Physical vs. Virtual PPA

Physical vs. Virtual

Despite these shared benefits, physical and virtual PPAs do differ in some material ways:

  • Regulatory: Physical PPAs require that the offtaker obtain power marketing authority from the Federal Energy Regulatory Commission (FERC) to purchase wholesale power from the power producer. While not insurmountable, doing so may be outside of the offtaker’s core business or simply be too time-consuming. An offtaker can engage a third party already authorized to buy power at wholesale, serving as the market participant. This, of course, has its own risks (see below). Because no power is changing hands in a VPPA, the offtaker does not require FERC authority.
  • Regulatory (again): Although the regulatory requirements for VPPAs are still being formed, the prevailing view is that these contracts are “swap” agreements and therefore bound by Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which includes reporting, recordkeeping and registration requirements for swap transactions. Physical PPAs are not typically considered swaps subject to Dodd-Frank. However, if a physical PPA contains specific terms (e.g., price optionality, buyer curtailment rights, option for financial settlement), it may in fact be deemed a swap and subject to ongoing reporting obligations. See this article for more.
  • Transmission/Delivery: Physical PPA offtakers need to consider what happens with the energy once they receive and take title to it and find a solution to move the purchased energy to its locations, requiring transmission, distribution, and delivery. C&I offtakers would typically contract with third party providers for these services, and perfectly syncing the deal terms of these services (typically limited to a couple to several years) with those of longer-term PPAs is unlikely and can add a compounding layer of risk and complexity to the overall transaction.
  • Location: As mentioned above, physical deal structures where the energy is delivered to an offtaker’s facility are limited to competitive retail markets (i.e., PJM, Northeast, ERCOT and other isolated states in MISO and WECC). Virtual PPAs have broader potential, possible in any RTO or ISO. Further, because VPPAs are financial in nature and don’t involve moving electricity, they are not inherently location-dependent. This means offtakers can find the most attractive project, no longer limited to projects located within its immediate region. It also allows offtakers to consolidate its demand across the country to capture economies of scale.
  • Internal Approvals: PPAs will require learning on multiple levels for an organization, but VPPAs tend to be a new procurement mechanism for most offtakers, requiring education on technical and non-technical topics alike. Not to be under-estimated, VPPAs require new departmental interdependencies within organizations, which can have cascading affects across the company. Processes will need to be developed, building a new ecosystem of collaboration among otherwise distant and unfamiliar stakeholders. All this takes time, effort, and persistence.

Each of these factors should be considered when evaluating PPA opportunities.