Project company

Why must the project company only sell its electricity on the wholesale market within the framework of a VPPA? – Energy and Natural Resources


United States: Why must the project company only sell its electricity on the wholesale market within the framework of a VPPA?

To print this article, all you need to do is be registered or log in to Mondaq.com.

A common question for commercial and industrial (C&I) buyers is why there is a commitment that the project company must sell everything electricity which it settles financially with the C&I customer on the wholesale market. A virtual PPA (VPPA) is an agreement with the C&I customer and the project company which provides for a financial settlement in relation to the wholesale price of electricity. The C&I client will generally receive from the project company a Renewable Energy Certificate (REC) for each megawatt hour (MWh) financially settled.

The basic payment terms in a VPPA are a formula: Fixed Price minus Variable Price, where (a) the Fixed Price is a fixed price in $/MWh, and (b) the Variable Price is the variable wholesale price. If the variable price is higher than the fixed price, the project company will owe the difference to the C&I client. If the variable price is lower than the fixed price, the C&I client will owe the difference to the project company. The fixed price is usually set where, most often, the C&I client is expected to receive more money from the project company than the C&I client has to send to the project company.

A fundamental principle underlying the payment term in VPPAs is that the project company receives the wholesale price (i.e. the project company receives the variable price) from the wholesale market through of its physical sale of electricity on the wholesale market. This is mainly what ensures that the project company can pay the C&I client if the wholesale price (i.e. the variable price) is higher than the fixed price.

If all or part of the electricity produced by the project company can be physically sold at a fixed rate to another customer (which is not the wholesale market), the creditworthiness of the project company will be compromised due to its payment obligations. under the VPPA:

1. First of all, a mismatch will be created between the price in $/MWh that the project company will receive from this sale to a third party and the wholesale price. For example, if the wholesale price is $50/MWh (and higher than the fixed price) and the third-party fixed price is $40/MWh, the VPPA payment formula will require the project company to pay the C&I customer as if he were receiving $50/MWh. MWh, instead of the $40/MWh it actually received, for each MWh sold to the third party. This creates a cash flow problem for the project company as to where it will receive the $10/MWh shortfall it must pay to the C&I customer, thus creating payment uncertainty to the C&I customer.

2. Second, there will also be a lag between the solvency of this third party and the solvency of the wholesale market. Wholesale electricity markets (until the Texas winter storm in Uri in 2021) are generally considered very safe. Even after the Uri winter storm, a third party buying physical electricity from the project company is probably less likely to pay their bills compared to the wholesale market. This creates more uncertainty about the project company’s ability to pay the C&I client, because the C&I client must rely on the third party’s ability to pay the project company in order for the project company to pay the C&I client.

Some of these credit issues could be partially alleviated with credit support, but any type of credit support, absent an unlimited parental guarantee, has its limitations. Instead, a project company will provide a commitment to the C&I customer that the project company will not physically sell the electricity it settles financially with the C&I customer to anyone, except for wholesale market sales. .

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

POPULAR ARTICLES ON: US Energy and Natural Resources

FERC backtracks on pipeline approval policy changes

Holland & Knight

The Federal Energy Regulatory Commission (FERC) issued a brief order on March 24, 2022, reversing historic — and divisive — changes it announced weeks ago to its gas pipeline certification policies. .

An Introduction to CCUS Regulations in Louisiana

Liskow and Lewis

Carbon capture, use and storage (CCUS) projects involve various legal issues. Like traditional exploration and development, CCUS projects require the operator to secure both the…

New LNG agreement between EU and US

Haynes and Boone

For example, how will the United States export the extra gas when its terminals are operating near capacity? Can European terminals cope with additional imports? Are there enough LNG carriers to ship the additional gas, …


Source link