What is a VPPA?
A Virtual Power Purchase Agreement (VPPA) is an instrument that closely follows the financial settlement terms of a Contract for Difference (CFD). In a traditional PPA, the generation and delivery points must be specified and agreed upon by both parties. Under a VPPA, there is more flexibility, which has led to increased popularity for these agreements in the broader market. At the start of a VPPA, both parties agree on a price per MWh. However, under this arrangement, the generator sells the energy into their local market, where the price fluctuates. If the local value exceeds the set price, the generator transfers the profits to the VPPA buyer; if the local value is lower, the buyer pays the generator the difference. As such, this closely replicates a typical OTC derivative CFD.
What are they used for?
VPPAs enable companies to advance their carbon reduction and ESG goals, even when they are not in proximity to renewable energy sources, to use their power directly. Typically, this is achieved through the use of renewable energy certificates, allowing companies to report that a portion of their energy consumption is sourced from renewables. VPPAs also offer the added benefit of hedging against energy price volatility, as companies can enter into long-term, fixed-priced agreements that support long-term planning.
Are they reportable?
VPPAs are typically structured as swaps, a type of OTC derivative. Therefore, under most global regimes, they are deemed reportable. The contract will be specified as a commodity asset class, and the specifics will be determined by the terms agreed at initiation.
Summary
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