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Virtual Power Purchase Agreements

Understand Price Risk

VPPA price risk arises from the fact that the energy is being sold into an open market where energy market prices vary over time. These fluctuations create financial uncertainty, or risk, regarding the revenue that will be generated by selling the project’s electricity into the market (i.e., the buyer’s revenues). This risk has two important implications for cities to consider:

  • Short-Term Volatility

    Energy price risk can create short term volatility in the buyer’s revenues on a daily and seasonal basis; buyers should understand the likely range of these fluctuations. Buyers can mitigate this risk by “settling at a hub” instead of the local node; this concept is discussed in further detail in the following section, Understand Basis Risk.

  • Deal Profitability

    The financial profitability or loss of a VPPA to a city is dictated by the difference between the agreed price that the city pays to the project developer and the sale price the city receives for each MWh sold in the wholesale market. To illustrate this, see the two examples below. In Example 1, long-term increases in wholesale market electricity prices create positive value for the VPPA buyer. However, if wholesale prices fall below the VPPA price, as shown in Example 2, the buyer could be forced to absorb those losses.

For a comprehensive summary of off-site PPA risks, see the World Business Council for Sustainable Development’s (WBCSD’s) Innovation in Power Purchase Agreement Structures report. PPA Risk Summary:
WBCSD’S Innovation in Power Purchase Agreement Structures report, while not specific to the United States or cities, provides a useful overview of potential risks in off-site PPAs.

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