The way a business powers its operations poses a major opportunity for achieving corporate sustainability goals. However, not all renewable energy contracts are created equal. One of the most popular contract structures, the Virtual Power Purchase Agreement (VPPA), also known as a Synthetic PPA, carries significant wholesale risks that many offtakers may be unprepared to manage.
MP2’s Retail-Delivered Renewable Product is an exciting alternative that resolves these issues and is poised to revolutionize both corporate energy procurement and the sustainability realm.
In the early days of C&I renewable energy procurement, PPAs were by far the most common arrangement for structuring the contract. In a PPA, a customer agrees to buy the energy generated by a renewables developer for a long-term (10-20 years) fixed price, along with the associated renewable energy credits (RECs), certificates of ownership for the environmental, social, and other attributes of each megawatt-hour of renewable electricity generated. The agreement provides the developer with the financing needed to build the project.
Because PPAs are very difficult to arrange in regulated markets, they are almost exclusively used in deregulated markets. The offtaker takes title to the physical energy and associated RECs. Scheduling delivery of the power is traditionally outsourced to a third-party Qualified Scheduling Entity (QSE).
VPPAs have been increasing in popularity in recent years, as much of corporate America still falls within regulated energy markets where PPAs are largely unworkable. Under a VPPA, the offtaker doesn’t receive, or take legal title to, the renewable power. VPPAs are described in further detail below.
A retail-delivered PPA is an evolved version of a typical PPA that solves many of that structure’s drawbacks. Instead of the customer transacting directly with the renewable asset developer, a Retail Energy Provider (REP) acts as the offtaker on behalf of the buyer, removing the burden on the customer to understand and manage the complexities of the wholesale electricity market.
The agreement may also include protection for the customer against risks such as volumetric risk, basic risks, shape risk, asset performance risk, and the failure to meet the agreed-upon energy production level.
Also called Utility Green Tariffs, this type of program is offered at the state level in many regulated energy markets as a way for larger C&I customers in those areas to buy bundled electricity from a specific renewables project at a special rate. The renewable asset may be either owned by the utility or contracted through the utility with a third-party developer in the region.
Programs differ from state to state as to the mechanisms for procuring the power, with some utilities allowing customers to deal with the renewables developer directly and some utilizing a “sleeved PPA” structure in which the utility signs a PPA with the developer and passes it on to the customer.
As the name implies, a Virtual Power Purchase Agreement is purely a financial instrument; there’s no physical delivery of power from the renewable source to the customer. Instead, the renewable asset sells electricity into the grid, which the utility distributes to the customer. In exchange for financial energy and associated RECs, the customer pays a fixed price for electricity generated by the renewable asset, which serves as a hedge against energy market fluctuations.
VPPAs are a good option for large electricity consumers with a distributed electric load to support the development of new renewable energy resources. Smaller companies can also benefit from the ability to participate, scale up, and make quick gains in their sustainability initiatives without possessing energy trading expertise.
However, those unfamiliar with VPPAs may be caught off-guard by the amount of potential downside involved, from the risk of a fixed-for-floating price structure, to the spectre of derivative accounting and additional regulatory requirements.
MP2’s answer to VPPAs is a retail-delivered, physical PPA.
Instead of a complicated process in which the customer buys financial electricity and associated RECs from a renewable asset and physical electricity from a utility, our solution brings the power directly to the customer for a fixed price. Using the utility’s infrastructure, Shell Energy North America (SENA)--MP2’s parent company--manages the offtake from the asset to the end user. As SENA offtakes the energy, MP2 firms, shapes, and delivers it, ensuring each of the customer’s facilities receives the needed amount of electricity to conduct its operations.
In a market with few alternatives, a VPPA can be a sound choice. However, in a deregulated market such as ERCOT, MP2’s integrated solution offers some incredible benefits:
VPPAs have served an important function in making renewable energy more broadly available to corporate America. However, just as renewables pose a better way to manage environmental resources, a retail-delivered PPA offers a smarter method of managing financial resources, without compromising on sustainability.
A retail supplier such as MP2 can deliver more flexibility on power contract terms, sizes, and product structures, thanks to its unparalleled industry knowledge, extensive capacity, and strong balance sheet. And with the ease of getting started with--then enjoying the benefits of--a retail plan like MP2’s, the choice is clear.
To hear how you can expand your customer base by becoming a solar, storage, or EV installer for MP2, contact us today.
