How do purchase power agreements (PPAs) for renewable energy certificates (RECs) work?

Some states allow organizations to purchase RECs directly from a third-party-owned electricity generator through a purchase power agreement (PPA). A PPA is a contract between a renewable energy generator (the seller) and a renewable electricity purchaser (the buyer). The contract ensures that the seller receives revenue for every megawatt-hour of renewable energy it sells and that the buyer receives the RECs the seller generates. There are two types of PPAs: physical and financial.

Physical PPAs

A physical PPA typically lasts 10 to 20 years and ensures fixed revenue for the seller and fixed costs for the buyer. While the renewable energy generator can be on- or off-site of the buyer, it must be located in the same power market so that the renewable energy generated can be delivered to the buyer. To make claims about using green power, the buyer must ensure that the RECs are included in the PPA.

Because of state regulations, physical PPAs aren’t available in all markets. Some states don’t allow end-use consumers to purchase directly from green power generators.

Financial PPAs

A financial (or virtual) PPA is a long-term contract between the seller and buyer who agree on a settlement price. The difference between the settlement and the wholesale market price is accounted for by both the buyer and seller. No power is physically delivered from the seller to the buyer; the energy is instead delivered to the electrical grid, and the buyer must purchase electricity from a different source. Similar to physical PPA buyers, financial PPA buyers must ensure that the RECs are included in the contract, which gives the buyer the exclusive right to make claims about using the seller’s renewable energy.

Financial PPAs are generally used by organizations that:

• Have a distributed load, such as multiple facility locations, which makes it financially unfeasible to purchase green power in each grid market; and/or
• Operate in states with regulations that prohibit physical PPAs.