Virtual Power Purchase Agreements
Virtual Power Purchase Agreements Allow Municipalities and Nonprofits to Meet Net-Zero Requirements While Making the Biggest Possible Environmental Impact
We will undoubtedly know the 2020s for vast societal shifts across the globe. One trend that can’t be ignored is the growing number of nations, regions, cities, and organizations that have committed to achieving net-zero carbon emissions. According to the Net Zero Tracker, which tracks net-zero pledges, the end of 2021 saw a total of 136 nations, 115 regions, 682 companies, and 235 cities have commitments in place to reach net-zero carbon emissions. While pledges vary in their timeframes, the movement to net zero is officially widespread and growing.
As more and more entities make such commitments, the question of how they achieve net-zero looms. Since consumption strategies like energy efficiency can only take you so far, renewable energy procurements are increasingly a strategy that will drive impact towards net zero. And organizations and entities looking to procure are looking for innovative ways to drive more renewables.
One way that several cities and nonprofit organizations have approached procurement in recent years is by participating in Virtual Power Purchase Agreements (Virtual PPAs or VPPAs) as a cost-effective way to meet carbon emission reduction goals.
What is a Virtual PPA?
In a traditional Power Purchase Agreement (PPA), a buyer contracts with a developer to purchase the energy produced from a renewable energy project over a period of time at a set price. Traditional PPAs require the buyer to be close to the physical energy source to off-take the energy. A Virtual PPA, however, takes out the need for proximity, opening more opportunities for buyers that aren’t in areas where large-scale renewables are being built. The deal is purely a financial transaction. The buyer has no ownership of the project itself but agrees to a fixed price for the energy. The electricity from the project is sold into the wholesale market at the current market rate. Revenue from that sale goes to the buyer at that current market rate. If the market rate is lower than the contracted price, the buyer will make a payment back to the developer, and if it’s higher the buyer receives a credit from the developer. The agreement between buyer and developer becomes a deal for differences.
Of course, most cities and organizations would prefer to purchase their renewable energy from a project close to their location to realize the economic development and local pollution reduction affects. But for entities located in areas where the grid is already cleaner and the cost of large-scale renewable energy can be a challenge due to siting and other supply challenges, such as in New England, VPPAs are a way for those entities to meet their emission reduction goals while making a significant carbon emissions impact in an area where it is more needed. The grid in some areas outside of New England have emissions nearly twice as much as New England.
In addition to net-zero commitments, local ordinances are starting to require large building owners to achieve net-zero over the next 10-20 years, such as with the Boston ordinance, Building Energy Reduction and Disclosure Ordinance (BERDO). One of the compliance pathways for BERDO is a VPPA, as long as the emissions of the grid in the area of the contract are greater than in New England. We expect this trend to continue as other municipalities and states begin to create net-zero energy and building codes.
Over the last ten years, corporate procurements have driven the development of large-scale, non-utility renewable energy development, with tools like VPPAs becoming increasingly popular. In addition, procurement aggregations for VPPAs, where several buyers come together to procure for the collective need of the buyer group. The deals are often arranged through a convener (typically either the developer, a financial institution, the utility, or an intermediary) who organizes the transaction which has allowed smaller entities to play in the corporate procurement game. As PowerOptions members know, aggregation deals provide several advantages, including the ability to drive larger projects that can have greater impact, better economies of scale from a price standpoint, lower market and contract risk through the consortium’s negotiating leverage, and shared expenses such as legal and consulting fees. And increasingly, municipalities and nonprofits are teaming up with companies to secure such deals.
For example, after Amazon signed up as the main off-taker for a 120 MW solar project in Virginia, Arlington County came on board to purchase the remaining power. Local area organizations have made similar deals, such as the 2016 deal between MIT and Boston Medical Center, and the Post Office Square Redevelopment Corporation, which together entered into a 25-year contract for 60 MW from a solar project in North Carolina. The group chose the site largely because North Carolina’s grid was significantly dirtier than New England’s, thus increasing their environmental impact.
Julie Newman, director of MIT’s Office of Sustainability, highlighted the power of such deals in allowing small organizations to access renewable energy procurements. “Many thousands of organizations around the country that are too small to initiate their own power purchase agreements could potentially follow this cooperative model,” she said.
Today, PowerOptions is bringing the power of Virtual PPAs to its members by serving as an aggregator of buyers for yet-to-be-built renewable energy projects through either a VPPA or a long-term REC purchase structure. Besides the economics of a project, we’ll be looking for projects that maximize environmental impacts, bring benefits to the local community, and address environmental justice impacts. In New England, where the grid is cleaner than other parts of the country and where cities and states are passing strong net-zero mandates, Virtual PPAs present a real way to meet the requirements while also making a significant impact.