Virtual Agreements, Real Change

What the heck is a Virtual Power Purchase Agreement?

At first hearing, it sounds like a theoretical construct that resides only in the mind.

But, in fact, VPPAs are very real. And they’re beginning to have a tangible impact on Toyota’s efforts to eliminate the carbon footprint of its North American manufacturing plants in keeping with the Toyota Environmental Challenge 2050.

“This is a concept that’s been around for about 15 years, but it’s new for us,” says Kevin Butt, TMNA’s director of environmental sustainability. “We anticipate VPPAs will play a leading role in helping to increase the supply of emissions-free sources of energy.”

Case in point: A VPPA signed in December calls for Toyota to guarantee the purchase of enough power going forward to help Clearway Energy Group secure the funding it needs to begin constructing a 110-megawatt wind farm in West Virginia later this year.

If that sounds complicated, it is. Hopefully if you read on, it will begin to make a bit more sense.

How Does It Work?

To grasp what Butt refers to as “a globally recognized financial instrument,” start by visualizing the power grid that distributes electricity to households and businesses throughout the country. The flow of electrons on this grid is generated by a wide array of power companies through various means. They could burn fossil fuels, such as coal or natural gas. Or they could opt for renewable and carbon-free sources, such as wind and solar. Increasingly, companies like Toyota are driving demand for the latter out of the need to operate in a more sustainable manner — environmentally, politically and financially.

But ramping up renewable energy generation requires a huge capital investment that can take many years to pay off. Companies that might want to pursue this business opportunity need more than a vague promise of a stable market for their output. They need the ironclad assurance that only a VPPA can give.

“Nearly all the power that’s consumed in this country is currently purchased an hour or a day in advance,” says Butt. “What we’re doing with a VPPA is making a commitment to buy power from the system owner to offset electricity Toyota will need for several years. That gives the renewable energy producers the backing they need to get the financing to expand their operations. In return, we receive the Renewable Energy Credits that accompany the electricity we need to offset our carbon footprint.”

Now, this doesn’t mean that Toyota is agreeing to use directly, say, the output of the wind farm in West Virginia. Rather, when Clearway Energy Group’s new operation is fully up and running, the electricity it produces will end up on the same grid we buy electricity from — displacing the electricity currently being generated by fossil fuels. This is why these agreements are referred to as being “virtual.”

Will It Make a Difference?

Yes, but it will take time to complete the transition to renewable energy.

For example in February, Toyota signed an agreement and is waiting on approval from the Kentucky Public Service Commission that would ensure that — by early 2022, if not sooner — 22 percent of Kentucky Utilities’ power provided to our Georgetown operations will be renewable. Currently, coal accounts for 93 percent of Kentucky Utilities’ output. That should help Kentucky begin to catch-up with the renewable generation already in place in other states. Nationwide, renewable sources now produce nearly as much electricity as coal.

“This is an agreement to purchase the equivalent of more than half of the power to be produced by a 100-megawatt solar panel array over the next 20 years,” says David Absher, senior manager of environmental sustainability. “This is historic. It’s the first time renewable energy at this scale will be available in Kentucky.”

On a smaller scale, in California, Toyota has entered into a Hydrogen and Power Purchase Agreement with the Port of Long Beach that’s helping to establish a plant that will generate hydrogen from biomass. Doing so will help to make this project economically viable, while it fuels a pilot fleet of commercial trucks that incorporates Toyota’s hydrogen fuel cell powertrain.

Bottom line: Toyota is a force for good on this front. These actions, and others like them, will help to usher in a new era in energy production that is carbon-free and renewable.

“We’re starting to embrace this strategy in a big way,” says Butt. “The West Virginia project, alone, will offset 8 percent of our carbon footprint in North America. The Port of Long Beach project is much smaller. But it’s very innovative and important as it will operate in one of the worst air quality districts in the country.

“There’s a lot going on here,” he adds. “But we will need to do more. These things can take years to fully develop.”

By Dan Miller