PowerPoint Presentation

May 16, 2018

Use of a Virtual Power

Purchase Agreement (VPPA):

The New Way to Acquire

Green Credits

VPPA–Wave of the Future for Green Energy

By: Fred Lowther and Joan Bondareff

Webinar Overview

• What is a VPPA?

• Why are companies using it?

• What are the advantages and

disadvantages?

• What state and federal laws

are implicated?

• Conclusions and Questions

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What is a Virtual Power Purchase Agreement?

First and foremost, it is NOT

an agreement to purchase

power. In that sense, the

name is somewhat of a

misnomer.

• By definition (i.e., the term

“virtual”), the party entering

in the “purchase” – usually

called the “Buyer” -- does not

actually buy or consume the

power generated by the

power project.

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What is a Virtual Power Purchase Agreement?

It IS actually a financial instrument, in several senses

• From a power project developer’s perspective, it is a commitment from a

creditworthy third party (the “Buyer”) to provide financial support for the

power project, in the form of a guaranteed fixed payment per Megawatt

Hour (Mwh) for every Mwh produced by the power facility over a long

period of time (usually 10-15 years). Such financial support underpins the

development and construction financing for the project.

• Because there is a prospective financial benefit to the Buyer under the

VPPA (discussed in more detail below), and because the financial benefit

depends on the price at which the power project actually sells electricity

into the grid, a VPPA is treated legally as a “fixed-for-floating swap,” which

is a form of hedging instrument.

• And because the VPPA is a “swap,” it is subject to regulation as a financial

instrument under the Dodd-Frank Act.

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Consumer Demands for Green Energy

Why are large companies such as Google, Amazon, Bimbo

Bakeries, Apple, etc. rushing to acquire green energy?

• Their consumers are demanding it.

• Their shareholders are demanding it.

• The public is demanding it.

• Properly structured, it can save companies money.

• It allows for green investment funds to be used.

• The VPPA is one way these major companies can go green.

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Pros of Using a VPPA

• The primary advantage of a VPPA is that it provides a financial

foundation for the development of a wind or solar project.

• In certain jurisdictions where the wholesale electricity market

is competitive and rates are not typical “utility cost of service”

rates (ERCOT in Texas being a primary example), the VPPA

provides a “fixed cost” recovery component which is key to a

viable development and construction financing arrangement.

• Another major advantage of a VPPA is that it allows the

“Buyer” under the VPPA to capture Renewable Energy Credits

as the foundation for the assertion that the “Buyer” is a

“Green” Company.

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Cons of Using a VPPA

• The primary disadvantage of a VPPA is its complexity – VPPAs

are very complex financial instruments – definitely not for the

faint of heart.

• A secondary disadvantage of a VPPA is that it is regulated

under Dodd-Frank and other laws, which makes VPPA

administration somewhat cumbersome both for the project

owner and the VPPA Buyer. Under Dodd-Frank, a VPPA is

treated as a “fixed for floating price” swap, a form of hedging

instrument.

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Four Basic Components to a VPPA

1. The Buyer commits pay a fixed price to

the Seller (the developer/owner of the

Project) for every Megawatt Hour

(Mwh) of electricity produced by the

Project and delivered to the

interconnection point. As noted

before, this fixed price payment

provides support for financing the

project.

2. If the price at which the power is sold

into the market exceeds a minimum

floating price (which is higher than the

fixed price component), the Seller pays

the Buyer the differential between the

fixed and floating price. This element

is why the VPPA is treated (and

regulated) as a “fixed for floating price”

swap.

3. If the floating price for any monthly

period is zero or negative and certain

other complex factors are present, the

Seller is obligated to make a “Floor-True-

Up Payment” to Buyer.

4. There are “facility attributes” and

“environmental attributes” which, if

earned, are transferred to the Buyer (or

sold, with the benefits going to the

Buyer). “Facility attributes” are complex,

and relate to certain “capacity benefits

and ancillary services” attributable to the

Project. “Environmental attributes” are

the RECs, and the foundation of the

ability of Buyer to claim the “green”

benefits from the VPPA.

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Other Components to a VPPA

There are a myriad of other VPPA components, far too

numerous to summarize here.

