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Common Terms and Conditions in a Virtual Power Purchase Agreement: A Guide for Corporate Buyers

Once you've identified a renewable energy project under development that meets your organization's needs and you're ready to proceed with a virtual power purchase agreement (VPPA), you'll be presented with terms and conditions of the contract. By entering into negotiations, you are indicating your intent to procure the energy that will be generated by the project. In return, the developer of the project will usually agree not to sell that portion of energy to any other buyers for 90 days, which gives you time to review the technical information related to their facility and negotiate the legal and financial terms of the contract that are important to your organization.

The VPPA contains language specific to renewable energy procurement you may not be familiar with, so we've developed this guide to help you understand what exactly you're agreeing to. We've listed the terms by the order in which they typically appear in contracts.

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Expected Facility Capacity

Sample Legalese: [XX] MW (AC)

What It Means: This is the expected total size of the renewable facility in terms of maximum capacity (megawatts) and measured in AC (alternating current). This number is also referred to as the Nameplate Capacity.


Minimum Installed Capacity

Sample Legalese: [YY] MW (AC)

What It Means: This is the minimum Nameplate Capacity the developer commits to build. With any project, there's a risk that the developer won't be able to install as much of the project as they have committed to. The minimum installed capacity helps to mitigate that risk. If a developer hasn't achieved the agreed-upon Minimum Installed Capacity by the Guaranteed Commercial Operation Date, then the buyer has the right to cancel the contract and collect damages.


Installed Quantity

Sample Legalese: Means, as of any date of calculation, the aggregate nameplate capacity of inverters that are installed and have been Commissioned and for whichthe Facility systems have been substantially completed at the Facility and are capable of delivering Energy to the Interconnection Point in accordance with Prudent Electrical Practices. [Provided that for all purposes of this Agreement, the Installed Quantity shall not be greater than [XX] MW.]

What it means: The Installed Quantity is the actual Nameplate Capacity that the renewable energy project ends up building. So, if their Expected Facility Capacity was 100 MW, but they only built 90 MW, their Installed Quantity would be 90 MW.Additionally, if the energy project ends up building more than their Expected Facility Capacity, this section clarifies that the buyer is only purchasing a share of the Expected Facility Capacity, not more. Let's say a project's Expected Facility Capacity is 100 MW, and your agreement is for 20 percent. If the project ends up building to 200 MW capacity, you're still only agreeing to 20 percent of 100 MW.


Buyer's Share

Sample Legalese: [ZZZ]%

What it means: The percentage of a renewable energy project's energy generation that you're agreeing to purchase.


Trade Quantity

Sample Legalese: For each Calculation Interval, the Buyer's Share times the amount of Energy, in MWh, generated by the Facility and delivered to the Interconnection Point.

What it means: Trade Quantity is how we measure the amount of energy that is produced by the facility. At each Calculation Interval (typically every hour), we look at how much energy was generated by the renewable energy facility and delivered to the Interconnection Point (the point where the energy changes ownership from the seller to the grid) and multiply it by Buyer's Share to get your Trade Quantity.


Fixed Price

Sample Legalese: $[XX.XX]/MWh escalating at [Y.Y]% per year.

What it means: The price you're agreeing to pay the Seller in exchange for the associated renewable energy certificates (RECs). For companies who need a smaller cost per megawatt hour (MWh) early in their contract, we can include a smaller Fixed Price in year one with a percentage increase per year. The Fixed Price shows up as a charge on your monthly settlement.


Market Price

Sample Legalese: The [real-time] [day ahead] Locational Marginal Price (as defined and published by the Independent System Operator) at the Settlement Point, expressed in $/MWh (if the Locational Marginal Price is published for intervals shorter than the Calculation Interval, and is not published for the Calculation Interval, the simple average of prices for all intervals in the Calculation Interval shall be used). [Negative Price Floor: zero Dollars ($XX.XX) per MWh]

[The Trade Quantity shall equal zero when the Market Price is less than the Negative Price Floor (during which time, Seller shall have no obligation to produce, settle or deliver Energy or Associated Products).]

