When transitioning to renewable energy, companies have a lot of decisions to make. Developers can customize solar and storage solutions around the specific goals and constraints of each client, leaving plenty of options for solar projects regardless of available space or a tighter budget. The first step any company should take is to understand the advantages of each option and assess how to best achieve their unique energy savings and sustainability goals. Should they build a solar system for their offices onsite, or purchase offsite RECs (Renewable Energy Credits)? In this article, we will walk through the basics of how a company should navigate this crucial decision and maximize their ROI.
What is a solar PPA?
A power purchase agreement or PPA is an agreement between an owner of an electric generating asset like solar PV, and a separate party who agrees to pay for the electricity at a defined rate over a determined period. Companies can tie Solar PPAs to a solar system onsite or offsite (Virtual PPA). Power generated from a PPA creates Renewable Energy Credits (RECs), which companies can use either to generate income or satisfy their sustainability goals.
How do renewable energy credits (RECs) work?
A Renewable Energy Credit (REC) is a tradable asset that represents the environmental benefits from generating 1 Megawatt hour of renewable electricity production. Entities can monetize RECs through sale or they can be retired and counted towards offsetting a company’s emissions. However, they cannot be double counted, so you must either retire the RECs or sell the RECs. It is not possible to do both.
What is the difference between a PPA and a VPPA?
Power Purchase Agreement (PPA) – Onsite
Onsite PPAs, as the name implies, involve a solar system integrated into a location, but owned by a solar company. The company would then agree to buy electricity generated at their site at a defined price over a defined period, typically 15-25 years.
Strengths and limitations
- Allows you to lower your onsite energy usage and claim the RECs from the solar system
- The permit process is much less complicated and requires fewer stakeholders than offsite VPPAs, making it faster to implement
- Onsite PPAs come with more certainty on how they will affect your operating costs since the power has a fixed cost, as opposed to a VPPA
- Since these types of PPAs are on site, you are limited to the footprint of a facility’s parcel
Virtual Power Purchase Agreement (VPPA) – Offsite
Companies typically refer to offsite PPAs as Virtual Power Purchase Agreements (VPPAs). A VPPA can be located anywhere and is a financial contract where no energy goes to the offtaker. VPPA projects are connected to the grid and the owner and offtaker agree to a fixed price for energy. This fixed price of energy is based on the wholesale price of electricity where your project is located. If the wholesale price exceeds this fixed price, the buyer will receive the difference. However, if the wholesale price is lower than the fixed price, the buyer must pay the difference to the asset owner.
VPPAs are traditionally large utility scale projects that are hundreds of Megawatts in capacity, usually ground mounted systems on large plot(s) of land.
Strengths and Limitations
- VPPAs offer you geographic flexibility
- Allow for the ability to procure a large quantity of RECs
- Permitting requires more intensive site surveys and environmental studies
- Longer timeline to build (3-5 years)
- VPPAs don’t lower your onsite electricity usage, you are only receiving RECs
- There is also a risk with VPPAs if wholesale prices are lower than expected meaning you could end up paying money to the owner of the solar project
How can solar PPAs and VPPAs Help Businesses meet their ESG goals?
One of the biggest challenges facing companies now and going forward is how they will meet their Environmental, Social, and Governance (ESG) goals. One of the most popular strategies to address environmental goals is to employ the use of both onsite and offsite solar energy PPAs. It’s rare that onsite solutions can account for 100% of emissions, so doing both onsite solar and a VPPA to meet the gap is a solid approach.
Daniel Murphy, Director of Policy & Regulatory Affairs at Empower Energies, says, “The US has a patchwork of legislation that make onsite solar preferable in some markets and prohibitive in others. There is no one size fits all solution when it comes to sustainability; understanding your opportunities and limitations will inform what is the right mix of offsite and onsite solutions.”
Get in touch with an Empower Energies representative to start evaluating your site(s) and we will work with you on a turnkey solution for your business needs.