Today is Halloween and we have a very SPOOKY blog topic this October. In this blog we talk about Virtual Power Purchase Agreements (VPPAs) for renewable energy, and highlight why they should not be viewed as a real commitment to sustainability and why they come with some significant problems. We go a bit further and point out how they are actually quite the opposite of sustainability and highlight a few other problems with these sorts of arrangements.
When corporations are looking to become more sustainable, they often look to their electricity consumption to make improvements. An increasing trend among corporations is to enter a virtual power purchase agreement to purchase renewable energy and/or the associated renewable energy credits (RECs).
First off, what exactly is a virtual power purchase agreement? There are a few definitions out there but we found one from the United States Environmental Protection Agency (epa.gov), which we expanded on a little bit to help explain what it means:
A VPPA is a financial arrangement between a renewable energy project owner or developer and a buyer, with the buyer receiving the energy and/or RECs. The word ‘virtual’ essentially means that there is no actual exchange of power to the buyer’s facilities. Therefore, VPPAs are purely a financial swap and power is generated in a completely different Province or State from where the consumer uses power.
Now, compare this to a standard/traditional/physical power purchase agreement (PPA) whereby power is physically delivered into the same electricity system that the power buyer is consuming the power in.
Here are two examples:
1) A VPPA could look like this: Corporation A wants to purchase RECs to offset 100% of their power consumption across all their operations in North America. They enter an agreement with Seller A who then builds a renewable energy project in a deregulated market such as Texas or Alberta (to name two). Corporation A still consumes power at all of their operations in North America, and now they are also responsible for the additional production of power in another market, while receiving the RECs.
2) A physical PPA could look like this: Corporation B wants to buy power and associated RECs to offset their consumption in the Province or State which they consume power. They enter an agreement called a PPA with Seller B who then builds a renewable energy project in the same market where Corporation B operates. Corporation B’s actual electricity load is then offset by this renewable energy project as it is contained within the same electricity system.
On the surface, both types of agreements seem fine and both are supporting the production of renewable energy. The problem with VPPAs is that electricity is every bit a physical product and system operators carefully plan their grids based largely on supply and demand.
To be clear, Blue Harp Consulting is pro-renewable energy and pro-sustainability, however VPPAs have little to no regard for sustainability and in many cases contribute negatively to sustainability as we will discuss here:
Problems with VPPAs
1) It is Greenwashing!
Without question, VPPAs are corporate greenwashing and this is a dangerous trend which has already taken off in North America. What is greenwashing? The Cambridge English dictionary defines greenwashing as: “Making people believe that your company is doing more to protect the environment than it really is.”
When a company indicates they procure 100% renewable energy, or any percentage for that matter, through a VPPA, they are making it seem as they are not still consuming the exact same amount and type of power as before. This is misleading and not the way electricity works. In the end, they are actually now responsible for potentially double the amount of electricity being produced! And, on a per kW or MW basis their CO2 emissions have actually risen. This is not sustainable in any way, regardless of how clean the additional power is being produced. To put another way, their marginal carbon footprint actually is increasing! Wind or solar energy are low carbon ways to produce power, however they still have a carbon footprint which must be factored in.
Corporations enter VPPAs in order to help them achieve various sustainability goals, such as trying to reach 100% renewable energy. To put it bluntly, using a VPPA to achieve this goal is a poor commitment and an example of greenwashing.
The RE100 is a group of companies across the globe (but primarily in the United States) that have made public commitments to procure 100% renewable energy. The goal of procuring 100% renewable energy is admirable, but in reality:
AND/OR 
In North America, we are in a relatively new wave of Corporate VPPAs. In fact, it could be viewed as a frenzy or perhaps even a bubble.
Imagine all major corporations in the USA decided to enter a VPPA with Texas solar or wind facilities to offset their operations’ power consumption. Would this decrease these companies’ emissions? No. Would it actually reduce the power consumption of their operations or help the companies decarbonize in any way? Not at all…and in fact it would cause their corporation to worsen their environmental track record. Would it cause local grid problems in Texas? Most definitely. And while corporations in other parts of the USA might not care, local Texans may be responsible to fund costs to ensure the electricity grid can still operate reliably (via increased distribution and transmission charges on their bills). New transmission lines would be required to disperse this renewable energy hundreds (or potentially thousands) of kilometers away. It is not sustainable to build transmission lines without integrated planning. If new transmission lines are not built, then there would be significant curtailment of…wait for it…renewable energy. In other words, all of this renewable energy would be shut off and wasted. Again, not sustainable.
2) No Regard for Location
Outside of greenwashing, likely the biggest problem with VPPAs is that there is no regard for location of the physical supply of power and the actual demand of electricity. As we’ve stated earlier, electricity is every bit a physical ‘product’ which is highly dependent on location and requires complex, costly, and vast physical infrastructure to bring it to consumers. VPPAs spilt the actual power consumption and power generation, when really, they need to be intertwined very carefully. To put another way, VPPAs support the building of infrastructure which produces electricity in locations where the power may not be needed, and they don’t reduce consumption either.
To help prove this problem, imagine if every power consumer in Canada decided it wanted to enter a VPPA with an Alberta wind or solar farm to take advantage of the cheap power and associated RECs. This would lead to extreme curtailment of power because the power transmission and distribution network would not have the ability to handle the power without substantial system upgrades. All these upgrades would be required to be built to accommodate this extra power that Albertans may not even end up using. This would drive up transmission and distribution costs to ratepayers and perhaps put power costs out of reach of people, particularly low-income residents.
