OPINION: Virtual PPAs in India – Are there any regulatory challenges?

With global interest in meeting net zero targat at its peak, VPPAs may essentially play an instrumental role in tiding the ongoing power crisis and add susbtantial RE capacity in India.New Delhi: VirtualPowerPurchase Agreements are one of the most preferred modes for most of the largeelectricity consumerslooking to meet net zero targets across the globe. This arrangement essentially allows the bulk consumers to support renewable energy capacity for the consumption beyond physical purchase of electricity.

India is proven lowest cost producer of renewable electricity (much lower than marginal cost of coal production) in the world. With a vibrant and liquid electricity market, the country has all the essential ingredients for becoming a hub for VPPAs.

However, the sad reality is that India is yet to see any VPPA driven project off the ground although the the regulatory tussle between regulators (CERC and SEBI) which was the primary reason affecting VPPAs has already been resolved.

There are no regulatory hurdles in entering into VPPAs in India anymore and global sustainability off-takers may seriously pursue India as market to meet sustainability requirements with no cost. To explain this, lets dig deeper into the structure of VPPAs:

A virtual PPA essentially enables an Independent Power Producer (IPP) to set up a Solar/Wind/Hybrid project for sale of electricity in the open market. Since, IPPs require long-term assured revenues to raise cheapest cost of debt, IPPs enter into a Contract for Difference arrangement (CfD) with Sustainability Offtakers. Under the terms of CfD, any upside (over and above strike price in CfD contract) realized from sale of electricity in open market is transferred to Sustainability offtaker. Further, if market price is lower than the strike price, the Sustainability offtaker supports for such difference.

While the arrangement looks quite simple, since the value of the contract is derived from sale of electricity from an underlying asset, VPPAs are quintessentially a “Derivate Contract”.

Therefore, the fundamental question is that being a “Derivative”, do VPPAs fall under jurisdiction of either CERC or SEBI? The answer is “No”. Since VPPAs do not involve physical delivery of electricity neither there these are tradeable contracts, VPPAs are out of regulatory oversight of either of the agencies.

To understand this let us dig deeper into the settlement arrived at between SEBI and CERC.

1. All ready Delivery Contracts and Non-Transferable Specific Delivery Contracts as defined in Securities Contracts (Regulations) Act 1956 in electricity, entered into by the members of the power exchanges, registered under CERC Power Market Regulations 2010 shall be regulated by CERC subject to following conditions:

Condition of SettlementApplicability on VPPAs
RationaleThe contracts are settled only by physical delivery without netting
Not applicableNo physical delivery of electricityThe rights and liabilities of parties to the contract are not transferable;Not applicableRights and liabilities are both parties are likely to be fixed (as this only shall enable project financing)
No such contract is performed either wholly or in part by any means whatsoever, as a result of which the actual delivery of electricity covered by the contract or payment of the full price therefore is dispensed with;
Not applicableVPPAs does not cover payment towards delivery of electricity; Payment under VPPAs is towards
shortfall in Strike price and market determined price for enabling cost effective green attributes
No circular trading shall be allowed and the rights and liabilities of parties to the specific delivery contracts shall not be transferred or rolled over by any other means whatsoever;
Not applicableNo specific delivery of electricity but only the Green Attribute (which does not fall under CERC)
The trading shall be done only by authorized grid connected entities or trading licensees on behalf of grid connected entities as participants;
Not applicableNo trading of electricity but direct sale in open marketsThe contract can be annulled or curtailed, without any transfer of position due to constraints in the transmission system or any other technical reason as per principles laid down by CERC in this regard. However, once annulled, same contract can not be reopened or renewed in any manner to carry forward the same transaction;
Not applicableVPPAs are out of purview as these are the risks related to sale of electricity and not the settlementAll information or returns relating to the trade, as and when asked for shall be
provided to CERC who shall monitor the performance of the contracts entered into the power exchanges. Not applicableNo reporting to CERC is required for
transactions in VPPAs


2. Commodity Derivatives in the electricity other than Non Transferable Specific Delivery Contracts as defined in SCRA shall fall under the purview of SEBI

As per Clause 18A of the SCRA 1956, the Act covers only for contracts which are traded on a recognized stock exchange and settled in a clearing house.

18A. Notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are (a) traded on a recognised stock exchange; (b) settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchange.

Since VPPAs are not traded instrument but only a bilateral arrangement between Generator and Sustainability Offtaker, these are out of purview of the SEBI also.

To further, understand regulatory clarity, lets review CERC Power Market Regulations 2010 and CERC Power Market Regulations 2021

Clause 8 of CERC Power Market Regulations 2010 provides that:

Notwithstanding anything contrary contained in these Regulations, no person shall enter into or transact in any of the following types of contracts unless the same has been permitted to be so launched or introduced by the Commission in terms of notification issued in this behalf – (i) Derivatives Contracts; (ii) Ancillary Services Contracts (iii) Capacity Contracts.

There was a blanket prohibition on any kind of Derivate Contracts in India.

However, CERC Power Market Regulations 2020 which supercedes to previous regulation is completely silent on ‘Derivate Contracts”. In fact, recognizing the settlement, CERC has made Power Market Regulations 2020 only for physical delivery of the electricity (Clause 4 of the Regulations).

Accordingly, there is no regulatory ambiguity for entering into VPPAs in India. With global interest in meeting net zero target at its peak, VPPAs may essentially play an instrumental role in tiding the ongoing power crisis and add substantial RE capacity in India.

[This piece was authored by Aditya Malpani, Regional Head – West & Director – Open Access at Amp Energy India]