Accounting for Renewable Power Purchase Agreements from the Buyer’s Perspective

As entities plan to reduce their carbon footprint, they are often seeking to use ‘green’ or ‘sustainable’ electricity. Electricity is a unique product, because it is not easily storable at scale, and often entities are connected to the electricity ‘grid’ rather than being directly connected to generators. The connection to a grid means that electricity generated from sustainable sources is mixed with conventional electricity, and the resulting electricity itself does not have distinguishable characteristics based on its source.
There are several ways in which an entity can demonstrate that it has ‘used’ sustainable electricity:
  1. Purchase of renewable energy certificates (‘RECs’) on a stand-alone basis in the market. RECs are created for each megawatt hour of electricity that is generated from a renewable energy resource, and they can be purchased by an entity in the market and then ‘used’ (that is, cancelled or retired) by the entity to offset energy usage from non-renewable sources.
  2. Physical power purchase agreements (‘PPAs’) for green electricity. The entity takes physical delivery of electricity (that is, title) under the contract from a particular generation facility at some point after the generation process. This is often at the interconnection point between the generation facility and the grid or transmission system. The entity also purchases RECs based on the electricity produced by the generation facility that can be ‘used’ (that is, cancelled or retired) to offset energy usage from non-renewable sources.
  3. Financial settlement of green electricity through a virtual power purchase agreement (‘VPPA’) and purchase of RECs from a generator. In this type of arrangement, an entity obtains RECs and notionally purchases electricity through the VPPA. VPPAs are sometimes called a ‘financial power purchase agreement’ or ‘contract for differences’ (‘CFD’). The RECs received can then be ‘used’ (that is, cancelled or retired) to offset energy usage from non-renewable sources.
Theoretically, all of the sustainable electricity generated in a particular market can be earmarked to be used by entities under these arrangements. The power consumed by entities that do not have RECs is sometimes called ‘grey power’, because it might or might not have been generated by a sustainable source, and so it is often presumed to be conventional electricity.
As noted above, RECs can be bought and sold together with (or separately from) the related energy, but only the entity that retires (that is, cancels) RECs is considered to have actually consumed the sustainable electricity. In other words, RECs can change hands between various market participants, but taking RECs out of the market is fundamentally the ‘consumption’ of the green power. RECs are colloquially referred to as being obtained ‘physically’ although, in reality, they are generally intangible in nature, and they can be transmitted electronically rather than on a physical piece of paper.
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