Virtual Power Purchase Agreements

How can a VPPA complement your existing Net Zero Strategy and even replace unviable projects?

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Virtual power purchase agreements for solar PV solutions

Generating renewable energy at your sites is a no- brainer. But it’s not always feasible so what can you do next?

Companies today are increasingly exploring generating renewable energy on site at their premises to not only reduce their energy bills but also reduce their carbon foot-print to deliver on CSR/ESG objectives and other internal and external targets. What seems a simple concept can often be fraught with complications and barriers which stop businesses delivering on these ambitions.

Shawton Energy are an experienced solar solutions business delivering solar projects for various sectors in the UK and their co-owners, Lazard Investment, fund projects through a direct wire Power Purchase agreement, typically roof and ground mount, on the premises of their customers. However, the barriers to delivering these projects can often be insurmountable. These barriers include;

The Distribution Network Operator (DNO) – The local power network

Every commercial solar project has to be connected to the local grid, regardless of whether you wish to export energy or not. As this grid has been underinvested in over the past 30 years then when an application is put in, the response can be either a flat no, yes but in several years or a yes, but you have to provide investment into the grid which can often kill the commercial business case.

Planning

Although formal planning has been reverted to permitted development status on projects of 50kWp to 1MWp, you still need planning on larger projects and any ground mount projects. Any planning application has the risk of rejection, plus also there are things like glint and glare issues around the main roads and airports.

Site Restrictions

Your site might simply have restrictions that might stop a solar project from being viable. From your roofs being old and weak, not having space for ground mount, your footprint being too small for your demand e.g. energy-intensive businesses under a small roof like a data centre or being in an unsunny part of the country.

Lease Length

If you don’t own your buildings, then your lease length is important to understand when entering a PPA as these kinds of contracts will be long-term (15-25 years) therefore if your business is planning to move out a few years down the line then a PPA might not be right.

Business Risk

Some businesses just don’t want solar on their roofs or within their boundaries as they believe it is an additional risk to their business. Therefore solar is limited from day one.

“So I can’t generate power onsite but I need to reduce carbon. What can I do?”

Approaching the problem from a different angle.

The energy markets have changed substantially over the last 10 years.

Buying renewable energy from suppliers used to be costly and complex, but it’s now common practice. However, many businesses recognize this as potential greenwashing, as the energy often comes from existing, non-UK assets and isn’t always fully renewable. While it has helped companies move toward Net Zero, businesses are now seeking more credible solutions.

On-site renewable generation became a popular option due to cost savings by avoiding non-commodity charges like transmission and distribution fees. However, it’s not always feasible for every business. As energy demands grow and emissions targets tighten under Scope 1, 2, and 3, finding the right energy solution becomes crucial.

This is where Virtual Power Purchase Agreements (VPPAs) come into play, offering businesses a viable alternative. Shawton Energy is here to guide and support businesses exploring this option.

What to do first

Energy Efficiency Improvements

Reducing energy use is one of the most cost-effective ways to lower your carbon footprint. Upgrading to energy-efficient lighting, HVAC systems, insulation, and appliances can significantly cut energy consumption and emissions.

Carbon Offsetting

Invest in certified carbon offset programs that fund projects aimed at reducing emissions, such as reforestation, renewable energy, or methane capture. These offsets can balance out your carbon footprint by compensating for the emissions you can’t eliminate.

Electrification of Heating and Transport

Switching from fossil fuels to electric systems for heating and transportation reduces carbon emissions, especially if paired with green energy tariffs or VPPAs. Consider adopting electric vehicles (EVs) and heat pumps as part of your strategy.

Sustainable Procurement

Choose suppliers and products with low carbon footprints. This includes sourcing materials from companies committed to sustainability, reducing waste, and prioritising recycled or recyclable materials.

Behavioural Changes and Employee Engagement

Encourage energy-saving practices within your organisation. Simple actions like reducing unnecessary travel, minimising waste, and promoting a culture of sustainability can make a significant difference.

What is a Virtual Power Purchase Agreement?

Buying renewable energy at a secured price

A Virtual PPA is a financial derivative contract in which the price for the underlying electricity is settled with a Contract for Difference (CfD). Under the CfD, the counterparties agree to a ‘strike price’ for the electricity and a market-based reference price over the duration of the contract. When the strike price is higher than the market reference price, the off-taker makes up the difference. When the market reference price is higher than the strike price, the power producer pays the difference to the off-taker. The contract provides the corporate consumer with a financial hedge against long-term electricity price fluctuation.

What benefits do Virtual PPAs offer?

Financial Hedging Against Energy Price Volatility

A VPPA allows businesses to lock in a fixed price for energy over a long-term period. This protects against the volatility of energy markets, providing financial stability and predictability in energy costs, which is particularly valuable in a landscape of fluctuating fossil fuel prices.

Achievement of Sustainability Goals

VPPAs enable businesses to support the generation of renewable energy even if on-site production isn’t possible. This directly contributes to a company’s carbon reduction targets and aligns with the UK’s stringent sustainability objectives, enhancing the business’s environmental credentials.

Corporate Social Responsibility (CSR) and Brand Enhancement

By entering into a VPPA, companies demonstrate a strong commitment to renewable energy, reinforcing their CSR initiatives. This commitment can bolster the company’s brand reputation, making it more attractive to environmentally conscious consumers, investors, and other stakeholders.

