Need help finding federal funding sources for your projects? Try our new and improved Funding Tool

Procurement Guidance Menu

Virtual PPA

Understand Legal and Accounting Risk

For a comprehensive review of legal and accounting risks associated with virtual PPAs, see Virtual Power Purchase Agreement Legal Considerations and state-specific guidance for select states including Georgia, Indiana, Minnesota, Missouri, Ohio, and Virginia.

Disclaimer: the following should be used as a starting point for legal discussions but should not be construed as legal advice and does not address all issues that may arise with respect to entering into a PPA in any particular jurisdiction.

The legality of VPPAs is nuanced and impacted by local and state laws. Local governments considering a VPPA should conduct a preliminary legal review to determine any additional steps needed to enter into a VPPA. This page provides an overview of some of the most common issues to consider in this process.

  • Dillon vs. Home Rule

    Start by determining the degree of municipal government authority your city has, often referred to as “Dillon’s Rule” or “Home Rule.”

    • “Dillon’s Rule” local governments typically do not have inherent powers delegated to local government and require express state authorization for local actions. Local governments operating under “Dillon’s Rule” should start by determining if there is any express state authority for entering into a VPPA.
    • “Home Rule” local governments have authority to take actions not expressly prohibited or preempted by state law, though the scope of local authority varies widely. Local governments with “Home Rule” first need to determine whether there is any state prohibition on entering into a VPPA. Home Rule jurisdictions tend to be more favorable to VPPAs.
  • State Laws Impacting Municipal VPPAs

    Some states have constitutional or statutory limitations that impact if a local government can enter into a VPPA.

    Many states operate with a Public Purpose Doctrine that requires public funds to be expended only for public purposes. VPPAs can support the public purpose doctrine because the primary purpose of a VPPA is to achieve a city’s environmental, energy, or other sustainability goals. Local governments can demonstrate this by referencing existing local greenhouse gas reduction and renewable energy goals, local energy plans, and environmental benefits of VPPAs.

    While it is unlikely to have statutes directing permitting or prescribing VPPAs, legal teams should evaluate other relevant concepts to ensure a VPPA will not be construed as a debt obligation or investment.

    • Many states limit the amount or form of debt obligations that can be incurred by local governments. A VPPA is not a typical debt instrument but does create future payment obligations. Legal teams should also check statutory definitions and precedent to determine if a VPPA may be subject to regulation and clarify if similar products, such as interest rate swaps, are expressly prohibited.
    • Similarly, many states have limitations on how local funds can be invested. A VPPA should not be characterized as an investment, but rather as a public purpose expenditure. Avoiding requirement for cash collateral to secure purchaser obligations under the VPPA will help support the determination that a VPPA is a public purchase expenditure.
  • Local Ordinances for VPPAs

    Local governments may choose to pass an ordinance that provides express local authority to enter into a VPPA before executing a transaction. An ideal ordinance will:

    • Be passed before pursuing a VPPA contract
    • Categorize the type of contract a VPPA is and specify the process for pursuing one
    • Take positions that support the legal rationale for the VPPA
    • Define the acceptable terms of a VPPA
    • Address how a VPPA supports a public purpose

    More information on what needs to be included in authorizing legislation for a virtual PPA is included in the VPPA legal primer on the Renewables Accelerator website.

  • Budgetary Requirements for VPPAs

    For some local governments, municipal budgeting requirements may be inconsistent with the variable nature of VPPAs, where fluctuations in wholesale energy market prices can lead cities to pay or receive varying and unpredictable amounts at the end of each settlement period. This risk can potentially be mitigated through contract provisions that increase the predictability of payments within each budgetary period, including:

    • Establishing longer settlement periods, such as one year instead of one month.
    • Setting a price floor or other limitations on the settlement amount payable in any period.
    • Carrying forward excess obligations into subsequent budgetary periods.
    • Requiring the seller to deliver annual forecasts.

    Including applicable contract requirements in the RFP will produce more accurate bids. It may also be possible to work with a retail electric utility to incorporate VPPA credits or debts into electric rates. For example, Arlington County worked with its utility Dominion Energy on a VPPA that incorporates the VPPA settlement into the County’s monthly electricity bill.

  • Accounting and Dodd-Frank Act Considerations

    VPPAs are subject to the Dodd-Frank Act, but administrative requirements can be minimized. VPPAs are generally exempt from clearing, margin, and registration requirements. Requirements for reporting and recordkeeping are minimal. It is a common best practice for the VPPA contracts to require the seller to take responsibility for reporting requirements. Additionally, all Dodd-Frank forms should be prepared prior to VPPA execution to ease the reporting process. Second, a municipality will need to comply with recordkeeping requirements under Dodd-Frank. All physical and electronic records associated with the VPPA transaction will need to be kept for five to fifteen years following the end of the swap arrangement (i.e., the end of the VPPA term) and be retrievable within five business days.

Resource: VPPA Legal Memo

The Renewables Accelerator has worked with Lawyers for Good Government (L4GG) and the Sabin Center for Climate Change Law to create a series of VPPA legal considerations. This includes a general legal memo and multiple state-specific ones for Georgia, Indiana, Minnesota, Missouri, Ohio, and Virginia. The memos address federal, state, and local legal considerations pertaining to a municipality in Indiana entering into a VPPA.