Month: June 2018

FAQs: PPA and VPPA

solar panels representing PPAs and VPPAs

Answers to your PPA and VPPA FAQs

Get your most questions about PPAs and VPPAs answered here. Check back frequently for updates. Have a question that you need answered? Contact us.

Frequently Asked Questions:

  1. Why are so many companies signing power purchase agreements (PPAs)?
  2. What is a power purchase agreement (PPA) and how does a PPA work?
  3. What is a virtual power purchase agreement (VPPA) and how does a VPPA work?

Q: Why are so many companies signing power purchase agreements (PPAs)?

A: Over the last 3 years, corporations have signed approximately 7 GW of either virtual or physical PPAs in order to offset their scope 2 emissions, support a de-carbonized grid, take advantage of all-time low costs of renewable energy and capture the value of declining tax benefits.  Most of these early movers used a well-proven structure (called a “contract for differences”) to enable them to gain economies of scale by signing large volumes from wind or solar projects in a financially optimal part of the country and then using those RECs to offset their load elsewhere. These long-term corporate contracts were directly responsible for enabling the financing of these renewable energy assets, thus also giving corporates the ability to prove their commitment to tackling climate change.  

Q: What is a power purchase agreement (PPA)? How does a physical PPA work?

A: A power purchase agreement (PPA) is a contract between two parties where one party (usually a renewable energy project developer) sells both electricity and renewable energy certificates (RECs) to another party (the buyer, sometimes called the offtaker). PPAs are a good mechanism for companies to make a long-term commitment to purchasing renewable energy.

Traditionally, the most common type of PPA has been the physical PPA. This type of contract is used most often by utilities for their energy procurement but a few experienced companies have also utilized this structure.

A physical PPA is structured as follows:

  • In order to participate in a physical PPA, both the buyer and the seller must obtain a license through the Federal Energy Regulatory Commission (FERC).
  • The seller (e.g. the project developer) builds, owns and operates the renewable energy project and sells the project generation and corresponding RECs as the revenue source  to finance the construction of the project.
  • The buyer purchases the energy and RECs as they are generated by the project.
  • The buyer takes legal title to the energy and the RECs at a delivery point agreed upon by the parties, either the project busbar or a nearby trading hub.
  • After the buyer takes title to the energy, it is responsible for the management of the energy – moving and scheduling the energy to its load or selling it into the wholesale power market. In addition to the aforementioned FERC license, this also requires forecasting of the project generation, the company’s load and scheduling experience. Some companies elect to use a third-party service provider for scheduling.

Companies that have elected to pursue physical PPAs typically are highly experienced energy buyers and have large, geographically-consolidated electricity load. They prefer to actively manage their energy supply and demand in parallel with meeting their renewable energy goals.

For more information on how PPAs and VPPAs work, see our article Renewable Energy Power Purchase Agreements

Q: What is a virtual power purchase agreement (VPPA)? How does a VPPA work?

A: A VPPA is a specific type of a PPA contract, used to procure long-term renewable energy. Unlike a physical PPA, with a VPPA the buyer does not receive, nor take legal title to the energy and thus the “virtual” moniker. The buyer continues to receive physical power from its utility or retail provider, allowing the buyer to utilize a VPPA in a different region than where it uses electricity.

In a VPPA (also sometimes called a “contract for differences”), a buyer pays a fixed price to the seller for the project’s generation and associated RECs. Instead of taking title to the power from the facility, which requires a FERC license and scheduling expertise, the energy is liquidated into the wholesale power market by the seller. When the energy is sold into the wholesale power market, it receives the corresponding floating market price and this revenue is passed through to the buyer.

More specifically, a VPPA is structured as follows:

  • Similar to a physical PPA, the seller in a VPPA is typically a renewable energy project developer who builds, owns and operates the project. The fixed PPA price it receives from the buyer under the VPPA is the revenue source used to finance the construction of the project.
  • The buyer agrees to pay the seller a fixed price for every MWh renewable energy generated by the project. This fixed PPA price is the guaranteed price the developer will receive for its project.
  • The project developer (or its agent) is responsible for selling the project output into the wholesale power market, receiving a market price on the agreed upon delivery point – either the project node or a nearby trading hub.
  • The “contract for differences” settlement is a comparison between the fixed price and the floating market price. When the market price exceeds the fixed VPPA price, the developer passes the positive difference to the buyer. When the converse is true – the market price is below the fixed VPPA price ‒ the buyer pays the developer the difference.
  • The buyer retains all of the RECs associated with the generated energy purchased under the VPPA.

For more information on how PPAs and VPPAs work, see our article Renewable Energy Power Purchase Agreements.

Green power programs can stagnate. Here’s how one utility kept theirs relevant.

Construction working building new wind turbine at Huntington Wind Project

Subscribers to utility green power programs pay a premium on their electricity bill for renewable energy certificates (RECs) in order to support renewable energy projects and reduce their personal carbon footprint. Since the late nineties, utilities have launched REC based green power programs in response to customer demand or regulatory mandate. There are now over 850 of these programs, offered to over 25 million customers across the nation and they continue to be a popular way to make a positive environmental impact.

