As corporations experience increased pressure from shareholders, consumers, employees, and the federal government to adopt Environmental, Social, and Governance (“ESG”) goals, many are procuring renewable energy as one way of meeting environmental targets. In 2022, more than 96% of S&P 500 companies published an ESG or other formal sustainability report.[1] In addition to voluntary goals and initiatives, the Securities and Exchange Commission is in the process of finalizing enhanced and standardized climate and ESG disclosure requirements for publicly traded corporations. As a result, corporate renewable energy power procurement is expected to account for nearly 40% of the projected utility-scale wind and solar project growth through 2023 and 2024 in the United States.[2]

Corporate Engagement in Power Purchase Agreements

To further ESG efforts and meet sustainability goals, more corporates are entering into power purchase agreements (“PPAs”) with sellers of renewable energy. While major energy users with excess land or rooftop space, such as a large-scale manufacturing facility or data center, may be able to engage in on-site PPAs, many corporates have ESG targets that exceed the amount of on-site energy that could be generated and procured. The two most common types of off-site PPAs are: (1) physical delivery PPAs, and (2) virtual PPAs (“VPPA”). Under both structures, the renewable energy purchaser typically claims the renewable energy credits (“RECs”) generated by the project. Such credits benefit the corporate offtaker’s ESG and sustainability goals and count against renewable portfolio standards targets in some states.

There is one critical difference between a physical PPA and a VPPA. Under a physical PPA, the buyer takes physical delivery of the energy generated by the project at a set location. These types of PPAs can be on-site (the energy is generated and used in the same location) or off-site (and delivered via a utility), but in either case, the buyer physically takes title to the energy at the delivery point. By contrast, under a VPPA, the generator and purchaser agree to a set price for the energy generated by the project; however, there is no physical delivery of the energy to the purchaser. In its simplest form, these arrangements include a set energy price measured at a particular node or hub and as energy is generated it is sold to the grid for the open-market price. If the open-market price is higher than the set energy price, the additional revenue is paid to the purchaser. If the open-market price is lower than the set energy price, the purchaser pays the generator the difference. These types of arrangements are purely financial swap transactions.

VPPAs and Dodd-Frank Act Compliance

One critical consideration when engaging in a VPPA transaction is the implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and other regulations by the Commodity Futures Trading Commission (“CFTC”) of complex derivative transactions. While it has not been directly addressed by Dodd-Frank or CFTC regulations, the prevailing interpretation is that VPPAs are regulated as a “swap” transaction.

As a swap, VPPAs must comply with the securities regulations established by Dodd-Frank and the CFTC. First, parties to a swap must be an Eligible Contract Participant, as defined by Section 1a(18) of the Commodity Exchange Act. An Eligible Contract Participant includes a corporation that: (a) has total assets exceeding $10,000,000; (b) the obligations of which are guaranteed or otherwise supported by a letter of credit or other agreement by an entity that otherwise meets the Eligible Contract Participant definition; or (c) both (i) has a net worth exceeding $1,000,000; and (ii) enters into the agreement in connection with their business to manage the risk associated with an asset or liability.

Beyond establishing that the contracting parties are Eligible Contract Participants, there are additional compliance obligations related to: clearing, posting margin, reporting, registration of the swap transactions, and ongoing recordkeeping as it pertains to the swap transaction. While the rules provide certain exceptions that may exempt a generator, purchaser, or both parties from some of these regulations, it is critical for VPPA parties to understand the ongoing compliance obligations that are triggered by becoming a party to a VPPA.

Conclusion

Historically, both physical PPAs and VPPAs were negotiated directly between a generator and purchaser. However, in recent years, the ability for eligible corporate purchasers of sufficient size to enter the renewable energy market has been made easier through buyer-side aggregation. Aggregators bring together several corporate purchasers, who individually may not want or need to purchase all the renewable energy generated from a utility-scale renewable energy project, to enter into VPPAs with the generator using more standardized agreements.

VPPAs, either individually negotiated or through buyer-side aggregation, have allowed corporates of all sizes to purchase renewable energy to help satisfy ESG and sustainability goals. New corporate buyers should be aware of the Dodd-Frank and CFTC obligations triggered by these VPPA transactions and ensure that they are equipped to manage the ongoing reporting obligations throughout the life of the contract. 

[1] Governance and Accountability Institute, Inc., 2022 Sustainability Reporting in Focus (2022),  https://www.globenewswire.com/news-release/2020/07/16/2063434/0/en/90-of-S-P-500-Index-Companies-Publish-Sustainability-Reports-in-2019-G-A-Announces-in-its-Latest-Annual-2020-Flash-Report.html.

[2] Renewable Energy Market Update, Outlook for 2023 and 2024, International Energy Agency (2023), https://iea.blob.core.windows.net/assets/63c14514-6833-4cd8-ac53-f9918c2e4cd9/RenewableEnergyMarketUpdate_June2023.pdf

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