Virtual PPA Market Yet to Gain Traction Amid Regulatory Confusion

VPPA market was opened in October 2021 after the SEBI-CERC dispute was settled


Almost a year after a jurisdictional dispute involving two regulators was settled, virtual power purchase agreements (VPPA) have not quite hit the ground running despite their promise.

VPPAs, which don’t involve any physical exchange of electricity, offer unique opportunities to earn renewable attributes for commercial and industrial consumers not in proximity to renewable energy sources.

These agreements are purely in the domain of bilateral financial transactions, which are designed to provide consumers with renewable attributes like renewable energy certificates (RECs) along with possible earnings on the exchange through the sale of power. They also help developers hedge against fluctuations in the electricity market.

“This VPPA market was just opened in October 2021 after the Supreme Court settled a dispute between SEBI and CERC. The market needs time to understand and respond. We need to create awareness among the consumers and observe their responses closely,” Rahul Tyagi, Associate Director at Amp Energy, said.

CERC and SEBI had moved to the Supreme Court to ascertain who would regulate electricity derivatives trading. The apex court ruled that electricity will now be traded as other commodities with forward contracts and derivatives on exchanges.

SEBI and CERC finally agreed that CERC would regulate all the physical delivery-based forward contracts, whereas SEBI would regulate the financial derivatives.

What is a VPPA?

A VPPA is signed between a renewable developer and a consumer primarily seeking RECs or green credits without disturbing the current power purchase arrangements. Under the arrangement, a fixed price per unit of electricity is agreed upon. If the units traded on the market are above the fixed price, the consumer pockets the difference. And if units are sold below the agreed price, the buyer makes up for the balance, thus ensuring developers’ return on investment is protected.

As derivative contracts do not involve any physical transfer of power, VPPAs can bypass many open access regulations. “VPPAs can help consumers procure renewable energy over and above what the OA regulations allow, which is typically 50-70% of total energy requirement, depending on individual states. However, with VPPA, the consumer can achieve 100% of energy needs through renewables,” Jay Kumar Waghela, Head – Business Development (West), Fourth Partner Energy, said.

However, VPPAs have not gained traction because the consumers are at a stage where they are aiming to replace the energy only up to the limit allowed as per state regulations, Waghela said.

Moreover, consumers’ interest in VPPAs is also dependent on the state of the electricity market, which still lacks depth. According to recent data by CERC, only 10.6% of the country’s annual electricity consumption was traded on the short-term market in 2020-21.

Further, VPPAs can create a settlement framework for the power sold on the exchanges but do not provide any compensation to the generators if the energy finds no takers in the open market. “This uncertainty is a hindrance even for the developers to get finance for their projects, and financial agencies will be hesitant due to lack of guaranteed cashflow,” Ambrish Kumar Khare, Vice President & Head of Business Development, Power Exchange India, said.

Khare explained: “For example, if the VPPA is signed for ₹4 (~$0.049)/kWh, the green attribute might be valued at ₹2.50 (~$0.031)/kWh, and the brown power will be valued at ₹1.50/kWh. If the brown power is sold for ₹2 (~$0.025)/kWh, then the offtaker will get ₹0.50 (~$0.0062)/kWh. If the power is sold for less than ₹1.50 (~$0.018) /kWh, the offtaker will compensate for the shortfall. However, there is no  undertaking from the offtaker about any compensation for what would happen if the brown power goes unsold.”

He added that in the case of unsold power, the generator is left with stranded power, which needs addressing before VPPA can become attractive to consumers.

Commenting on the scope of VPPA in India, Srini Viswanathan, CEO at Vibrant Energy, said, “VPPA could mean different things in India, unlike in the U.S., where it’s a Contract for Difference (CfD) for derivative trading. However, our regulations have just started to evolve, and we are yet to receive clarity on regulations for using the CfD route.”

“A VPPA contract could also be about buying just the green attributes from the developers. These types of pacts will bring additionalities into the sector and attract funding in the Indian market,” he added.

VPPAs promise to significantly increase the uptake of renewables in the Indian market. However, certain regulations must be clarified, particularly those relating to swap contracts, renewable energy certifications, and open access approvals. As consumers look for various ways of obtaining green attributes, the VPPA regime would come into the picture and become more attractive as the rough edges around regulatory and other issues are worked out.