Virtual Energy Supply Purchasing Agreements 

Virtual energy supply purchasing agreements are financial transactions that allow corporate buyers to demonstrate a direct link between their actions and new renewable energy generating capacity.

As simple as it sounds, energy supply purchasing has multiple aspects that are not as obvious for business owners. One such aspect is power purchasing agreements. Both physical and virtual, these allow corporate buyers to demonstrate a direct link between their actions and new renewable energy generating capacity. Therefore, they are a tool to capitalize on RECs. At Onyx Power & Gas Consulting we are breaking down the reasons why companies might want to consider entering into virtual PPAs.

How Do Power Purchase Agreements Work?

Offsite power purchase agreements (PPAs) are renewable energy (RE) contracts entered by a project developer (and likely backed by a financial counterparty) and a company, where the RE installation is not sited at the location of the company’s electricity usage. They are entered over a period of time for a predetermined price per unit of energy, such as a megawatt-hour (MWh). PPAs can deliver the energy physically to a company through the grid or can be financially-settled transactions (i.e. virtual PPA or vPPA).

Physical vs. Virtual Energy Supply Purchasing

Physical PPAs

In a physical PPA, the buyer owns the electrons produced by the renewable energy project, which they typically sell into the wholesale electricity market. Physical PPAs are most common in states that have created electric retail choice markets (or partial retail choice markets, as in California).

Virtual PPAs

In the case of VPPAs, the buyer does not own and is not responsible for the physical electrons generated by the renewable energy project. Purely a financial transaction, it exchanges a fixed-price cash flow for a variable-priced cash flow and renewable energy certificates (RECs). Therefore, the buyer still needs to meet its electricity load.

VPPAs can be scaled easily and thus enable buyers to satisfy a large portion of their sustainability goals through a small number of deals.

An Example Case

A NewYork-based retail company with multiple locations across states is seeking to execute a VPPA.

It learns that it can execute a VPPA in any deregulated market in the country, but will continue to pay its electricity bill to its New York utility, as always.

It enters a bilateral contract with a wind energy project in Texas where they pay a fixed price ($/MWh) for the electricity produced by the developers project. In exchange, they receive RECs that count toward sustainability goals, which they can retire or sell into the REC market.

The wind farm, in turn, sells the electricity into the Texas wholesale market. 

The Variability of Market Prices

Scenario 1: Market Price Exceeds the VPPA Price

• Suppose the wind farm sells electricity into the Texas wholesale market at $40 per MWh (higher than the fixed price of $30 per MWh).
• In this case, the wind farm pays the retail company the difference:
• $40 (market price) – $30 (VPPA price) = $10 per MWh.
• If the wind farm produces 1,000 MWh of electricity that month, the company receives a payment of $10,000. This helps the company hedge against rising electricity prices.

➡ Related: Hedging Energy Procurement Solutions for Businesses

Scenario 2: Market Price Falls Below the VPPA Price

• Now, let’s say the market price drops to $25 per MWh (lower than the fixed VPPA price of $30 per MWh).
• In this case, the retail company pays the wind farm the difference:
• $30 (VPPA price) – $25 (market price) = $5 per MWh.
• If the wind farm generates 1,000 MWh that month, the company owes $5,000 to the wind farm. Even though the company is paying this difference, it still receives the Renewable Energy Certificates (RECs) for the electricity produced.

RECs and Sustainability Goals

In return for their participation, companies receive RECs for every MWh of electricity generated by the renewable energy project. These RECs are essential for meeting sustainability targets, as they represent the environmental benefits of producing clean energy. The company can either retire these RECs to claim the renewable energy generation or sell them in the open REC market for additional financial gain.

Financial Hedging and Flexibility

By entering a VPPA, companies can secure several benefits:

• Hedge against price volatility: They are protected from potential increases in energy prices because when market prices rise, the renewable energy project pays the difference.
• Sustainability tracking: The company can meet its renewable energy commitments through the acquisition and retirement of RECs, even though its physical operations remain powered by traditional utility providers.
• No geographic constraints: The company’s VPPA can be executed in a deregulated market, even though its stores and offices are primarily in a different location.

The Present and Future of Energy Supply Purchasing

Virtual Power Purchase Agreements (VPPAs) offer a solution for companies looking to meet their renewable energy targets while managing financial risks associated with fluctuating energy prices. As a result of entering VPPAs, businesses can secure RECs, hedge against market volatility, and contribute to the development of clean energy infrastructure—all without being tied to a specific location. As energy markets continue to evolve, having an energy consulting partner can be a strategic asset.

Onyx Power & Gas Consulting specializes in guiding companies through the intricacies of energy procurement, including VPPAs. Whether you’re looking to achieve sustainability goals or optimize your energy strategy, Onyx Power & Gas Consulting can provide tailored solutions to meet your unique needs. Contact us today to explore how we can help your business take advantage of innovative energy opportunities.

Our Partners