July / August 2024 | Volume 44 | Issue 7 Futures and Derivatives Law Report value and purpose of PPAs has increasingly become the associated environmental attributes more than the electricity output or the hedging of electricity prices .
Whereas traditional utility off-takers are in the business of making and taking physical delivery of power in wholesale markets , can anticipate consistent and contiguous load , and might even be forced to purchase electricity from Qualifying Facilities ( QFs ) pursuant to the Public Utility Regulatory Policies Act of 1978 , corporate offtakers historically have lacked the experience and / or interest in owning and scheduling electricity in wholesale markets , may have highly variant and geographically decentralized consumption , and may prefer to avoid participating in the physical wholesale markets subject to the regulations of the Federal Energy Regulatory Commission (“ FERC ”).
The virtual PPA became an attractive alternative as corporate end-users began to see opportunities to hedge electricity costs and potentially reduce their carbon footprint but were not interested in receiving intermittent electricity at a single location ( often not near the off-taker ’ s load centers ). Rather than purchasing the output and physically scheduling it or trading it for energy delivered to the corporate end-user ’ s various locations , the virtual PPA enabled the off-taker to fix energy prices ( subject to basis risk ) and obtain the environmental attributes of the renewable energy produced without having the inconvenience of receiving electricity at inconvenient locations .
With this backdrop , virtual PPAs have often been characterized as contracts-for-differences or financial hedges . Over time , although virtual PPAs have continued to be drafted and characterized by the industry as though they are contractsfor-differences and financially settled electricity contracts , the primary purpose of virtual PPAs today often seems to be the purchase and sale of the associated environmental attributes such as RECs . In fact , although the financial terms of virtual PPAs can resemble a contract-fordifferences with the off-taker paying a fixed price and receiving a market-based index price based on the output of the resource , this fixed-for-float pricing may be better understood as reflecting the value of the RECs . That is , the RECs are purchased at a fixed price minus the value of the associated energy , which will be sold separately .
II . Futures , Swaps , and Forward Contracts
The Commodity Exchange Act ( the “ CEA ”) grants the CFTC exclusive jurisdiction over , inter alia , transactions involving “ contracts of sale of a commodity for future delivery ” and “ swaps .” 2 The CEA does not define “ contract [ s ] of sale of a commodity for future delivery ” ( i . e ., futures contracts ) but does define “ future delivery ” to exclude “ any sale of any cash commodity for deferred shipment or delivery .” 3 This exclusion is commonly referred to as the “ forward contract exclusion .”
The CEA defines the term “ swap ,” but the definition is so broad that its limits often are best understood by reference to enumerated exclusions , including the exclusion of “ any sale of a nonfinancial commodity or security for deferred shipment or delivery , so long as the transaction is intended to be physically settled .” 4 This exclusion is recognized as another expression of the forward contract exclusion . 5 In the Swaps Definition Final Rule , the CFTC announced its intent to apply the forward contract exclusion to swaps
2 K 2024 Thomson Reuters