REPORT
Reprinted with permission from Futures and Derivatives Law Report , Volume 44 , Issue 7 , K2024 Thomson Reuters . Further reproduction without permission of the publisher is prohibited . For additional information about this publication , please visit https :// legal . thomsonreuters . com /.
July / August 2024 ▪ Volume 44 ▪ Issue 7
The Journal on the Law of Investment & Risk Management Products
Futures & Derivatives Law
VIRTUAL PPAS : FORWARDS MASQUERADING AS SWAPS
By Michael Brooks and Caroline Sinegar , Bracewell LLP
Michael Brooks focuses his practice in the areas of energy , commodities and derivatives law , representing companies in a wide variety of commercial , regulatory , compliance and enforcement matters . Caroline Sinegar advises clients on regulatory , litigation , enforcement and policy matters across the energy industry . During law school , she served on The George Washington Law Review .
The Commodity Futures Trading Commission (“ CFTC ” or “ Commission ”) has explicitly recognized that contracts for intangible , non-financial commodities , including environmental commodities , can qualify for the forward contract exclusion if physical delivery is a predominant feature of the contract . 1 However , the historical characterization of “ virtual ” power purchase agreements (“ PPAs ”) as contracts-for-differences , and therefore swaps , has led the industry to report most virtual PPAs as swaps even when the predominant feature of many virtual PPAs is the deferred physical delivery of renewable energy certificates (“ RECs ”).
This article considers the scope of the forward contract exclusion and discusses its potential application to virtual PPAs . Section I discusses virtual PPAs and describes a transition from contracts primarily used as power hedging agreements to agreements primarily for the purpose of the purchase and sale of RECs . Because little has been written about the history of virtual PPAs , this section is based largely on the authors ’ personal experience . Section II considers the scope of the forward contract exclusion by ( i ) examining courts ’ attempts to define futures contracts and contrast forward contracts , ( ii ) exploring the CFTC ’ s application of and interpretative guidance regarding the exclusion , and ( iii ) drawing parallels from the CFTC ’ s guidance regarding “ actual delivery ” in the context of digital assets . Finally , Section III applies the concepts discussed in Section II and concludes certain virtual PPAs qualify for the forward contract exclusion and therefore should not be regulated as swaps .
I . Introduction : Virtual PPAs as RECs Purchase and Sale Agreements
Over the past 10 or more years , there has been a shift in the United States from traditional PPAs that involve physical delivery of electricity to synthetic or virtual PPAs , which do not require physical delivery of electricity but often may involve the physical delivery of the associated environmental attributes . This shift from traditional PPAs to virtual PPAs has paralleled an increase in corporate offtakers and the displacement of utility offtakers . At the same time , the primary
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