The 101: Power Purchase Agreements

Trends are a fundamental part of both the social and business landscape.  Trends give name and context to observable patterns that may cut across sectors, regions, or even continents.  In many cases trends are fleeting (think planking, Myspace, or the dot com bubble).  In other cases though, trends redefine the landscape in which they exist, offering opportunity for early adopters while simultaneously challenging conventional strategies. Given recent activity, Power Purchase Agreements (PPAs) are a trend that is reshaping renewable energy purchasing around the world.

Why do PPAs Matter?

As global consensus has emerged around the need for coordinated climate action, corporations are increasingly finding themselves challenged to play a leading role. While each company’s situation is unique, many corporations are leveraging PPAs as a way to achieve step-wise progress toward sustainability and financial goals.

A quick look at the current landscape for corporate renewable energy makes a compelling case for a trend firmly taking shape as commercial & industrial (C&I) end user focus on renewable energy targets is on the rise.

For starters, a growing number of the world’s most powerful and recognizable companies have committed to an ambitious and large-scale renewable energy and sustainability strategy. Currently, nearly a quarter of the global Fortune 100 have set defined renewable energy targets, with many companies seeking a long-term goal of 100% renewable energy.

Following the Trend

While the trend is clear, most major corporations still have less-defined strategies for moving forward. That’s understandable given the sometimes complex questions that can come with the goal of utilizing renewable energy.  However, the evidence is already clear that there are strategies capable of meeting these goals, while still keeping an eye on the bottom line.

While there are many strategies that can assist in addressing these challenges, the early corporate adopters of ambitious renewable strategies offer an invaluable roadmap.  Broadly speaking, the companies that have made the most significant, sustainable, and cost-effective strides towards their corporate renewable goals have overwhelmingly favored utilizing the advantages presented by a PPA.

While a push for corporate sustainability has accelerated in recent years, the utilization of corporate PPAs to achieve these goals has exploded.  Virtually non-existent as recently as 2012, corporate PPAs accounted for 3 GW of additional renewable capacity in 2015.  That’s more additional capacity – renewable or otherwise – than any state except Texas, and it’s greater than the amount of utility scale solar that was added in the entire U.S.

PPAs have surged into the corporate space as an effective tool for achieving ambitious goals while also addressing the typical issues of the energy trilemma (i.e., simultaneously pursuing supply security, sustainability, and profitability).  As covered in the following sections, PPAs are uniquely suited for addressing financial, logistical, and public perception issues that can challenge corporate renewable efforts.  At the same time, PPAs can entail a fair amount of complexity, and often require the participation of many internal stakeholders to see a project through to execution.

A better understanding of PPAs can form the necessary foundation for converting lofty corporate renewable goals from being only a vision to being a positive and sustainable reality.

Understanding the Trend

Power purchase agreements are on the rise and understanding the differences between different project contracting structures can essentially be divided into three main types.

First, on-site projects are fairly self-explanatory, where a project like rooftop solar is on a company’s site and may be either self-financed, or leased through a PPA agreement with a developer. Second, directed PPAs allow for the renewable resource to be managed by the retail electricity provider within the same grid.  Finally, synthetic or “virtual” PPAs allow a buyer to use a contract-for-difference (CFD) model to acquire the benefits of additional renewable generation without many of the standard geographical and logistical constraints.

In a directed PPA, the electrons from the project are “directed” towards the project’s buyer or “offtaker.” In a directed PPA, the developer is generally the retail electricity provider, with the provider contracting with the offtaker to route energy from a renewable resource to be used for the offtaker’s energy consumption within the same grid.  Thus, a directed PPA still has a physical connection to the buyer’s site(s), and still represents a physical transaction.

For virtual power purchase agreements (VPPAs), the electrons from the renewable generation will never actually reach the VPPA buyer, even though the buyer has contracted with the developer to pay a designated price for the project’s generation.  Instead, the project’s generation will be sold into the local grid at the available price, also known as the Location Marginal Price or “LMP”.  In place of this physical connection, a virtual connection is made via a contract for difference.

However, despite the absence of the physical link between developer and purchaser, the VPPA typically provides the buyer with the associated renewable energy certificates (RECs) and benefits of “additionality”. Additionality is a key claim for many organizations related to their sustainability goal where, without the VPPA, the renewable energy project could not be financed. Therefore, a VPPA commitment brings new, additional renewable energy generation to the grid.

For more information on the different types of PPAs, benefits and risks of a PPA or VPPA and how to convert ideas into action and realize savings from these mechanisms, download the full whitepaper here. For more information on how to continuously receive insights such as these, check out the NEO Network™ or contact the NEO Network team at NEONetwork@ems.schneider-electric.com.