In this way, a synthetic AAE serves as a financial hedge against the volatility of electricity prices. As a general rule, the buyer receives the project`s renewable attributes or renewable energy certificates (RETs). In the absence of physical electricity supply, VPPA is an excellent option for large electricity consumers with a fragmented/distributed electrical charge to support the development of new renewable energy sources. A virtual energy sales contract is a long-term contract between a company and a developer. As the name suggests, there is no physical exchange of energy in a virtual energy sales contract. Unlike the traditional UNbundled purchase of the REC, which always costs money, the VPPA swap offers UC at a price determined by the net difference between the fixed price of the VPPA and the wholesale price. A positive difference between the market price and the fixed price of the VPPA can result in significant positive cash flows. In many previous VPPAs, the fixed price of the VPPA was below or above the market price, and the buyer had to review the price forecasts to determine whether the project would ultimately provide a positive NPV. There are now markets and projects in which it is possible to guarantee a fixed VPPA price below the current market price, which means that the virtual PPP will generate a positive cash flow from day one. VPAPs are flexible and can help companies aggregate their load into a single renewable energy project under a single AAE, regardless of where their individual facilities are located. The VPPA is a separate financial contract that does not directly affect an organization`s traditional electricity supply.
The organization continues to purchase electricity from the distribution company, in addition to the VPPA for renewable energy. In a virtual AAE, the company that develops the renewable energy project sells the electricity to the grid once the project is completed. To obtain financing, the developer enters into a virtual PPP with a third party – let`s call the ACME Co. ACME Co.dem owner of the renewable project guarantees a certain fixed price for the electricity it sells to the grid. If the electricity is sold for less than the guaranteed amount, ACME Co. will pay the difference; If electricity is sold to the grid for more than the fixed price, ACME Co. will actually earn money. In this arrangement, there are some advantages for all concerned: the developer of the solar installation or wind farm has the price security he needs to get funding for the project, and ACME Co. has the opportunity to earn money.
When a company signs a VPPA, it agrees to pay a fixed price for a specified period of time for each electrical unit produced in a wind or solar facility. The developer then sells this electricity on the wholesale market. The point of sale is a pre-selected place from which the public can access electricity generated by renewable energy. Unlike a physical power purchase contract, a virtual AAE is a simple monetary contract. This is why it is also known as the Financial Power Purchase Agreement. We have written in detail about traditional corporate PPAs for your enjoyment of reading on our blog. Before we get into virtual PPAs, let`s summarize some basics here. A virtual AAE is actually a form of price backup. A company enters into a contract to pay a renewable energy project at an agreed starting price.
The renewable energy project sells electricity produced on the basis of distributors on the local wholesale market. The project is paid by the company when the electricity is sold on the market above the agreed price and the company pays the difference to the project when the electricity falls below the agreed price. This is why VPPA encourages them to contribute to a new wind or solar project and to the achievement of their own sustainable development goals. This breakdown highlights the determinants they should keep in mind when managing risks in your Renewable Energy Sales Contract (AAE).