This blog post discusses three such vehicles: the Virtual Power Purchase Agreement (“VPPA”), the Virtual Net Metering Program (“VNMP”), and Metered Energy Efficiency Credits (“MEECs”). All three are relatively new, relatively complex, and in two cases—VPPA and VNMP—substantially regulated. However, the basic concepts are easy to explain and that is the goal of this post.
Many companies with a desire to “go green” do not have access to renewable energy sources, for the obvious reason that many renewable energy projects are in locations relatively remote from heavily-populated industrial/commercial areas. In addition, many large renewable energy projects are best suited to selling into wholesale markets, versus connecting directly to energy users. The VPPA is a device that enables a “go green” company to make the “green” claim based on a purely financial arrangement with a renewable energy project hundreds if not thousands of miles away. The VPPA works as follows: the “go green” company (the Buyer) enters into an agreement to pay the wind or solar project developer (the Seller) a fixed price per megawatt hour (“MWh”) for output from the wind or solar project. That fixed price commitment, which extends over a long period of time (15–20 years, typically), becomes the revenue foundation for financing the project (just as the power purchase agreements formed the basis for financing Independent Power Projects in the past). Because it is the revenue foundation, it is of course necessary that the Buyer be a creditworthy organization. In return for the fixed price payment, the Buyer captures all of the Renewable Energy Credits (“RECs”) resulting from the production of power from the project. The Buyer then uses those RECs as the support for its claim that is “green.” The typical VPPA Buyer wants to convey that it is a “100% Renewable Energy” company, and to do that, it must match the RECs (and the output of the project) to the total electricity consumption of the Buyer. So, if a Buyer has an enterprise-wide electricity appetite of 100 MW, it would enter into a VPPA to support development of 100 MW of capacity. (Note that wind or solar projects that have greater capacity than a specific Buyer needs can enter into VPPAs with multiple Buyers. By the same token, a Buyer with an appetite bigger than one project can enter into multiple VPPAs). The electricity generated by the operating wind or solar project is typically sold into the wholesale market via the competitive processes conducted by the relevant Independent System Operator/Regional Transmission Operator (“ISO/RTO”). In the simplest of terms, if the wholesale price is greater than the Buyer’s fixed price commitment, the Buyer is paid the differential. Conversely, if the wholesale price is lower, Buyer must pay a true-up payment to Seller. Because of this arrangement, VPPAs are treated as “fixed for floating swaps” or “financially settled contracts for difference,” both of which are Federally-regulated under the Dodd-Frank Act. (Note that these instruments can themselves be hedged to reduce risk exposure, and the industry has already started to develop appropriate hedging products). Finally, a Buyer’s claim that it is a “100% Renewable Energy Company” must pass scrutiny at the Federal Trade Commission (“FTC”) and, in some cases, the Securities and Exchange Commission. The FTC has in fact published “Green Guides,” which set the standards for these types of claims.
VNMPs typically involve wind or solar projects that are smaller scale than the projects involved in VPPAs. The typical VNMP involves a rooftop solar system on a large building or complex of buildings (such as a shopping mall). Because such buildings have multiple tenants, each of which has a separate meter to measure power received from the local electric utility, the process of connecting a rooftop solar system to each of those meters, and then wheeling excess power to the local utility, is complicated and can be hard to administer. Under a VNMP, the rooftop solar system wheels all of its power to the local utility. The RECs generated by the system are provided to the utility, which then credits their value to the metered tenants of the building (thus reducing their electricity costs). The tenants then pay to the solar system owner some portion (usually 90–95%) of those savings, a portion of which is then remitted to the building owner as rent for the rooftop space. The commitment to share the savings becomes the revenue foundation for financing the solar installation. The utility benefits from receiving the RECs, the tenants benefit from the reduced electricity costs, the solar system owner benefits from the assured revenue stream and the relative simplicity of dealing only with the utility, and the building owner benefits from the presence of a “green” energy system on its building. Obviously, a VNMP only works with a utility that has a VNMP approved by its regulator(s), and only works with buildings whose tenants are willing to share the savings. The VNMP can apply to systems other than rooftop systems—for example, so-called “community solar systems” or “community wind systems,” where the land-based installation is proximate to the utility and the energy consumers.
MEECs are new, and still being tested at the pilot project level. Nonetheless, they have great potential. The three players are a Building Owner, the building tenants, and a so-called “Energy Tenant.” The “initiating party” is the Energy Tenant. A building is selected for efficiency improvements. A baseline for energy consumption prior to the efficiency improvements is developed, and converted to a metered baseline (one that can be carried forward dynamically, taking into account factors such as time of year, weather variations, etc.). Energy Tenant, the Building Owner, and the building tenants enter into an agreement that operates as follows:
- Energy Tenant installs energy efficiency improvements (HVAC upgrades, smart meter systems, hi-tech windows, insulation, etc.) that result in reduced energy consumption.
- The differential between baseline consumption and actual consumption is measured and becomes the quantifiable MEECs.
- The Building Owner and the tenants continue to pay for electricity as if the efficiency improvements had not been installed and the utility collects the rates based on the dynamic baseline consumption.
- That process generates “excess” revenue for the utility, which the utility then uses to purchase MEECs from the Energy Tenant.
- That committed revenue stream to the Energy Tenant is the foundation for financing the energy efficiency improvements.
The utility benefits because its gross revenue is unaffected and it can credit the MEECs to its energy efficiency goals; the Building Owner benefits because it now has a more efficient building (note that the efficiency improvements typically become assets of the Building Owner); the tenants are no worse off and reside in an energy efficient building; and the Energy Tenant benefits by having a revenue stream to finance the improvements (with an investment return). So far, MEECs are not part of the regulatory landscape but that could change, perhaps for the better.
The VPPA, VNMP, and MEECs approaches will continue to evolve and improve, but for now, they are useful tools for companies that want to join the “green” wave.