfront investment to pay for the project and in return, receives a contracted long-term revenue stream from the energy buyer as well as all other available incentives. The energy buyer receives a fixed rate for energy, usually at a discount to what they are already paying, without having to put up capital to build the project.
Common Types of PPA for Offsite Renewable Energy Projects
What is a Virtual Power Purchase Agreement (VPPA)?
The Virtual Power Purchase Agreement (VPPA), also known as a “Contract for Differences”, is a contract structure under which a buyer (or offtaker) agrees to purchase the project’s renewable energy for a pre-agreed price, while the project receives the floating market price for all energy generated. If the price the project achieves by selling into the wholesale electricity market is greater than the fixed VPPA price, the offtaker receives the difference. If the price the project achieves is less than the fixed VPPA price, the offtaker pays the project to make up the difference. In this way, a VPPA is a financial hedge against volatile electricity prices. Typically, the buyer receives the project’s Renewable Attributes, or Renewable Energy Certificates (RECs), but does not take physical delivery of the energy. The buyer/offtaker continues to purchase its electricity through their local utility. The VPPA is a great option for large electricity consumers and enables customers with fragmented/distributed electric load to realize the benefits of renewable energy.
What is a Direct Power Purchase Agreement?
A Direct Power Purchase Agreement is a structure that requires a utility, electricity supplier, or independent power producer (IPP) to stand in between a renewable project and the offtaker. These types of PPA’s come in different varieties based on the particular market where the renewable project and offtaker are located. The key difference with a Direct PPA from a VPPA for offsite renewables is that the utility, electricity supplier or IPP is taking on the market risks instead of the offtaker. Below we explain the key differences between the two most common Direct PPA structures: The Retail Power Purchase Agreement and the Green Tariff.
Retail Power Purchase Agreement
The Retail PPA is a structure that is only suitable in de-regulated electricity markets where customers have retail choice, such as Maryland. Under this structure, the buyer enters a power purchase agreement with their retail electricity supplier and takes delivery and title to a project’s energy. In many cases, the buyer receives the RECs as part of the agreement. In other cases, the project sells the RECs on the market separately to improve the deal economics. The benefit of this structure is that the retail electric supplier takes on the market risks associated with wholesale electricity and the customer gets a fixed price for the energy. Unfortunately, because these contracts are only available to customers in de-regulated electricity markets, the amount of renewable energy procurement is restricted to the buyer’s total load within those markets.
A Green Tariff (often referred to as a Sleeved PPA) is a structure which has been gaining momentum over the last year in regulated electricity markets. Typically, these programs are set up through a regulated utility’s rate structure. The utility, with approval from the state public utility commission, offers customers renewable energy through a “Green Tariff”. Like the Retail PPA, with a Sleeve PPA, the utility wears the wholesale market pricing risk, and delivers renewable energy and in many cases the RECs, to the customer for a fixed price. Often the greatest downside to this structure is that customers will pay a premium for renewable energy in exchange for the utility taking on the market risk.
Which PPA is Right For Your Renewable Energy Goals?
Today, PPA’s are a key driver in the widespread deployment of utility-scale solar in the United States. While there are trade-offs and varying risks among the structure types for energy buyers, a PPA requires no capital investment, carries no maintenance cost, and locks in energy prices for up to 25 years. PPAs put clean energy into the electric grid, and the offtaker owns all the environmental benefits associated with its portion of the project. This is great news in a volatile energy market and for buyers looking to meet renewable energy and sustainability goals.
If you’d like to discuss a PPA and how it could help you meet your renewable energy goals, call us at (410) 604-3603 or contact us online today.