There are two primary contractual structures used in aggregated transactions: off-site physical PPAs and virtual PPAs.
The video below provides an overview of the off-site procurement options available to aggregation groups.
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Physical PPAs
With a physical PPA, buyers purchase electricity from a utility-scale, off-site renewable energy generator to use at their facilities. Physical PPAs are sometimes referred to as “sleeved PPAs” because a utility or third party delivers, or “sleeves,” the power from the project site to the buyer. See Exhibit 2 for an overview of how an aggregated physical PPA contract works.
For aggregated groups that want to receive energy from an off-site physical PPA, the renewable resource needs to be located in, or have access to, the same wholesale market as the buyers.
Buyers should also be relatively close together (e.g., within the same distribution utility area) to avoid issues related to transmission costs or other constraints that may cause the price of energy from any given project to differ significantly across buyers.
Depending on state regulations, buyers have three options to receive the energy from a PPA.
- Local governments served by vertically integrated, monopoly utilities are only able to work with their traditional utility.
- Local governments in retail choice markets (see Exhibit 3) or those served by municipal utilities or community choice aggregators (CCAs) may work with a competitive retail supplier.
- Local governments in retail choice markets or those served by municipal utilities or CCAs may manage the delivery themselves.
While buyers in an aggregated deal do not necessarily need to pursue the same delivery option, it is generally easiest and more cost-effective to do so.
Options for receiving energy from an off-site physical PPA.
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1. Working with a Traditional Utility:
A traditional utility may agree to deliver, or “sleeve,” the energy from the physical PPA to the buyer, usually in exchange for a fee ($/kWh) incorporated into buyers’ electricity bills.
Considerations:
- Working with a traditional utility is much easier if all buyers are served by the same traditional utility. Otherwise, the group will need to negotiate with multiple utilities.
- Groups interested in this approach should engage with the utility early in the process, ideally months before issuing a request for proposal (RFP). In some cases, the utility may choose to issue the RFP on the group’s behalf.
- For buyers served by integrated, regulated utilities, this is the only option to receive power from a physical PPA. If the utility does not agree to deliver the power, groups should consider a virtual PPA.
Case Study: The Nashville-Vanderbilt Solar Project.
The video below explains how to sign a utility special contract and provides real-world examples.
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2. Working with a Competitive Retail Supplier:
Buyers in states with retail choice can sign a contract with a retail supplier to integrate the energy from a project into their electricity service.
Considerations:
- A key benefit of this approach is that the retail supplier takes on the responsibility of delivering the renewable electricity and, often, managing mismatches over time between buyer energy needs and the output of the project(s).
- If the buyers already work with a retail supplier, the buyers can ask the supplier to deliver the power from the physical PPA at any time. Or the buyers can discuss physical PPA power delivery during contract negotiations with a new or existing retail supplier.
- Not all buyers need to use the same retail supplier, but suppliers may prefer this as it simplifies contract negotiations and can bring them additional business.
- In some cases, a retail supplier may be willing to issue the RFP on the group’s behalf.
- Given that PPA contracts typically require a commitment of 10 years or more, local governments may want to make the PPA detachable from the energy supply contract so that they can retain the PPA agreement even if they switch to a new retail supplier in the future.
Learn more:
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3. Managing One’s Own Power:
Buyers can also integrate a physical PPA into wholesale market operations via a wholesale market subaccount or as a Federal Energy Regulatory Commission (FERC) licensed power marketer.
Considerations:
- Some local governments may choose to purchase electricity through the wholesale market if they are registered as a FERC licensed power marketer, or through a retailer using a dedicated subaccount. This approach brings additional complexity and risk but can reduce non-PPA electricity costs.
- Local governments that participate in wholesale markets have the option to integrate a physical PPA into their current processes.
- Not all buyers need to opt into this approach, but it may be more cost-effective for groups to share the costs associated with hiring staff or third parties to manage the market operations.
- Due to the lengthy process involved in becoming a FER-licensed power marketer, this approach is not usually recommended if your organization does not already have these capabilities.
Managing power via a wholesale market subaccount:
Subaccounts provide a mechanism through which buyers can access competitive market prices and actively manage their energy purchases via an established power marketer/retailer. This approach makes the most sense for local governments that already have a subaccount or for those that have a large load and would be interested in purchasing electricity on the wholesale market.
Managing power as a FERC-licensed power marketer:
Instead of working with a retailer, buyers may be able to directly manage their own power as a power marketer. Becoming a power marketer requires completing a lengthy application process with the FERC. As such, this approach makes the most sense for local governments that are already managing power as a FERC licensed power marketer (e.g., cities with their own municipal utility).
Learn more:
Baltimore Metropolitan Council, Off-Site Solar RFP and Cincinnati, Ohio, Off-Site Physical PPA
For more information on off-site physical PPAs, visit Procurement Guidance for Off-site Physical PPAs
Virtual PPAs
A virtual PPA (VPPA) is a financial arrangement between a renewable energy project developer and a group of buyers. Unlike a physical PPA, the buyer does not take ownership of or receive the produced energy, and there is no direct impact on a buyer’s physical operations or utility bills. Instead, the electricity generated by the project is sold into a wholesale electricity market at the prevailing price (which can fluctuate significantly over time, depending on market conditions). If the wholesale market prices are greater than the predetermined $/MWh PPA price, the developer pays the positive difference to the buyers. If the wholesale market prices are lower than the PPA price, the buyers pay the difference to the developer. The buyers also, typically, receive the associated RECs. See Exhibit 4 for an overview of how an aggregated virtual PPA contract works.
There are many benefits of virtual PPAs that make them attractive to buyers:
- Like physical PPAs, virtual PPAs can provide critical revenue certainty to developers looking to finance and construct new renewable energy projects. This makes virtual PPAs attractive for buyers interested in supporting new (additional) renewable energy development.
- The buyers can be located anywhere in the United States — they do not need to be located near each other or be in a retail choice state. The only requirement is that the renewable energy project be in or have access to a wholesale market (see Exhibit 5). However, signing virtual PPAs with projects that are geographically close to the buyers can provide additional benefits such as local job creation and enhanced hedge value.
- Similarly, a virtual PPA does not require FERC approval for the buyer or require a FERC-licensed power marketer to facilitate delivery because a virtual PPA does not involve any physical sale of electricity.
