As the need for climate action grows, both utility and corporate buyers are increasingly looking to reduce greenhouse gas (GHG) emissions. There are a variety of motivations for these actions—for many corporate buyers, for instance, there is stakeholder pressure from customers, employees, and investors. This need to reduce emissions is leading to increased demand for renewable energy power purchase agreements (PPAs) and virtual power purchase agreements (VPPAs).
Enel X discusses how a record-breaking 23.7 gigawatts of renewable energy was contracted globally in 2020, even in the face of the obstacles created by the coronavirus. And that number is growing not just because of the headline-grabbing corporate giants, but also because businesses of all sizes are seeking out small and medium-sized PPAs—data from BloombergNEF shows that PPAs under 100MW doubled between 2017 and 2019.
Going forward, this landscape will likely only become increasingly competitive. PPAs and VPPAs are among the most powerful tools available to corporations for reducing Scope 2 emissions, and organizations are adopting more ambitious GHG emissions goals every year.
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What is a PPA, and How Does it Relate to VPPAs?
As more businesses begin to explore PPAs, it’s important to understand the basics of these tools.
A power purchase agreement (PPA) is a contract between a buyer and seller of electricity. PPAs include terms like price per megawatt hour (MWh) and outline the logistics of delivery and financial settlement. PPAs were historically tools for buyers like utilities and on occasion major energy users, but that has changed in recent years organizations of all types have adopted the PPA structure.
Renewable energy PPAs are typically structured in one of two ways: physical PPAs or virtual (sometimes known as financial) PPAs. With a physical PPA, the project must be located either on-site or within the same region of the buyer’s utility grid. The buyer contracts with a developer for purchase of physical power and associated renewable energy credits, also known as RECs. RECs are used to prove renewable electricity use claims, and, as a market-based instrument, can be sold and exchanged in order to claim renewable energy use for carbon accounting.
Virtual PPAs (also known as VPPAs, financial PPAs and synthetic PPAs) are a variation on the typical PPA structure, and are a rapidly growing tool in decreasing emissions. In the case of a virtual PPA, the buyer never receives the physical electricity generated by the project under contract—instead, the VPPA is purely a financial transaction, or a contract-for-differences, with the buyer exchanging a fixed-price cash flow for a variable-priced cash flow and the associated RECs.
A Deeper Look at PPAs and VPPAs
To help parties interested in these tools, Enel X has written a new eBook, “Understanding Renewable Energy Agreements,” which explains how to evaluate the financial and environmental implications of PPAs and VPPAs. The guide aims to:
- Introduce readers to the structure of PPAs and VPPAs
- Explain the RFP process for acquiring these agreements, including the importance of ESG criteria
- Walk readers through a case study that introduces the basics of economic evaluation for VPPAs
Download the eBook now to learn about these topics and more.
About Enel X and OMNIA Partners
Large energy consumers partner with Enel X North America to capitalize on demand response, energy storage, renewable energy, energy supply management, utility bill management, demand management, sustainability, and electric vehicle charging solutions. Enel X connects large energy users to opportunities in the energy world and help them integrate the technologies and processes they need to capitalize on them. Members of OMNIA Partners can utilize Enel X services through our Energy Management program today. To find out how you can become a member of OMNIA Partners, click here.
