Virtual PPAs

Challenges and potential benefits

By Gurpreet Chugh, Managing Director, India; and Sushmita Ajwani, Director, Power and Renewable, ICF International

The Government of India, as a part of its Climate Action Plan, has set an ambitious target of 450 GW by 2030. In August 2021, India achiev­ed the 100 GW installed renewable energy milestone, with another 75 GW at, various stages of implementation, however, there is still a long way to go. To fast-track the ac­hie­vement of the 2030 target, the ad­option of renewables by the co­m­­mercial and industrial (C&I) segment will be vital, as they account for almost half of the total electricity consumption.

Today, C&I consumers have a str­ong incentive to switch to renewable power given the dual benefits of cost savings and sustainability. As of March 2021, India had signed close to 17 GW1 of corporate rene­w­­able energy capacity, which is almost 5 per cent of the total C&I demand. Today, power sector regulation allo­ws only physical power purchase agreements (PPAs), including offsite, onsite, captive, group captive and bilateral PPAs. Phy­sical PPAs require real-time accounting between generation and consumption. Hence, they have the ability to replace 40-50 per cent of the total power consumed by the C&I segment during a year. Further, C&I consumers have fragmented demand, which is difficult to consolidate in the current open access re­gi­me, as each state has its own regulation and accounting framework. Therefore, there is a clear need for an innovative model that will facilitate renewable energy procurement.

Globally, virtual PPAs (VPPAs) have emerged as a popular tool for corporate groups to increase their consumption of renewable power. Large corporate groups like Microsoft, Google and Amazon have successfully adopted this instrument. VPPAs have a strategic advantage over many other procurement ins­truments, particularly because they are less impacted by the changing power sector regulations (which affect most of the physical PPAs in India today). VPPAs provide the benefits of demand aggregation and savings, which are not possible in the case of renewable energy certificates (RECs).

VPPA

A VPPA is a financial instrument signed between a generator and a consumer through a bilateral contract outside the po­wer market. Under this contract, no physical transaction of po­wer takes place between the signatories. The generator sells the power in the power exchange and transfers the green attributes to the consumer with whom it has signed the VPPA. Since VPPAs do not involve physical trading of power between the generator and the consumer, it does not disrupt the existing relationship between the consumer and the distribution company.

In a VPPA, the strike price is agreed between the generator and the consumer. This strike price is compared with the real-time prices in the power exchange where the generator is selling the physical power. The difference between the strike price and the price in the real-time market needs to be settled between the consumer and the generator. For instance, if the agreement is signed at Rs 3 per kWh but the price during actual trading was Rs 4 per kWh, then the generator needs to compensate the con­sumer for the difference, Rs 1 per kWh (outside the market transaction). Similarly, if the power was traded at Rs 2 per kWh, then the consumer would pay Rs 1 per kWh to the generator. This kind of settlement is called contracts for difference or “fixed-for-floating swap”.

Challenges

It is estimated that the total demand of VPPAs in India may be in the range of 20-90 GW by 2030 based on ease of regulatory compliances. This would help in meeting 5-20 per cent of the 450 GW renewable energy target. The biggest risk in the adoption of VPPA is the ambiguity in regulatory jurisdiction bet­ween the CERC and SEBI (to monitor the instrument in power markets). As per the MoP’s committee on “Efficient Regulation of Electricity Derivatives”, 2019, it was agreed that the physical transaction of power will be regulated by the CERC and the financial transaction of power will fall under the purview of SEBI. The Supreme Court on October 7, 2021, gave a legal go-ahead to this suggested arrangement, opening the gateway for power derivatives in India. However, this order has not fully resolved the jurisdictional issue of a VPPA. A VPPA is a non-tradable instrument and can be called a borderline case bet­ween physical and financial transactions. Therefore, the following questions are still unanswered:

  • How SEBI will and the CERC jointly monitor this instrument as physical transaction of power needs to be monitored by the CERC and financial settlement by SEBI?
  • How will the RECs be issued directly to the consumer in a VPPA transaction?
  • In case conflicts arise due to physical or financial transaction of power, how will arbitration be done keeping in view the interest of SEBI and the CERC?

Separately, there are issues related to its actual roll-out. These are:

  • Will VPPAs get long-term or short-term open access? The cost of long-term open access is very high, whereas in short-term open access there is a high risk of curtailment.
  • What are the compliances a consumer and a developer need to meet to enter into a VPPA?

Conclusion

VPPAs undoubtedly have a large potential in the Indian power market given the benefits it accrues to the consumer, developer, discoms and the government without creating any conflicting situation for open access corporate renewable energy PPAs. To ensure that there is ease of adoption, clear guidelines need to be defined, outlining the role of the CERC and SEBI. It is also important that the adoption of VPPAs is not espoused by heavy documentation and compliance activity. Therefore, an easy mechanism for clearance and declaration needs to be devised. Given that there are two large regulatory institutes involved, it is important for the MoP to intervene and guide the way forward to ensure its early roll-out.

 

  1. India Corporate Renewable Brief, Q1 2021, Bridge to India

 

 

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