Virtual Purchase Power Agreements (VPPA’s) – Tax considerations

The conclusion of Power Purchase Agreements (“PPA’s”) has been on the rise during the past years as large multinationals commit themselves to reduce their ecological footprint globally. These contracts are concluded for a long period (usually 10 to 15 years) between developers of renewable energy and (large or industrial) consumers whereby the consumers agree to purchase electricity at a predetermined price over a set period of time. Depending on whether or not the market price exceeds the predetermined price, the consumer will receive the positive difference or has to pay the negative difference.

A variant of this agreement, Virtual Power Purchase Agreements (“VPPA’s”), has recently been emerging and has as major difference that the physical delivery of the electricity, which is injected by the developer of renewable energy into the grid and consumed by another party than with whom the VPPA has been concluded, is decoupled from the financial settlement. In exchange for the payments for the electricity the consumer receives renewable energy certificates (“REC’s”) or guarantees of origin (“GO’s”) from the developer of renewable energy which certify that the electricity is generated from renewable energy sources and allow the consumer to claim the environmental attributes of the purchased renewable energy.

As a result of the decoupling of the physical flow of the electricity and the financial settlement the tax considerations, both for the developers of renewable energy (“suppliers”) and the large or industrial consumers (“customers”), can be very complex and may largely differ depending on the actual circumstances and the precise contractual set-up.
 

Suppliers

• Have you already considered that the VAT treatment to be applied on the issuance and distribution of REC’s or GO’s may differ across countries?
• Have you considered that a rejection of input VAT deduction, increased with penalties and late payment interests imposed, in the hands of your customer (due to incorrect invoices), may lead to adverse consequences for the commercial relationship?
• Have you considered that the physical supply of electricity to consumers in Belgium is subject to excise registrations and potentially the payment of excise duties? That there may be the possibility to exempt the supply of electricity from excise duties to the extent that renewable nature is guaranteed and certain conditions are being met?
  
  

Customers

• Have you already considered that the provision of a price guarantee is exempt from VAT and may have an impact on the right to deduct input VAT? That there may be arguments to defend that the revenue of this service should not be taken into account when determining the level of input VAT deduction?
• Have you already considered that the purchase of the REC’s or GO’s potentially may lead to a VAT registration requirement when the contracts are structured in such a way that the GO’s are acquired by a non-VAT registered finance company within the group?
• Have you considered the impact of future new taxes on the contract pricing and whether the contracts allow to pass on these taxes in the supply chain when redistributing the REC’s or GO’s within the group?
• Have you considered that transfer pricing rules may come into play when costs are recharged between companies established in different jurisdictions?

Based on our experience and the high amounts at stake, we highly recommend to verify the applicable tax considerations in order to avoid potential considerable tax risks and VAT leakage in the framework of such agreement.

Please feel free to reach out to us for any questions. Upon your request, we would be happy to set up a call to discuss the tax considerations for your set-up and see how we could optimize to avoid any adverse consequences.