As the corporate market for renewable energy has increased
dramatically in recent years, power purchases under virtual power
purchase agreements ("PPAs") have witnessed significant
growth and show no signs of slowing down. Unlike physical PPAs in
which energy is physically delivered from the generator to the
offtaker, a virtual PPA, also known as a synthetic PPA, does not
involve the physical exchange of energy between the generator and
the consumer. Instead, the parties agree to a strike price, and the
corporate consumer continues to procure energy in the market at the
spot market price. If the spot price rises above the strike price,
the generator pays the corporate consumer the difference, and vice
versa if the spot price falls below the strike price. Virtual PPAs
serve as a financial hedge for both parties, with the generator
typically delivering renewable energy certificates
("RECs") to the corporate buyer as a key component of the
virtual PPA.
Shifting consumer trends and peer pressure from competitors have
led to an increased corporate focus on sustainability and
environment, social, and governance ("ESG"). As a result,
hundreds of corporations have joined renewable initiatives such as
RE100, setting concrete goals to procure 100% renewable energy by a
date certain. Virtual PPAs offer a unique opportunity for
corporations to lock in a favorable rate and hedge against volatile
electricity prices while signaling to the market that they are
committed to renewable energy, as many corporations rely on the
RECs acquired through virtual PPAs as a critical component of their
ESG goals. Moreover, virtual PPAs enable corporate buyers to
satisfy a significant percentage of their sustainability goals
through relatively few transactions.
Unsurprisingly, energy hungry technology companies have dominated the corporate PPA market to date; however, other industries are quickly entering the fold. At least one restaurant company and two telecommunication companies have inked large virtual PPA deals. Corporations in the health care, industrial, and financial sectors are also following suit.
After the repeal of the Clean Power Plan in 2019, the private sector is stepping up to drive the transition to renewable energy and virtual PPAs often offer the most cost-effective means for corporate buyers to add renewable energy to their energy mix. One emerging trend is an "off-the-shelf" aggregated structure that allows smaller buyers and those lacking energy trading expertise to enter the market by bundling their energy capacity needs with similarly situated offtakers into a single virtual PPA. This type of aggregation will permit smaller corporate offtakers access to deals formerly reserved for well-funded corporations by lowering transaction costs and driving down risk. In addition, subsidy phase-outs will require generators to enter into long-term PPAs with creditworthy corporations in order to demonstrate project bankability to investors. All of these factors point toward virtual PPAs continuing to flourish as an increasingly popular corporate PPA structure in 2020 and beyond.
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