Corporations entering a VPPA to offset their nationwide power consumption through one generating facility may not understand that location is extremely important in the electricity sector. A large, well known multinational biopharmaceutical company just entered a 300MW+ solar VPPA in Texas to power all of its North American facilities. This simply does not make sense and despite the probable good intention behind it, it is hard to imagine these sorts of deals continuing for much longer before regulators, system operators, or governments step in. VPPAs fail in their consideration of the location of the renewable energy production.
A few more problems:
3) No System Planning Involved with VPPAs
Another problem with VPPAs is that there is no system planning involvement. System operators in electricity markets which allow VPPAs have no involvement in the planning of project siting. Since VPPAs are producing power which isn’t serving any local load, this creates a big problem for system planners. How can system planners forecast this, if the hot topic for the next couple years becomes “corporate VPPAs”? How will system operators factor in load from Ontario or other Provinces that want to purchase renewable energy in Alberta? Physical PPAs are much better as they are directly offsetting power consumption within the same grid system.
For this reason, VPPAs will undoubtedly cause eventual system wide planning problems as system operators scratch their heads trying to figure out how to accommodate this generation which doesn’t actually serve any real load. A well-planned electricity grid always considers location for power generation, distribution, and transmission.
4) Impacts to Ratepayers and Associated Negative Externalities
VPPAs are an example of negative externalities, because the production of new renewable energy projects associated with corporate VPPAs cause ratepayers to bear the additional costs of distribution and transmission fees to accommodate the new power. “A negative externality exists when the production or consumption of a product results in costs to a third party.” (Brittanica.com).
Hopefully, regulators will pick up on this risk of VPPAs (if they haven’t already) and develop policies which limit or restrict out-of-market power consumers ability to enter virtual arrangements so they do not cause a negative impact to ratepayers.
5) VPPAs Promote a Poor Use of Sustainable Capital
Corporations can allocate sustainable capital more efficiently and more productively than entering into VPPAs. As we pointed out already, VPPAs cause a corporation’s carbon emissions per unit of power to increase, not decrease. When considering that companies have a limited budget to implementing sustainability initiatives, it is unfortunate to see them allocate it in a way that does not improve sustainability. Every dollar (or millions of dollars) counts when it comes to improving sustainability and decreasing carbon emissions. Simply put, corporations in Canada or the USA will struggle to achieve sustainability goals if corporate VPPAs continue because they are non-solutions.
Hopefully by this point in the blog you understand the problems we’ve identified relating to corporate VPPAs. There are likely more that we haven’t pointed out here. Feel free to add your comments to this blog if you think of any more…or if you don’t agree then please comment as well.
So, what can be done in place of VPPAs?
Alternatives to VPPAs that Corporations Should Consider
Corporations looking to the power sector to achieve their sustainability targets and goals with a VPPA have other options they should be considering.
We recognize that not every jurisdiction has an electricity system that has flexibility but there are many tools in the toolbox to reduce a company’s impact on the environment through power consumption.
These alternatives can range from:
- Producing renewable energy onsite (gold standard).
- To adding energy efficiency measures (another gold standard).
- To buying power in a power purchase agreement from a nearby facility within the same electricity system, (physical PPA).
At least one of the above should be an option that is achievable to your organization. If not, there are other ways which are not explored here in this blog.
On the Bright Side…
Corporations entering VPPAs is a prime example of greenwashing but the good news is that clearly some corporations want to buy renewable energy and want to lower carbon emissions from their electricity purchases.
In many cases consumers can dictate what the market provides. However, this is a bit more difficult in the electricity sector. In many jurisdictions, there is considerable work to be done on the regulatory, utility, and political side to spur a change in power generation towards renewable energy.
If anything good comes out of VPPAs for renewable energy, it could be that utilities, grid planners, and government regulators recognize that more mandates and regulations for renewable energy generation and strategic transmission infrastructure are needed. However, the mandates and regulations need to take into account who is buying the power/RECs, grid planning, and long-term reliability of the grid.
In Conclusion
Blue Harp Consulting absolutely supports companies, organizations, businesses, and individuals who want to purchase renewable energy or be more sustainable, but we strongly believe there are many un-intended risks and consequences of “quick and easy” options, such as VPPAs. These problems will ultimately cause negative impacts to the environment, society, and the economics of an electricity grid and move society further from becoming more sustainable. We don’t have time to be going backwards in our push to be more sustainable. The goal should be to replace fossil fuel generation with renewable energy as quickly and efficiently as possible, however doing so without any system wide or centralized planning is setting us up for failure.
Corporations need to look for better ways to meet their sustainability goals which starts by setting more realistic goals to begin with. Next time an organization claims that it uses 100% renewable energy to power its facilities, do a little bit of research into that claim to make sure it is accurate…because it could be a trick or treat.
Blue Harp Consulting
Founded in Calgary, Alberta in February 2020, Blue Harp Consulting works with Canadian and international governments, financial institutions, First Nations, energy developers, and utilities on renewable energy, energy storage, smart grid, and sustainability related projects across Canada.
Are you curious how we can help your organization reach its sustainability goals closer to home? Contact dcarscadden@blueharpconsulting.ca to discuss how we may be able to help your organization make real sustainability commitments.
Blog written by: Dave Carscadden, CEO – Blue Harp Consulting
