Background
For nearly a decade, energy sector stakeholders in India, particularly renewable energy (RE) generators and their investors, have sought regulatory clarity and certainty on entering into virtual power purchase agreements or VPPAs. For a long time, the issue remained unresolved due to lack of clarity on whether the SEBI or the CERC is empowered to exercise jurisdiction over VPPAs. In October 2021, this jurisdictional issue was resolved, pursuant to settlement terms (formulated by the Ministry of Power) agreed between the SEBI and CERC, under which CERC has jurisdiction to regulate ready delivery and non-transferable specific delivery contracts in electricity, involving physical delivery of electricity, and the SEBI has jurisdiction to regulate commodity derivatives in electricity, other than non-transferable specific delivery (NTSD) contracts. Despite the settlement terms recorded in a Supreme Court order, the regulatory uncertainty around VPPAs continued to persist. On May 22, 2025, the CERC issued “Draft Guidelines for Virtual Power Purchase Agreements” (hereafter “VPPA Guidelines”), seeking public comments.
What is a VPPA?
A virtual power purchase agreement or VPPA, as the name suggests, is a contract between an electricity generator and a buyer, which does not involve physical delivery of electricity to the buyer. Instead, the generator has the liberty to sell physical electricity on the power exchanges (as brown or grey power) and the buyer pays the generator a fixed price for each unit of electricity sold under the contract. The buyer is primarily interested in green attributes (or sustainability benefits) of the electricity produced by the generator and compensates the buyer if it receives a lower realisation from sale of physical electricity. The generator obtains a long-term stable revenue source (akin to a normal power purchase agreement involving physical delivery of electricity) and can set up new generation plants basis this long-term revenue source. This form of PPA is particularly useful for corporate energy buyers with multiple consumption centers, aiming to achieve their GHG emission targets.
Scope of VPPA and VPPA Price
The VPPA Guidelines define VPPA to mean NTSD based OTC contracts entered into between a ‘Consumer’ or ‘Designated Consumer’ and an ‘RE generator’. The VPPA Guidelines provide complete flexibility to the parties to agree on a VPPA price (which could include either a fixed price or a price determined by a formula linked to price at the power exchanges). However, the requirement for a ‘Designated Consumer’ (incidentally, the definition of ‘VPPA’ omits ‘Consumer’, which appears unintentional) to guarantee payment of VPPA price may be interpreted by market players to include a mandate for RE generators to provide a separate payment security instrument, which appears unintentional and avoidable.
‘VPPA Price’ is linked to price of ‘electricity’, as mutually agreed between the parties. Conceivably, VPPA Price could be designated as price of RECs or other green attributes (GAs) as determined by the parties, and to this extent the definition of VPPA Price should be tweaked to include price of electricity or GAs.
Who are covered?
The VPPA Guidelines apply to a Consumer or a Designated Consumer and RE generators. “Consumer” is defined in the Electricity Act, 2003 (“EA”), to mean any person who is supplied with electricity for his own use, i.e., an end-user. “Designated Consumer” is defined in the Energy Conservation Act, 2001 (“ECA”), to mean class of energy users in energy intensive industries as specified in the ECA. Such energy intensive industries include steel, aluminum, cement, sugar, petroleum and petrochemicals, etc. However, given the broad definition of Consumer under the EA, it may not be necessary to separately include Designated Consumers within the scope of the VPPA Guidelines. In addition, it is unclear whether a person who is not a Consumer or Designated Consumer (for example, foreign entities who are not end-users of electricity in India), can enter into VPPAs with an RE generator in India.
The lack of a definition for “RE generator” may create confusion regarding eligibility to enter into VPPAs. This should be clarified by adding a separate definition of “renewable energy sources” to include solar, wind, hydro, biomass, energy storage solutions, etc., on the lines of definition contained in the CERC (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022 (“REC Regulations”), to not limit the scope of RE generators who could enter into VPPAs.
Tenor of VPPAs
Paragraph 5.1 of the VPPA Guidelines requires entering into a long-term VPPAs with RE generators. This could cause unnecessary and avoidable confusion among market participants about the meaning of ‘long-term’. In any event, it would be appropriate for the parties to determine the tenor of VPPA, just as they reach a mutual agreement on the VPPA price.
Whether REC registration is mandatory?
VPPA Guidelines mandate registration of the RE project under the REC Regulations, and transfer of the RECs to the Consumer or Designated Consumer against settlement of payment under the VPPA. While RECs may be used for meeting renewable consumption obligation (RCO) targets, there are other methodologies that entities use globally to meet their net zero and sustainability commitments, including I-RECs, voluntary emission reduction (VERs), carbon credits and the VPPA itself (without any attribute transfer). The mandatory requirement of registration of RE projects under the REC Regulations needs to be revisited and it should be clarified that RE projects may register for RECs in India or, for any green energy attributes programme available worldwide. This would allow market participants more flexibility and expand the pool of available buyers beyond the Designated Consumers under the VPPA. Interestingly, the Bureau of Energy Efficiency (BEE) recently published a draft notification, setting out the greenhouse gas emission intensity (GEI) targets for around 173 energy intensive establishments in the country. These establishments are intended to be covered under the first phase of compliance market under the Indian Carbon Credit Trading Scheme, 2023 (CCTS). The VPPA Guidelines need to be integrated with the CCTS to enable RE generators to register for carbon credits, which would provide greater commercial flexibility to VPPA participants and expand the market depth to attract new participants in the sector.
Form of Regulatory Framework
Lastly, the regulatory framework for the VPPA has been characterised as “guidelines” rather than “regulations”, which is the usual framework for CERC to notify regulatory framework for power market development. It appears that the VPPA regulatory framework may have been designed as “guidelines” to signal to market participants that these are guidance or clarifications but not intended to be mandatory. However, this ambiguity on the form and status of VPPA regulatory framework is not desirable since there are provisions in the VPPA Guidelines that may be seen as mandatory. If the intent of the regulatory framework is to provide clarity and certainty to market participants, then they ought to know which provisions are mandatory, and which provisions are to be treated as guidance alone.
Conclusion
In conclusion, the VPPA Guidelines are a welcome addition for deepening India’s renewable energy sector, and would be an additional tool to help the country achieve its ambitious decarbonisation agenda, including the target of 500 GW of installed RE capacity by 2030. The VPPA Guidelines provide regulatory clarity and certainty for entering into VPPAs. Most importantly, it would enable development of new revenue sources for RE generators and ensure greater bankability of merchant RE projects whose primary revenue source is the price of green attributes instead of electricity.
For further information, please contact:
Ramanuj Kumar, Partner, Cyril Amarchand Mangaldas
ramanuj.kumar@cyrilshroff.com
