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Virtual Power Purchase Agreements

Build a Deal Team

To complete a transaction, you will need to build a team with the ability to manage a variety of key issues. Your team may be a combination of internal city staff and external subject matter experts, but will likely include some combination of the following:

  • Finance expertise

    You will need to work closely with your city’s internal finance team to evaluate any potential deals from a financial and risk perspective. The finance team will need to evaluate the potential financial risks for your city and whether a deal could impact the city’s credit score. You may want to share the technical and financial risk sections of this guide with the finance team as a starting point.

  • Renewable PPA expertise

    PPAs require that the buyer (your city) accept some level of uncertainty in the PPA operational and financial performance. You will need someone who can create a financial model of the transaction and evaluate how volume, shape and price risk could impact the deal’s performance. Your city may have an energy office with this expertise. If not, you should consider hiring an external advisor to assist with your analysis. There are a number of specialized firms that can assist buyers with virtual or physical PPA transactions.

  • Legal expertise

    You will likely require both internal and external legal support to fully evaluate a PPA’s legal considerations. Your legal staff will need to consider what contractual requirements may be necessary to accommodate local bylaws and city purchasing requirements. External council can also provide expert advice on standard contract clauses and help you select a project and negotiate the deal. For more information, see Stoel Rives’s free guide to legal issues.

  • Accounting expertise

    You may need to determine whether a VPPA would be considered a derivative contract by your accounting team. For large companies, the appropriate Financial Accounting Standards Board (FASB) treatment can vary depending upon how the contract is structured, with the most common outcomes being accrual accounting, lease accounting, and derivative accounting. As noted in this article, derivative accounting is usually not required unless the contract stipulates a required minimum amount of energy per year. You should work with your accounting team, and potentially outside experts, to understand the most appropriate and desirable accounting treatment of the deal by your city and how you may want to structure the content as a result; in this process, you may wish to consult the GASB derivative instruments summary.

  • Procurement expertise

    You should plan to engage with your procurement department to understand city restrictions and requirements for procurement processes, including requests for information (RFIs) or requests for proposals (RFPs).

Consultants and brokers

When hiring an external expert, consider how their firm will be compensated. Some organizations bill by the hour (i.e., consultants), while other firms take some, or all, of their compensation as a portion of every MWh sold as part of a PPA: this is often arranged as a fixed ¢/MWh over time (i.e., brokers). While most companies are open to both forms of payment, you should know how the firm is being paid. Firms with success fees (a fee paid for successfully closing a transaction) can have an incentive to close as large a deal as possible regardless of whether it is ultimately in the city’s best interests.

Outcome

  • A list of the regions in which your city is interested in pursuing a VPPA and your preferred technology for each
  • A clear understanding of the key risks in VPPAs
  • A team consisting of internal expert staff and appropriate external experts
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