As the global focus on reducing carbon emissions and the transition towards renewable energy sources, Virtual Power Purchase Agreements (VPPAs) or Financial Power Purchase Agreements (FPPAs) have emerged as a mechanism for companies aiming to meet sustainability targets and mitigate energy price volatility.

This blog explores these instruments, their regulatory reporting obligations, and how MAP FinTech can assist clients in navigating this complex landscape

What Are Virtual Power Purchase Agreements

A Virtual Power Purchase Agreement is a formal multiyear agreement between an energy producer and a consumer (corporate), for the sale of electricity at a prefixed price.

Unlike physical power purchase agreements, there is no physical delivery of electricity, but the contract is financially settled. I.e., the energy producer (seller) supplies its electricity output to the electricity grid and the consumer’s (buyer) supply of electricity is independent from the VPPA.

The financial settlement process may differ from VPPA to VPPA, but the most common form is as follows. The Parties to the contract agree that each billing cycle, if the fixed price is above the prevailing market price for electricity (as published by a third party such as power exchanges like Nord Pool) the seller (energy producer) will pay to the buyer (consumer) the difference between fixed contract price and prevailing market price (adjusted for the output as defined in the contract). If the prevailing market price is above the contract fixed price, the buyer (consumer) will pay the difference to the seller (energy producer).

Moreover, in several VPPAs the energy producer will deliver to the consumer a so-called Energy Attribute Certificate (EAC). The said EAC is evidence that the energy the consumer bought comes from renewable sources. EACs are tradeable and transferable in many jurisdictions, as countries from around the world are scrambling to offer incentives towards transitioning to clean energy sources. As such, the consumer may also stand to gain from trading EACs obtained under the VPPA. EACs come in many flavours such as the EU’s Guarantee of Origin (GoOs) harmonising the EAC system of EU member states, the US’s Renewable Energy Certificates (RECs) and the UK’s Renewable Obligation Certificates (ROCs).

Finally, it is worth noting that the financial settlement process of the VPPA allows for such contracts to be cross-border, e.g. the producer may be established in a different country than the consumer.

Why are Virtual Power Purchase Agreements subject to EMIR reporting

As we have analysed in the previous paragraph VPPAs are complex, usually long-term commodity (electricity) contracts which are financially settled. Therefore, such contracts fall under the perimeter of a derivative financial instrument. Moreover, given the bilateral nature of such contracts these are OTC unlisted and, in most cases, uncleared (by Central Clearing Counterparty) derivatives.

Additionally, depending on the terms of the agreement, VPPAs may have the characteristics of a forward , a contract for difference, a swap, or even a swaption.

Considering all of the above, the said contracts fall under the scope of the EU’s and/or the UK’s EMIR rules that capture all derivative financial products. As such, both the energy producer and the consumer, upon entering a VPPA become subject to the provisions of EMIR which include, inter-alia, a reporting obligation.

How can MAP FinTech assist

At MAP FinTech we understand that in many cases producers and consumers cannot set up by themselves the necessary processes for EMIR reporting, as such, we offer various options for parties to a VPPA including a service whereby, we take upon ourselves to:

• Analysing the VPPA agreement, either bespoke contracts or standardised master agreements (e.g. ISDA, EFET) in order to identify the commercial aspects.
• Mapping the commercial aspects of the VPPA to the values required under EMIR.
• Enriching the EMIR report with other requisite data such as interconnection points, delivery zones, electricity load types.
• Creating and submitting reports on behalf of such clients to an EU or a UK Trade Repository.
• Providing the end client with the relevant files (e.g. TR responses, submitted files) for their records.

Contact our team of experts for more information or any assistance you may require.