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Weighing the Pros and Cons of VPPAs

Updated: Apr 2

Corporate buyers are increasingly turning to solutions to bring new renewable projects online while meeting their 100% clean electricity goals. One such solution that has gained significant attention is the Virtual Power Purchase Agreement (VPPA). VPPAs offer a way for corporations to procure renewable energy and RECs from new generation projects but they come with their own risks and complexities. Here are some of the primary pros and cons of using VPPAs as part of your clean energy plan.

Pros of Using VPPAs:

1. Additionality: By entering into VPPAs with projects under development, corporate buyers directly contribute to the expansion of clean energy infrastructure and reduce greenhouse gas emissions.

2. Scalability: VPPAs allow corporate buyers to procure a large amount of renewable energy, often from offsite, utility-scale (100MW+) projects, enabling them to make substantial progress towards their clean energy targets.

3. Cost-Hedging: VPPAs can be used to hedge against volatility in the market price of RECs. The buyer receives RECs from the developer along with the power generated, and will only have to pay the developer if the market price of power is less than the strike price set in the VPPA. If the market price of power is always greater than or equal to the strike price the buyer can effectively receive RECs at the fixed price or at a discount based on a higher price. This provides a hedge overall, especially in the case where the market price of RECs increases over time.

4. Geographically Unrestricted: Because VPPAs are purely financial transactions, there is no requirement for the buyer and generator to be located in the same region. Buyers can enter a VPPA regardless of where they’re located – even in an unregulated electricity market.

5. Brand Enhancement: Demonstrating a commitment to sustainability through VPPAs with projects under development can enhance a company's reputation, attract environmentally conscious consumers, and strengthen stakeholder relationships.

Cons of Using VPPAs:

1. Market Risk: Changing market conditions may cause the price of electricity to dip below the strike price set in the VPPA, leaving the buyer to settle the difference with the project developer. In this case, the buyer could end up paying more than the current market rate to receive the RECs from the project. Further, VPPAs are considered swap agreements, and therefore are regulated derivatives requiring disclosure and “mark to market” accounting.

2. Project Development Risk: VPPAs are typically bilateral agreements between a buyer and developer, and are executed before a renewable energy project is operational. This exposes buyers to the risk of project delays or cancellations. This can result in potential supply disruptions and financial implications for the buyer.

3. Counterparty Risk: The bilateral nature of VPPAs means that buyers are directly tied to the financial stability and performance of the project developer or generator. If the developer encounters financial difficulties or operational challenges, it could impact the delivery of energy under the agreement.

4. Regulatory Risks: VPPAs are influenced by complex regulatory environments and market dynamics. Changes in regulations or market conditions can affect the economic viability of the underlying renewable energy projects, posing risks to the long-term success of the agreement.

5. Volume Risk: The performance of a renewable generation project is often tied to external factors such as climate and weather patterns, and can’t always be accurately predicted. If the developer underperforms the buyer may not receive enough RECs to cover their electricity usage, and will be required to purchase RECs at the current market rate to cover the difference.

Overall, VPPAs offer significant benefits for corporate buyers seeking to advance their clean energy goals, but they also entail inherent risks, particularly at the project level. To effectively navigate these challenges, sustainability leaders should conduct thorough due diligence, engage in robust risk management strategies, and consider diversifying their clean energy procurement portfolio to mitigate potential downsides.

The AREC Market provides an alternative approach through Additionality RECs purchased  from net-new generation projects at a fixed price over the course of 5 or 10 years, offering all of the benefits of VPPAs with less risk and less complexity.

Read more about ARECs here.


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