What it means: This is the price paid by the grid for the electricity generated by the project, in dollars per megawatt hour. The Market Price shows up as a credit on your monthly settlement.

The Market Price is variable each hour and can reach zero dollars and even go negative (where the project pays the grid to take the energy rather than getting paid) in some instances. Because your company wears that variable risk in the contract, we include additional language that helps protect your company.

We have two primary ways of doing this. The first we refer to as a Non-Settlement Threshold. In the event that the Market Price for energy reaches zero or is negative, no money exchanges hands-not even the agreed-upon Fixed Price-until the Market Price rises above zero again, at which point the contract resumes. In exchange, no RECs are delivered to you during this period.

Sometimes a Zero Dollar Price Floor is more appropriate. Rather than stopping the contract when the Market Price hits zero or goes negative, you as buyer still agree to pay the Fixed Price and you still receive your RECs. However, you have established a floor for your Market Price and are not responsible for the additional cost of a negative Market Price.

For example, let's say the fixed price is $30/MWh, but prices for energy hit -$20 at the facility with which you have an agreement. Without these additional terms, your company would be responsible for your $30 fixed price plus a -$20 market price or $50/MWh for that hour. But the Zero Dollar Price Floor instead says that you, the Buyer, will only ever be responsible for up to $30/MWh. This significantly decreases your company's risk, but still gives the Seller the stability they need to maintain production.


Calculation Interval

Sample Legalese: [Hourly] OR[The time interval published by the ISO with respect to settlements in the [Real-Time][Day Ahead Energy Market ([five] minutes as of the Effective Date). Buyer's selection shall not affect the Fixed Price.]

What it means: The Calculation Interval is the time period over which your Market Price is calculated and multiplied by your Trade Quantity, typically on an hourly basis.


Settlement Amount

Sample Legalese: For each Settlement Period, an aggregate amount equal to: (a) the Fixed Price Payment, defined as the amount equal to the sum of the product of (i) Trade Quantity and (ii) the Fixed Price for each Calculation Interval during each Settlement Period, minus (b) the Floating Price Payment, defined as the amount equal to the sum of the product of (i) the Trade Quantity and (ii) the Market Price, for each Calculation Interval during such Settlement Period. If the Settlement Amount is greater than zero, the Settlement Amount shall be payable by Buyer to Seller. If the Settlement Amount is less than zero, the absolute value of the Settlement Amount shall be payable by Seller to Buyer. If the Settlement Amount equals zero (0), no amount shall be payable by either Party.

What it means: This is the dollar amount at the end of each Settlement Period-typically each calendar month-that is either owed to you, the Buyer, or that you owe to the Seller. This is calculated by looking at the difference between the Trade Quantity you bought at your Fixed Price and the Trade Quantity sold to the grid at the Market Price.

If, at the end of the Settlement Period, the total volume of the energy sold to the grid at the market price sold for less than the total volume of energy you owe the seller at your Fixed Price, you will owe the Seller payment. If the opposite is true and the total value of the energy sold to the grid is worth less than the volume of energy you bought at your Fixed Price, the Seller will owe you money. If the number is equal, neither party will owe the other. These are your Settlement Amounts.


Settlement Term

Sample Legalese: Subject to early termination of the Definitive Agreements in accordance with its terms, the period from the first day immediately following the Commercial Operation Date until the [15th] anniversary of the Commercial Operation Date.

What it means: How long your contract lasts, beginning from the first day following the Commercial Operation Date.


Commercial Operation Date

Sample Legalese: The date when the following conditions have been satisfied or waived by the Parties: (a) the Installed Quantity is equal to or greater than the Minimum Installed Capacity, (b) the Facility systems have been completed in all material respects and are capable of delivering energy from such photovoltaic modules to the Delivery Point in accordance with prudent electrical practices, and (c) the Seller has issued a notice of commercial operation.

What it means: This is when the facility is officially open and selling energy on the market. This is typically the day the project starts delivering to you under the PPA as well.