Since VPPAs are entered into typically before the wind

or solar project is constructed, some relate to the

vagaries of the construction and start-up process, and

others relate to vagaries of facility operation and

dispatch.

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State Laws and Markets

• What state and federal laws must be

considered before entering into a

VPPA?

• Does the state have renewable

energy credits? If so, how are they

valued?

• Does the state recognize a VPPA as a

valid contract?

• Does the state regulate green

marketing claims?

• How are the major energy marketing

indices, e.g. PJM and ERCOT,

implicated?

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The FTC Regulates Green Marketing Claims

What federal laws are implicated?

• Green claims are regulated by the Federal Trade Commission

(FTC).

• The FTC regulates marketing and advertising by U.S.

companies.

• The FTC has established national standards for green

marketing claims in its Green Guides (16 CFR Section 260.1-

260.17).

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The FTC Regulates Green Marketing Claims

The Guides set forth the following principles:

– Make clear, prominent, and understandable statements.

– Identify to what the claims apply.

– Do not overstate the environmental attribute or benefit.

– Ensure that the basis for any comparative claims is clear.

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The FTC Regulates Green Marketing Claims

• In the area of renewable energy, companies should match the

non-renewable energy used with a renewable energy

certificate.

• Avoid making a claim that overstates the renewable energy

used.

• FTC has acted to enforce its rules against companies making

unreasonable green claims:

• Petition to Investigate Deceptive Trade Practices of Green Mountain Power

Company in the Marketing of Renewable Energy to Vermont Consumers., 2015

WL 628252.

• In re: Volkswagen "Clean Diesel" Mktg., Sales Practices, & Prod. Liab. Litig., No.

3:15-MD-2672, 2016 WL 6824450, at *1 (N.D. Cal. Oct. 25, 2016).

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Role of the SEC in Reviewing Green Claims

• Publicly-traded companies have different obligations than

private companies.

• Public companies must file 10-K forms with the SEC. The SEC

will review the MD&A section of the 10-K to see that it

contains clear and accurate reporting.

• The SEC had proposed rules requiring disclosures of the

impact of company actions on climate change but this rule

was never made mandatory.

• There is a system of voluntary reporting of sustainability

actions but no single reporting format.

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Role of the SEC in Reviewing Green Claims

• The UN has adopted a series of Sustainable

Development Goals which companies are also using.

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Role of the SEC and CFTC in Reviewing Green

Claims

• Both the SEC and CFTC have

authority to impose fines and

penalties on companies

reporting inaccurate

information on their 10-K

and other forms. See e.g.

Securities Exchange Act of

1934, § 10(b), Commodity

Exchange Act, § 4b(a).

• Most companies, e.g., Exxon

Mobil, have decided to make

voluntary disclosures of their

impacts on climate change.

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How does the Dodd-Frank Act apply to VPPAs?

• Title VII of the Dodd-Frank Act imposes substantial regulation of

over-the-counter derivative transactions.

• The exchange of RECs for funding green projects and claiming

environmental attributes is considered a swap under Dodd-Frank.

• The SEC and the CFTC are in charge of implementing Dodd-Frank.

But the CFTC is largely in charge of energy and agricultural swaps.

• The CFTC and SEC have jointly issued rules regarding the definitions

of swaps. See 77 FR 48207, 8/13/2012.

• The CFTC may exempt a swap under its forward exclusion rule if the

transaction is intended to be physically settled vs. traded in

secondary markets. See 77 FR 48234.

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Conclusions

• The VPPA is a new legal instrument that allows investors to

build wind farms and companies to brag about their use of

green energy.

• The VPPA is a complicated instrument that implicates both

state and federal laws.

• Companies have to ensure that green claims are realistic and

reasonable in order to avoid FTC enforcement actions.

• Security laws such as Dodd-Frank may well be implicated in

creation of energy swaps in a VPPA.

• SEC and CFTC have enforcement authority (and have used it

against companies making false claims.)

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Frederick M. Lowther

Partner

T: 202.420.2208

E: flowther@blankrome.com

Joan M. Bondareff

Of Counsel

T: 202.772.5911

E: bondareff@blankrome.com

For More Information

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