UK Corporate Virtual Power Purchase Agreements (VPPA) Guide

Key Takeaways

• Corporate Virtual Power Purchase Agreements (VPPAs) are financial contracts that help businesses procure renewable energy without direct physical delivery.
• The UK government's Contracts for Difference (CfD) scheme provides long-term price stability for renewable generators in Great Britain.
• Renewable Energy Guarantees of Origin (REGOs) verify the renewable source of electricity and are crucial for environmental reporting.
• Small-scale electricity generation and supply in Great Britain may qualify for exemptions from licensing requirements under specific conditions.

What is a Corporate Virtual Power Purchase Agreement (VPPA)?

A Corporate Virtual Power Purchase Agreement (VPPA) is a financial arrangement that allows a corporate buyer to support renewable energy projects and claim associated environmental benefits without directly purchasing electricity from the generator. Unlike a physical Power Purchase Agreement (PPA), the electricity from the renewable project is sold into the wholesale market, and the corporate buyer receives financial payments based on the difference between a pre-agreed 'strike price' and the market price. The corporate buyer also receives the Renewable Energy Guarantees of Origin (REGOs) associated with the generation.

This guide focuses on the mechanisms and regulatory framework in Great Britain that underpin such agreements, specifically the Contracts for Difference (CfD) scheme and Renewable Energy Guarantees of Origin (REGOs), which are integral to understanding how VPPAs function in the UK market.

How Contracts for Difference (CfDs) Support Renewable Generation

The Contracts for Difference (CfD) scheme is the UK government’s main mechanism for supporting low-carbon electricity generation. This scheme incentivises investment in renewable energy by providing developers with protection from volatile wholesale prices. It also protects consumers from high support costs when electricity prices are high.

Under a CfD, developers of renewable projects in Great Britain enter into a private law contract with the Low Carbon Contracts Company (LCCC), a government-owned company. The LCCC's primary role is to issue and manage these contracts and make CfD payments. Developers are paid a flat indexed rate for the electricity they produce over a 15-year period. This rate is based on the difference between a 'strike price' (reflecting the cost of investing in a particular low-carbon technology) and a 'reference price' (a measure of the average market price for electricity in the GB market). National Grid ESO is the delivery body for the CfD scheme, responsible for running the CfD allocation process, which involves 'sealed bid' auctions. Ofgem is responsible for hearing certain appeals related to the CfD scheme.

CfD Allocation Rounds

The CfD scheme operates through allocation rounds, where eligible renewable generators can bid for contracts.

Renewable Energy Guarantees of Origin (REGOs) for Transparency

The Renewable Energy Guarantees of Origin (REGO) scheme provides transparency to consumers about the proportion of electricity that suppliers source from renewable electricity. One REGO certificate is issued per megawatt hour (MWh) of eligible renewable output to generators of renewable electricity. Ofgem is the administrator of the REGO scheme for generation in Great Britain on behalf of the Department for Energy Security and Net Zero.

The primary use of REGOs in Great Britain and Northern Ireland is for Fuel Mix Disclosure (FMD). FMD requires licensed electricity suppliers to disclose to potential and existing customers the mix of fuels used to generate the electricity supplied. All REGOs held in a supplier account for the relevant disclosure period that are not retired or revoked are redeemed by Ofgem by midday 1 July following the generation disclosure period to capture REGOs used for GB FMD.

It is important to note that as of 1 January 2021, the EU no longer recognises UK REGOs. Conversely, from 1 April 2023 onwards, EU Guarantees of Origin (GoOs) are no longer recognised for use in GB FMD, FIT annual levelisation, or CfD. Ofgem also does not recognise Non-EU GoOs for GB FMD.

Licensing and Exemptions for Electricity Generation in Great Britain

The Electricity Act 1989 prohibits unlicensed generation, transmission, distribution, or supply of electricity. However, the Secretary of State can grant exemptions from these licensing requirements. These exemptions are detailed in The Electricity (Class Exemptions from the Requirement for a Licence) Order 2001.

Generation Exemptions

Class A exemptions for small generators cover persons who do not at any time provide more electrical power from any one generating station than 10 megawatts. This limit can extend to 50 megawatts in the case of a generating station with a declared net capacity of less than 100 megawatts.

Supply Exemptions

Exemptions also exist for small suppliers. Class A exemptions cover persons who do not supply any electricity except electricity they generate themselves, and who do not at any time supply more electrical power than 5 megawatts, of which not more than 2.5 megawatts is supplied to domestic consumers. Other classes, such as Class B (Resale) and Class C (On-site supply), provide further exemptions under specific conditions related to the source and quantity of electricity supplied.

Metering and Verification

Schedule 7 of the Electricity Act 1989 governs the use and testing of electricity meters. The Measuring Instruments Regulations 2016 outline requirements for notified bodies involved in conformity assessment of measuring instruments. For REGOs, Regulation 5 of The Electricity (Guarantees of Origin of Electricity Produced from Renewable Energy Sources) Regulations 2003 grants Ofgem access to plants for verification purposes and allows refusal of GO issuance if access is denied.

What the Published Sources Do Not Detail About Corporate VPPAs

While the Contracts for Difference (CfD) and Renewable Energy Guarantees of Origin (REGO) schemes provide a foundational framework for renewable energy in Great Britain, published statutory guidance and Ofgem rules do not explicitly define or detail the specific structure and terms of a "virtual PPA."

Key areas not fully elaborated in the available documentation include:

• Specific VPPA Structure: The CfD is a government support contract for generators, not a direct corporate VPPA agreement. The precise contractual clauses and legal mechanisms that would facilitate a "CfD and REGO certificate transfer" to a corporate entity in a virtual PPA are not present.
• Grid Connection Criteria for Corporate PPAs: Detailed grid connection criteria and technical compliance requirements for corporate PPAs, beyond general licensing and metering regulations, are not fully elaborated.
• REGO Transfer Process for Corporate Buyers: The process for transferring REGO certificates in the context of a corporate PPA, specifically how a corporate buyer would acquire and utilise them for their own reporting, is not detailed.
• Commercial Aspects and Risk Allocation: The published regulations focus on the regulatory framework and government schemes, rather than the commercial aspects or specific contractual structures, financial implications, and risk allocation inherent to corporate virtual PPAs.
• Intermediaries and Platforms: The role of intermediaries or specific platforms designed to facilitate corporate virtual PPAs is not mentioned.

This information highlights that while the CfD and REGO schemes are crucial components, the commercial and legal specifics of corporate VPPAs often involve bespoke agreements between corporate buyers and renewable generators, which fall outside the scope of these government-focused regulatory documents.