One of the most common approaches to purchasing offsite renewable energy is the virtual power purchase agreement (PPA). Today, many corporate renewable energy buyers are leveraging the virtual PPA to not only reduce their carbon footprint but also hedge against financial risk in the traditional energy markets.
In this article, we will explain how the virtual PPA works and why it has become such a valuable tool for energy risk management.
To start, we should define the term power purchase agreement (PPA). A PPA is essentially an agreement to buy the electricity from a power generation project. Often, commercial and industrial (C&I) energy consumers use this approach to establish a fixed rate for renewable power, including on-site renewable power generation projects and combined solar-plus-storage systems, but also for offsite renewable projects connected to their regional electric market. For the C&I customer, this agreement creates an opportunity to integrate renewables without committing their own capital to make the upfront investment, while also locking in a guaranteed rate that can be significantly lower than rates currently available from utilities and third-party suppliers. For the project developer, this long-term agreement ensures adequate compensation to cover the costs of the project.
A virtual PPA, on the other hand, enables the customer to purchase power from a renewable power project regardless of its location. That means a corporate buyer located in New York can purchase the power—and thereby fund its development and production—of a renewable project located in Nebraska at a fixed, long-term rate.
This agreement leaves one glaring question—why would a corporate buyer in New York pay for a project that exports power to the electric grid in Nebraska? Wouldn’t that result in higher costs, requiring the buyer to pay for both the power from a renewable project in Nebraska and the power that its facilities consume in New York?
On the contrary, a fixed-rate virtual PPA guarantees the rate for both the buyer and seller. If the electricity prices for the New York facility exceed the rate in the PPA (often known as the strike price), the project developer will reimburse the buyer for any additional costs.
This is why so many corporate buyers are turning to renewable power for risk management. Forward electricity markets typically only offer power contracts that extend for five years, and longer-term contracts carry a significant risk premium. The fixed, long-term nature of a virtual PPA offers budget certainty that buyers often can’t obtain through the traditional power market alone.
Additionally, by purchasing a large amount of zero-emission renewable power, the corporate buyer can reduce their organization’s reported greenhouse gas emissions. While on-site renewable generation has its clear benefits, the virtual PPA is an opportunity for a corporate buyer to improve their environmental performance beyond the limitations of their buildings or the renewable options in their region, while also protecting against risk on the traditional market.