Targeted Commercial Operation Date

Sample Legalese: [Month, Date, Year], subject to a day-for-day extension to the extent that the Commercial Operation Date is delayed (i) by a Force Majeure event, up to a maximum of [one hundred eighty (180)] days, [or (ii) by an Interconnection Delay, up to a maximum of thirty (30) days.]

What it means: This is the date that the facility is targeting for opening. In the event that the facility is not open by this date, the Seller has to start paying the Buyer Delay Damages for every day of delay.


Guaranteed Commercial Operation Date

Sample Legalese: The date that is the later of (a) [Month, Date, Year] and (b) [one hundred twenty (120)] calendar days after the Targeted Commercial Operation Date.

What it means: This is the date the facility guarantees it will be operational. In the event that it is not, you as Buyer can terminate the VPPA, and the Seller will owe you damages.


Settlement Period

Sample Legalese: Each calendar month during the Settlement Term.

What it means: How often the amount owed/due will be calculated and invoiced. We primarily set this as a calendar month.


Independent System Operator (ISO)

Sample Legalese: [ISO Name] ("[ISO Abbreviation]") or its successor organization in function.

What it means: This is the independent body that manages the electrical grid in the specific geographic area related to your contract. It is the entity that sets and pays the Market Price for the facility's electricity.


Delivery Point

Sample Legalese: The Facility's Point of Interconnection.

What it means: Where ownership of the facility's energy transfers to the grid.


Settlement Point

Sample Legalese: [Hub Name]

What it means: The Settlement Point is at what's called a "hub," where your Market Price is published. A hub doesn't physically exist; it is the average of hundreds of different locational marginal prices. This allows the pricing to be more stable. Settling at a hub, rather than the interconnection point of the project, will typically provide your company more stability in the Market Price.


Associated Products

Sample Legalese: Facility RECs and Environmental Attributes in amount equal to the Trade Quantity over each Settlement Period. Facility RECs and Environmental Attributes shall mean, but not be limited to, environmental, renewable energy, or green attributes generated by the Facility, of any kind or nature, current or future, whether in the form of renewable energy credits or renewable energy certificates, green tags, emissions credits or other emissions allowances similar to the foregoing. Facility RECs and Environmental Attributes shall be conveyed from Seller to Buyer and are included in the Fixed Price. Seller shall ensure that the RECs delivered to Buyer are [certified] under the Green-e National Standard Version 3.2, or its successor standard.

[Notwithstanding the foregoing, Associated Products will not include capacity rights and ancillary services benefits. Seller shall retain all capacity rights and ancillary services benefits associated with the Project and the output from the Project.] [Associated Products shall also include fifty percent (50%) of the net revenues from the sale of Additional Products, as defined in the Definitive Agreements, times Buyer's Share.]

What it means: Most companies are interested in power purchase agreements primarily for the renewable energy certificates (RECs). A REC is considered an Environmental Attribute, and at the end of each Settlement Period, the seller will directly convey these to you.

During the length of your contract, even if a new administration or bill comes along that replaces the REC concept or creates an additional product, you're still entitled to any Environmental Attributes (RECs or any concept that replaces or corresponds with them).

However, there are also additional products the project can generate that are not considered Environmental Attributes. Depending on the market, these Associated Products may stay with the Seller or go to the Buyer, and may or may not include a percentage of any new Associated Products that get created in the future.


Physical Delivery Option

Sample Legalese: At Buyer's election, the Definitive Agreements shall include a right, to be exercised not more than once per year and with at least sixty (60) day's notice, for Buyer to direct Seller (or Seller's Market Participant) to deliver the Trade Quantity for each Calculation Interval to Buyer's Market Participant at the Settlement Point, and to report such transaction to the ISO according to its Bilateral Scheduling Process ("Physical Delivery"). Such Physical Delivery period shall remain in effect until the earlier of: (i) termination by Buyer with at least sixty (60) day's notice, and (ii) the end of the Settlement Term. The Floating Price shall equal $0 during any Physical Delivery period.