However, while the renewable energy market has changed dramatically in recent decades, many green power programs haven’t. With lower REC prices, the rapid growth of rooftop solar, and dramatic expansion of community solar programs, utilities are now considering how to evolve their existing programs in order to keep them relevant to customers and to the wider renewable energy market.

Pacific Power recently confronted this challenge with their Blue Sky program. Pacific Power’s Blue Sky Program Manager, Berit Kling, reports that “Blue Sky was first launched in 1999 and is still consistently ranked as one of the top REC-based programs in the country with over 110,000 residential and business customers currently participating in Blue Sky across the 6 states.” This level of customer support creates opportunities for impactful supply strategies. Oregon was a particular target for new procurement approaches as more than half of the Blue Sky customers live there.

“We know that our customers care about the environment and want to see more renewable energy in Oregon,” says Scott Bolton, VP of External Affairs and Customer Solutions at Pacific Power. “We worked closely with 3Degrees to develop a REC procurement strategy that has, in a single year, driven the development of 51 megawatts (MWs) of additional renewable capacity in the state of Oregon.”

The strategy was straight-forward. Scott Eidson, VP of Environmental Markets at 3Degrees reports, “We knew Pacific Power valued making a difference in Oregon so we looked for new projects that needed long-term REC purchase commitments in order to make the project viable.” In this scenario, a contract for RECs is similar in structure to a Power Purchase Agreement (PPA) in that it offers a guaranteed payment per megawatt-hour produced over a certain period of time. Today, most green power programs do not purchase RECs at a price or term that can really drive the development of new projects. This example suggests that perhaps they should be.

At a high-level, the approach was to:

  • Identify projects that had not yet been financed.
  • Work with developers to determine the REC price needed to secure financing or get the project built.
  • Sign long-term REC contracts to guarantee this income stream for multiple year periods.

Bolton reports that, “The specific renewable energy projects that have been developed due to this innovative approach are the Huntington Wind project, a 50 MW project in Eastern Oregon, and Blue Basin Power, a 1 MW solar project near Klamath Falls in southern Oregon.” Blue Basin is being developed in two phases; the 1 MW installation currently in operation, and a second 2.5 MW phase planned for 2017. Bill Eddie, CEO of OneEnergy Renewables, the project developer, describes how finding reliable funding for the projects was key in getting both phases of the project off the ground. “The first phase of the project was critical to break the ice as this is one of the first projects that has been built in the area…by partnering with Blue Sky, we were able to get enough revenue into the project to support financing.”

Not only does this approach directly impact the regional renewable energy landscape, but it creates a more tangible connection between program participants and the facilities they support—something that is often lacking in the traditional green pricing model. “Huntington will be the largest wind project to come on-line in Oregon since 2012. It’s great to be able to point to a large, high profile project like this and say, ‘Blue Sky customers made this happen.’ They can and should feel good about making a real difference in renewable energy development in Oregon,” says Bolton. Pacific Power recently released a video highlighting the difference customers are making.

Pacific Power has been publicly recognized for this procurement strategy through awards from the Northwest Environmental Business Council and the Center for Resource Solutions (CRS). Jennifer Martin, Executive Director of CRS, commented that “[Pacific Power’s] innovative Blue Sky program…helps drive new development of clean energy generation and can serve as a model for new projects throughout the country.”

While the Blue Sky program is the second largest renewable energy program in the country, this model is replicable for green power programs of any size. Pacific Power isn’t alone in wanting to offer innovative solutions for customers though they are the first to pursue this strategy at such scale and success. Utilities with existing green power programs would be wise to consider how to leverage these programs to deliver new value to participants, the renewable energy market, and ultimately to the utility in the form of increased customer satisfaction and engagement.

This article was originally posted on LinkedIn.

Why my work matters: Kelly Rytel

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Kelly is a director in the energy and climate practice at 3Degrees.
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Some of my favorite recent projects:

  • Using both quantitative and qualitative research tools, developing a sustainability baseline and helping to prioritize sustainability opportunities for a high tech transportation company.
  • For the past several years has helped a large data center provider develop and report on their sustainability work, integrating GRI frameworks into all reporting initiatives.
  • Helped a large, multinational firm on a major initiative to engage their suppliers in 100% renewable energy goals. Developed end to end engagement process and created educational materials that provide actionable information on renewable energy options in multiple countries.

 

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I believe climate change is our generation’s largest challenge and it’s gratifying to be part of the solution.

 Special skills & expertise

reporting  financial-analysis  global creative-thinking
Broad knowledge in sustainability reporting and footprinting Skilled in creating custom financial models, including feasibility and sensitivity analyses Deep knowledge of renewable energy landscape in Asia Superpower:
Equal parts creative and analytical (both left and right brained)

 

Watch Kelly’s video: