< Back to Newsroom
Powering Up: Clean Power Purchasing 101
In the first post in our Powering Up series, MN8 SVP of Corporate Sales Kevin Helmich walks you through the basics of power purchase agreements (PPAs), differences between the types and how they are used.
Sep 27 2024 | 7 min read
In our Powering Up blog series, experts from across the MN8 Energy team offer lessons and insights to help you better understand and navigate clean energy procurement and fleet electrification, wherever you are in your organization’s journey.
When it comes to purchasing clean power, there isn’t a one-size-fits-all solution.
For homeowners who want clean energy, they have onsite options including residential solar or geothermal systems, or offsite options like utility clean energy programs or community solar to help them achieve their goal. However, as the scale of power demand grows, the process of purchasing clean energy for large buyers, including enterprise customers, looks different than it does for energy purchasing at a small scale.
Larger-scale businesses – like those with a large real estate footprint, data centers and/or manufacturing facilities — consume considerably more energy than single family homes and small businesses, requiring energy purchase options that can support that scale. A common path that large-scale businesses take to reduce their carbon footprints and reach clean energy adoption goals is to enter into a Power Purchase Agreement (PPA). In this post, we’ll walk you through the basics of PPAs and the differences between types.
What is a Power Purchase Agreement?
Power Purchase Agreements are an important corporate procurement vehicle for sourcing renewable power, especially as corporates set lofty sustainability targets requiring percentages of their power consumption to be met by clean energy. As of 2022, corporations account for 16% of operating clean power in the U.S. These agreements, which are typically long-term, define the terms for the exchanging of power between the energy producer and the buyer.
There are two types of PPAs: physical and virtual – let’s get into the difference and which would be best for your company.
Physical Power Purchase Agreements
A physical power purchase agreement is a contract in which the buyer commits to purchasing the electricity generated by a clean energy project or portfolio of projects for a set period. Typically, physical PPAs are signed with projects on the same regional grid as the party purchasing the power, giving a real connection to the energy source. These agreements are usually 10- to 20- year agreements that outline the commercial terms for the sale of renewable electricity and delivery mechanisms for the purchased power.
The energy is usually “bundled” with the renewable energy certificates (RECs) created from the production of that energy or contracted without the associated RECs. Enterprise customers can choose to take ownership of the RECs or not, and if they do own them, they can claim the environmental attributes for their own emissions reporting (“retiring” the RECs) or sell them to other parties. Without any REC paired with the delivery of energy, the purchaser cannot make claims to buying “green” energy, as monitored by the Federal Trade Commission.
Physical PPA contracts enable organizations to run at least part of their operations on clean energy at a set price, providing surety of supply and a physical link between buyers and their renewable investments. These PPAs are well suited for organizations and businesses located in the same Independent System Operator (ISO) as the project.
Virtual Power Purchase Agreements
In contrast, Virtual Power Purchase Agreements are financial agreements that allows businesses to buy renewable energy credits (RECs) associated with a specific project not necessarily on the same regional grid, without having to arrange physical delivery of generated electricity from the site. The project owner liquidates the energy at market pricing and passes the revenue through to the offtaker.
So if they’re not receiving the energy themselves, what does the buyer get out of a VPPA?
When buyers sign a VPPA, they become the owner of the RECs that the project generates. RECs are used to address indirect greenhouse gas emissions associated with purchased electricity (scope 2 emissions) – typically power supplied from the buyers’ regional grid — by using adjusting the calculations of gross scope 2 emissions based on the emissions factor of renewable generation convened with the REC. Buyers can also benefit from energy price fluctuations as the liquidated energy price compared to the fixed price paid under the VPPA.
The VPPA approach is an attractive option for companies without the infrastructure or regulatory framework to handle direct physical procurement of clean energy, without available projects to procure from on their local grid, or that do not have large enough aggregated demand to make a physical PPA feasible.
Which Power Purchase Agreement is the Best Fit for Your Company?
Every company has different sets of energy capabilities, needs and goals that must be considered when entering into a PPA. For some companies, signing a physical PPA isn’t a possibility given their geography, energy needs and other mitigating factors, which would make a virtual PPA more appealing. For others, a virtual PPA is too removed from their day-to-day operations, creating a preference towards the direct energy sourcing from a physical PPA.
The best structure for any organization depends on the markets where the purchaser is located and where projects are available in parallel to source from, which enable that organization to meet its goals and priorities.
Either approach provides the direct financial support needed to get new renewable energy projects built and contributes to the decarbonization of the power grid supply mix.
What’s the Standard Length of a PPA?
Power Purchase Agreements are typically long contracts, defining the terms of the exchanging of power more than twenty years in the future. For the offtaker, this means a guaranteed price of energy, with a predetermined rate of growth, with low-to-no upfront capital costs to develop.
Wholesale energy markets can be volatile, especially in areas with fluctuating demand like ERCOT in Texas. Markets with major cities with high population density, like NYISO, PJM and ISO-NE, are always going to have a high demand for energy. In other markets, especially rural areas with large service areas but small customer bases, the certainty of energy demands can vary. Longer agreements reduce the risk of energy prices fluctuating drastically, guaranteeing a fair cost of energy for a predetermined period of time.
In future posts, we’ll delve into additional facets of power purchasing that leading companies are pursuing, including PPAs centered on additionality, emissionality, emissions-first or 24/7 carbon-free energy approaches.
Exploring which Power Purchase Agreement is best for your organization? Reach out to origination@mn8.com.