What it means: We're talking throughout this document about VPPAs, where the Buyer is not buying any electricity, they're essentially buying renewable energy credits (RECs).But some Buyers who are signing a VPPA want to include the option to switch to a physical PPA in the future, where they could physically buy energy to run their businesses. A desire to switch to a physical PPA could also be desirable if there is ever a change to accounting law that could trigger adverse accounting treatment for VPPAs.


Buyer's Performance Assurance

Sample Legalese: The Parties acknowledge and agree that as of the effective date of this Agreement Buyer [has] [does not have] an Investment Grade Credit Rating. To the extent Buyer's credit rating, as determined by an established ratings agency such as Moody's or S&P, is not considered investment grade (Moody's Baa3 or S&P's BBB-or higher), Seller shall notify Buyer in writing of same and, within sixty (60) days of the receipt of same, Buyer shall provide either A) a Parent Guaranty from an entity with an Investment Grade Credit Rating or B) a letter of credit equal to [$100,000/MW] of Installed Quantity times Buyer's Share. Any amounts drawn on the Buyer's Performance Assurance shall be replenished within sixty (60) days.

fWhat it means: The Buyer's Performance Assurance outlines that if a Buyer has an investment-grade credit rating, they don't have to post any collateral in order to qualify for the VPPA contract. If that's not the case, they'll need to provide a Parent Guaranty from an entity that does have an investment-grade credit rating, or provide a letter of credit from a bank for a specific amount.


Seller's Performance Assurance

Sample Legalese: Prior to COD: Within thirty (30) days following the Execution Date of the Definitive Agreements, Seller shall be required to post a letter of credit [or a Surety Bond] equal to [$100,000]/MW of Expected Capacity times Buyer's Share (the "Seller Pre-COD Credit Amount"); and Post COD: Within thirty (30) days following COD, Seller shall be required to post a letter of credit equal to $100,000/MW of Installed Capacity times Buyer's Share from COD until the end of the Settlement Term (the "Seller Operation Credit Amount"). Seller shall have no obligation to replenish the Seller Pre-COD Credit Amount. Seller shall replenish within thirty (30) days any amounts drawn on the Seller Operation Credit Amount. ["Surety Bond" means a bond that is issued by a surety or insurance company with, in either case, a Credit Rating of at least "A-" by S&P or "A3" by Moody's, in a form reasonably acceptable to Buyer.]

What it means: The Seller's Performance Assurance establishes the financial conditions necessary for the Seller, including a letter of credit within a set time of signing the contract, and a letter of credit after Commercial Operation Date that is made available until the end of the Settlement Term (end of the contract).


Facility Guaranty

Sample Legalese: Availability Guaranty: [Ninety percent (90%)] in the first Contract Year and [ninety-five percent (95%)] in each Contract Year thereafter (the "Required Availability").

Availability Calculation: Annual Availability shall be equal to: (i) the sum of Eligible Intervals minus the sum of Unavailable Intervals, which term shall then be divided by (ii) the sum of Eligible Intervals. All such calculations shall be performed at the inverter level. Eligible Intervals shall include any interval when the Plane of Array Irradiance is greater than or equal to 100 W/m^2, except that Eligible Intervals shall exclude: (a) Force Majeure events, (b) Directed Curtailments, (c) System Emergencies, (d) intervals when the Trade Quantity equals zero, and (f) intervals that are unavailable due to actions of Buyer. Unavailable Intervals shall be limited to Eligible Intervals, and shall include intervals during which: (x) an inverter does not produce Energy, (y) the Energy produced by any inverter is less than 50% of the weighted average of the Energy generated by all inverters that generated Energy during a Calculation Interval, or (z) there is an Economic Curtailment due to a Seller offer of the Facility's output into the ISO's real-time Energy market greater than [$0]/MWh. For the sake of clarity, a Calculation Interval shall not be considered an Unavailable Interval if that Calculation Interval is not also classified as an Eligible Interval.

"Availability Damages Rate" means [$X,XXX] multiplied by Buyer's Share for each one tenth of one percent (0.1%) of Availability Shortfall. Such Availability Damages Rate shall be Buyer's sole form of compensation in the event of an Availability Shortfall (i.e., Seller shall not be required to furnish Replacement RECs).

What it means: For many corporate buyers there are accounting reasons for not wanting to define how much energy a facility must create on a monthly basis in order to hold up their end of the contract. Instead, we typically set agreements around how often the facility must be open and able to produce. We call this the Availability Guaranty.

We create calculations based on how often the facility would reasonably be able to produce to ensure the project is being well maintained. This is the Availability Calculation.

In the case that a plant is available to generate less often than Availability Guaranty stipulates, the Seller owes the Buyer damages. The calculation we use to describe this number is the Availability Damages Rate. We also set a minimum - if the Seller is available below the minimum threshold for more than two years, the Buyer is able to cancel the contract and potentially claim damages.


Delay Damages

Sample Legalese: If, on the Targeted Commercial Operation Date, the actual Installed Quantity is less than the Minimum Installed Capacity, Seller shall pay to Buyer $[250]/MW/day for each day of delay that occurs after the Targeted Commercial Operation Date and until the earlier of(a) the Commercial Operation Date and (b) thedate theDefinitive Agreements have been terminated.

What it means: In the event that the Facility is not operating with at least the Minimum Installed Capacity on the Targeted Commercial Operation Date, the Seller owes a defined amount for each day that the Seller is late. This is a daily damages charge and continues until the Commercial Operation Date or until the contract has been terminated. The Seller will have a maximum number of days in the contract they can delay before Buyer can terminate the contract.


Capacity Buydown

Sample Legalese: If by the Guaranteed Commercial Operation Date, the Commercial Operation Date has occurred but the Installed Quantity is less than the Expected Facility Capacity, Seller shall pay to Buyer shortfall damages (the "Capacity Buydown") equal to (i) the difference between the Installed Quantity and the Expected Capacity (in MW), multiplied by (ii) Buyer's Share as of such date, multiplied by (iii) [$100,000]/MW.

What it means: In the event that the facility hasn't built the capacity promised (Expected Facility Capacity) by the date of opening (Guaranteed Commercial Operation Date), the Seller must pay the Buyer damages for the shortfall. The calculation for this number is the difference between the Installed Quantity and Expected Capacity (in MW), multiplied by the Buyer's Share, multiplied by an agreed upon amount per MW.


Market Participant

Sample Legalese: Seller shall, directly or through its scheduling coordinator or a qualified third party, be the Facility's Market Participant. Seller shall be responsible for all charges associated with bidding and scheduling energy into market, including but not limited to any charges levied by the ISO.

What it means: This section clarifies that the Seller is the one who is responsible for selling the energy to market, as well as any charges associated with bidding or scheduling the energy.



Sample Legalese: Assignment of the Definitive Agreements generally requires consent of the other party, not to be unreasonably withheld. As further defined in the Definitive Agreements, either Party may, without the prior written consent of the other Party, transfer or assign all of its rights and obligations under this Agreement to an Affiliate or to any Person succeeding to all or substantially all of its assets, provided that the Performance Assurance of the assigning Party remains in full force and effect after such transfer or assignment or such Affiliate causes the delivery of replacement Performance Assurance in form and substance reasonably acceptable to the non-assigning Party. Buyer agrees that Seller can collaterally assign the Definitive Agreements to its lenders without consent, and agrees to execute customary consent to assignment and estoppel certificates to Seller's lenders and tax equity providers.

What it means: This section outlines the rules by which both the Seller and Buyer can sell their interest in the PPA or their renewable energy assets with or without consent of the other Party.



Let's chat. LevelTen Energy advisors can guide you through each stage of the power purchase agreement process, from finding a PPA that meets your needs, to getting through negotiations, and tracking results once all is said and done.


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Jessica Johnson

Jessica Johnson leads commercial negotiations for LevenTen’s buyers, providing support through the term sheet and power purchase agreement process. Jessica joined LevelTen from a 16-year tenure at Avangrid Renewables where she acted most recently as director of origination for the Western markets. Jessica received a B.A. from Bennington College in Vermont.