No Upfront Capital Expenditure

VPPAs typically do not require any upfront investment in renewable energy infrastructure. This allows businesses to benefit from renewable energy and meet sustainability targets without the capital burden associated with on-site installations.

Energy Source Diversification

Through a VPPA, businesses can diversify their energy sources by supporting renewable projects in different locations. This geographical diversification can further insulate the business from regional energy market risks and ensure a more secure energy supply.

Revenue from Renewable Energy Guarantees of Origin (REGOs)

A VPPA often includes the transfer of REGOs to the business. These certificates can be sold on the open market, providing an additional revenue stream, or retained to offset the company’s carbon emissions, contributing to sustainability reporting and compliance with environmental regulations

How does a Virtual Power Purchase Agreement work?

A Virtual Power Purchase Agreement (VPPA) is a financial contract where businesses support renewable energy generation without receiving the energy directly. The business agrees to buy electricity from a project at a fixed price, with the energy sold to the grid at market rates.

If the market price is higher, the business is paid the difference; if lower, the business compensates the developer. VPPAs help hedge against energy price volatility and provide renewable energy certificates, supporting sustainability goals without requiring on-site infrastructure.

Virtual power purchase agreement process

Who We Are

In-House Funding Decisions Made Quickly

Shawton Energy Ltd specialises in fully funded, bespoke solar energy solutions for businesses across the UK. Our expertise covers everything from design to installation and ongoing support, offering clients either direct investment or the option to use our Power Purchase Agreement (PPA) for fully funded projects.

In 2023, Lazard Asset Management (LAM) acquired 50% of Shawton Energy, forming a strategic partnership that enables rapid decision-making on project funding. Lazard has committed significant financial support to Shawton Energy in expanding its renewable energy offerings, providing the financial strength and agility to pursue new energy markets and scale efficiently. This partnership ensures fast, reliable funding and enhanced project execution.

About Us

map containing pins for commercial Solar & Battery projects in development or operational for Shawton Energy

Working with Shawton Energy to deliver your VPPA

Navigating the complexity of a VPPA with a trusted energy partner

Delivering a Virtual Power Purchase Agreement (VPPA) for your business in the UK involves close collaboration with Shawton Energy to align the agreement with your company’s financial, operational, and sustainability objectives. Here’s how the process typically unfolds:

Negotiating the VPPA Terms

Once a partner is chosen, the focus shifts to negotiating the terms of the VPPA. This includes agreeing on the fixed price for the energy generated, the contract duration, and the management of any financial settlements arising from market price fluctuations. Legal and financial teams from both sides will work closely to ensure the contract meets regulatory requirements and aligns with your company’s risk tolerance.

What does it all mean?

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Direct PPA

An agreement to sell some or all of your electricity directly to a customer.

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Distribution Network

The network that carries lower voltage electricity (that’s been converted from the high voltage transmission network) to industrial, commercial and domestic consumers.

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Embedded Benefits

These are extra payments on top of the fixed price for electricity included in a PPA. They essentially reward electricity generators who contribute to their local lower- voltage network (without using the infrastructure of the main national ‘distribution’ network).

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Embedded Generation

Generation plants that are connected to the distribution network rather than the transmission network.

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Power Purchase Agreement

A contract where your business agrees to sell some or all of the electricity you’re generating to a buyer for a set number of years

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Retail Price Index

The Retail Price Index (RPI) is a measure of inflation, published monthly by the Office for National Statistics (O.N.S). It measures the change in the cost of a representative sample of retail goods and services.

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System Sell Price

The ‘cash-out’ price set by the system operator that is used to settle the difference between the amount of energy that was contracted to be generated or consumed in each half hour trading period and the actual amount that was generated or consumed.

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Renewable Energy Guarantee of Origin (REGO) Certificate.

Certifies that the electricity you’re generating is renewable. When a supplier buys this power from you, they’ll also buy the relevant REGO certificates from you.

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Transmission Network

The network of pylons and cables that transmits higher voltage electricity from power stations (where it’s produced) to wherever it’s needed across the UK.

FAQs

What are Embedded Benefits?

These are extra payments on top of the fixed price for electricity included in a PPA. They essentially reward electricity generators that contribute to their local lower-voltage network (without using the infrastructure of the main national ‘distribution’ network).

What’s the System Sell Price?

The ‘cash-out’ price set by the system operator. This is used to settle the difference between the amount of energy that was contracted to be generated or consumed in each half hour trading period and the actual amount that was generated or consumed.

What is additionality?

Organisations buying a PPA with additionality are guaranteeing to purchase the offtake of a new project at a fixed price. This positively influences the financial investment decision that allows a new renewable generation project to be built, which will bring additional green energy to the grid.

What are REGOs?

REGO is short for Renewable Energy Guarantee of Origin. REGOS are official certificates to prove where electricity was generated. REGOs certify that the electricity you’re generating is renewable. When a supplier buys this power from you, they’ll also buy the relevant REGO certificates from you.

What’s the Retail Price Index?

The Retail Price Index (RPI) is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a representative sample of retail goods and services.

What are Contracts for Difference CFD?

Contracts for Difference (CFDs) is a UK government-backed scheme to support low-carbon electricity generation. Each year, the government holds an auction to buy a specified amount of electricity. Electricity generators submit bids to develop renewable projects. This involves a rigorous application process and competition is usually high. Successful bidders form a contract with the government-owned Low Carbon Contracts Company.

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