The Central Electricity Regulatory Commission (CERC) has issued guidelines for virtual power purchase agreements (VPPAs), introducing a regulatory framework for an alternative renewable energy procurement mechanism that allows consumers to meet their renewable consumption obligation (RCO).

By allowing large electricity consumers to meet renewable energy consumption mandates through a financial hedging mechanism without the need for physical power delivery, the framework is expected to increase corporate participation in renewable energy procurement, improve price certainty for developers, and support faster renewable capacity addition.

With the regulatory framework in place, VPPAs are expected to emerge as an important compliance and risk-management tool as India advances toward a cleaner and more flexible electricity system.

In October 2023, the government notified mandatory minimum shares of non-fossil energy consumption for designated consumers. These RCO targets apply to a wide range of entities, including electricity distribution licensees, open-access consumers, and captive power users. Any shortfall in meeting the specified targets is treated as non-compliance and attracts penalties.

Until now, compliance options have largely been limited to direct renewable energy consumption or the purchase of renewable energy certificates (RECs). CERC observed that internationally, VPPAs have emerged as an effective tool for renewable energy deployment and compliance, prompting the decision to develop a similar mechanism for the Indian power market.

Regulatory Jurisdiction

Given the financial characteristics of VPPAs, CERC sought regulatory clarity from the Securities and Exchange Board of India (SEBI). In its response, SEBI stated that VPPAs are bilateral, non-tradable, and non-transferable over-the-counter contracts. SEBI further clarified that if such contracts are treated as non-transferable specific delivery (NTSD) contracts, they do not fall under the purview of the Securities Contracts (Regulation) Act, 1956.

Based on this clarification, the regulatory oversight of VPPAs rests with CERC. Subsequently, the Ministry of Power requested that the CERC put in place a suitable regulatory framework to facilitate RCO compliance through VPPAs.

Definition and Structure

Under the guidelines, a VPPA is defined as a non-transferable, specific delivery-based over-the-counter contract entered into between a consumer or designated consumer and a renewable energy generating station. The consumer guarantees payment of a mutually agreed VPPA strike price for the duration of the contract.

The renewable energy generator sells the electricity produced through a power exchange or any other mode authorised under the Electricity Act, 2003 or the Power Market Regulations, 2021. Such sales are explicitly excluded from being counted toward Renewable Purchase Obligation (RPO) or RCO compliance. Instead, the financial settlement between the parties is based on the difference between the VPPA strike price and the market-discovered settlement price.

CERC has specified that electricity generated under a VPPA must be sold through authorized market mechanisms for physical delivery, while the RECs issued to the generating station must be transferred to the consumer or designated consumer entering into the agreement. The agreements are strictly bilateral, non-tradable, and non-transferable. Each VPPA must have a minimum contract duration of one year.

Contractual Arrangements

Consumers or designated consumers may enter into VPPAs with renewable energy generating stations on mutually agreed commercial terms. The renewable generators must be registered in accordance with the CERC Renewable Energy Certificate Regulations, 2022.

While the electricity component of the transaction is sold in the market, the associated RECs are transferred to the consumer, who may use them to meet RPO or RCO compliance requirements. The guidelines clearly state that RECs transferred under a VPPA are not eligible for trading.

In the event of a change in ownership of the renewable energy generating station, the responsibilities under the VPPA must be transferred in accordance with applicable laws, ensuring continuity of contractual obligations.

Payment Structure

The payment structure under a VPPA follows a contract-for-difference model. Renewable energy generators sell electricity at prevailing market prices through authorized market platforms. The difference between the market settlement price and the VPPA strike price is settled bilaterally between the contracting parties, based on the terms agreed in the contract.

Treatment of RECs

The guidelines clarify that renewable energy capacity contracted under a VPPA remains eligible for RECs, subject to compliance with the REC Regulations. To avoid double-counting, renewable generators must submit an undertaking to the REC Registry specifying the capacity contracted under a VPPA.

Once transferred to the consumer or designated consumer, the RECs are used exclusively for RPO or RCO compliance and are extinguished after use. Any excess certificates beyond annual compliance requirements may be carried forward to subsequent years. All transfers and uses of RECs must be communicated to the REC Registry and the National Load Despatch Centre for record-keeping.

Dispute Resolution

Any disputes arising from a VPPA must be resolved mutually by the contracting parties in accordance with the terms of the contract.

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