Virtual PPA Market Continues to Grow

As the corporate market for renewable energy has increased dramatically in recent years, power purchases under virtual power purchase agreements ("PPAs") have witnessed significant growth and show no signs of slowing down. Unlike physical PPAs in which energy is physically delivered from the generator to the offtaker, a virtual PPA, also known as a synthetic PPA, does not involve the physical exchange of energy between the generator and the consumer. Instead, the parties agree to a strike price, and the corporate consumer continues to procure energy in the market at the spot market price. If the spot price rises above the strike price, the generator pays the corporate consumer the difference, and vice versa if the spot price falls below the strike price. Virtual PPAs serve as a financial hedge for both parties, with the generator typically delivering renewable energy certificates ("RECs") to the corporate buyer as a key component of the virtual PPA.

Shifting consumer trends and peer pressure from competitors have led to an increased corporate focus on sustainability and environment, social, and governance ("ESG"). As a result, hundreds of corporations have joined renewable initiatives such as RE100, setting concrete goals to procure 100% renewable energy by a date certain. Virtual PPAs offer a unique opportunity for corporations to lock in a favorable rate and hedge against volatile electricity prices while signaling to the market that they are committed to renewable energy, as many corporations rely on the RECs acquired through virtual PPAs as a critical component of their ESG goals. Moreover, virtual PPAs enable corporate buyers to satisfy a significant percentage of their sustainability goals through relatively few transactions.

Unsurprisingly, energy hungry technology companies have dominated the corporate PPA market to date; however, other industries are quickly entering the fold. At least one restaurant company and two telecommunication companies have inked large virtual PPA deals. Corporations in the health care, industrial, and financial sectors are also following suit.

After the repeal of the Clean Power Plan in 2019, the private sector is stepping up to drive the transition to renewable energy and virtual PPAs often offer the most cost-effective means for corporate buyers to add renewable energy to their energy mix. One emerging trend is an "off-the-shelf" aggregated structure that allows smaller buyers and those lacking energy trading expertise to enter the market by bundling their energy capacity needs with similarly situated offtakers into a single virtual PPA. This type of aggregation will permit smaller corporate offtakers access to deals formerly reserved for well-funded corporations by lowering transaction costs and driving down risk. In addition, subsidy phase-outs will require generators to enter into long-term PPAs with creditworthy corporations in order to demonstrate project bankability to investors. All of these factors point toward virtual PPAs continuing to flourish as an increasingly popular corporate PPA structure in 2020 and beyond.

Insights by Jones Day should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request permission to reprint or reuse any of our Insights, please use our “Contact Us” form, which can be found on our website at This Insight is not intended to create, and neither publication nor receipt of it constitutes, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.