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 by both parties. Whereas under a VPPA, there is more flexibility which has led to an 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 method, the generator sells the energy into their local market, where the price fluctuates. If the local value is higher than the set price, the generator transfers the profits to the VPPA buyer and 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 allow companies to attempt to hit their carbon and ESG goals even when they are too far away from renewable energy sources to use their power directly. They can also help companies hedge away their energy price risk by entering long term fixed priced agreements, enabling a long-term plan.
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 with the specifics determined by the terms agreed at initiation.
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