Virtual power purchase agreements (VPPAs) are an important tool for accelerating renewable energy adoption, driving the decarbonisation of commercial and industrial operations, and supporting organisations in achieving their renewable energy goals. They are particularly relevant for markets like India, which are transitioning toward open, market-based electricity systems. VPPAs enable consumers to support clean energy generation without any physical transfer of power between signatories. Through a financial contract, consumers can hedge against power price volatility, meet sustainability goals and comply with renewable energy consumption obligations (RCOs). In a step towards enabling VPPAs in the country, the Central Electricity Regulatory Commission (CERC) recently issued draft guidelines for VPPAS and invited stakeholder comments.
Background
To recall, in October 2023, the central government, in consultation with the Bureau of Energy Efficiency, issued new guidelines under the Energy Conservation Act, 2001. It introduced RCOs, which mandate minimum levels of renewable electricity consumption by designated consumers. Specific RCO targets vary depending on the type of consumer, such as distribution licensees, open access users and captive consumers, and are based on their overall electricity consumption. Currently, these targets can be met either through the direct consumption of renewable energy or by purchasing renewable energy certificates (RECs). International practices highlight that flexible, market-based mechanisms such as VPPAs can help in meeting RCO targets.
Since VPPAs are over-the-counter (OTC) contracts that are bilateral, non-tradable and non-transferable in nature, these are classified as non-transferable specific delivery agreements. As such, they do not fall within the definition of securities under the Securities Contracts (Regulation) Act (SCRA), 1956. Consequently, the regulatory responsibility for VPPAs lies with the CERC, and they do not come under the Securities and Exchange Board of India’s oversight.
Overview of the CERC’s draft guidelines for VPPAs
VPPA structure and REC transfer: As per the CERC guidelines, a designated consumer may enter into a long-term bilateral VPPA with a renewable energy generator at a mutually agreed price. The renewable energy generator can sell electricity through power exchanges such as the day-ahead market and the real-time market, or any mode authorised under the Electricity Act, 2003. The RECs generated from these sales are transferred directly to the consumer, which can be used to meet RCO targets or to claim green attributes. However, these RECs cannot be traded further.
Implementation and payment mechanism: The guidelines state that VPPAs can be signed directly between the parties, through a trader or be listed on an OTC platform registered with the CERC. The renewable energy project involved must be registered in accordance with the REC Regulations, 2022, or any subsequent amendments. Regarding payment, the renewable energy generator sells electricity at the prevailing market price, and the difference between the VPPA price and the market price is settled bilaterally between the contracting parties, based on mutually agreed terms.
REC handling and dispute resolution: The renewable energy capacity contracted under a VPPA is eligible for the issuance of RECs. Upon receipt, the consumer or designated entity must notify the REC Registry to extinguish the certificates. These RECs can be used exclusively for RCO compliance or for claiming green attributes. Any disputes arising from the VPPA are to be resolved mutually by the contracting parties as per the agreed terms.
VPPAs: A market-based tool
VPPAs are innovative financial contracts between renewable energy generators and designated electricity consumers. Unlike traditional PPAs, these do not involve the physical delivery of electricity. Instead, the renewable energy generator sells power in the open market, while the consumer pays a pre-agreed VPPA price. The difference between this price and the market price is settled between the two parties, making it a flexible tool for promoting renewable energy investment.
Arun Goyal, former secretary, Government of India, and former member, CERC, explains, “Simply put, a VPPA is a financial agreement between a corporate buyer and a renewable energy generator, where no physical electricity is actually delivered to the corporate buyer. The corporate buyer agrees to pay a fixed price for electricity generated by a renewable energy project. The renewable generator sells the actual electricity into the wholesale electricity market at the prevailing market price. If the market price is higher than the fixed price, the renewable generator pays the difference to the corporate buyer. On the other hand, if the market price is lower, the corporate buyer pays the difference to the generator. The corporate buyer receives RECs for the power, enabling it to claim environmental benefits and meet its RCO. VPPAs allow companies to hedge against energy price volatility and contribute to their carbon reduction targets. They also enable the financing of new renewable energy projects and help countries advance towards their clean energy and climate goals. The introduction of VPPAs can significantly boost renewable energy capacity addition and accelerate India’s journey towards reaching 500 GW of non-fossil fuel capacity by 2030.”
One of the primary drivers for VPPAs is the growing focus on corporate sustainability and net zero commitments. Investors, regulators, consumers and companies are increasingly exploring reliable ways to decarbonise operations and increase the uptake of green power. VPPAs offer a clear and traceable method to source renewable energy, enabling businesses to demonstrate measurable progress toward their environmental targets. Another important factor is the flexibility VPPAs provide in supporting grid decarbonisation. Many corporates face geographic or regulatory barriers that prevent them from directly accessing renewable power. VPPAs address this by allowing companies to financially support new renewable energy capacity even if they are not physically located near the project. This allows businesses to contribute to a greener grid, regardless of their operational footprint. Additionally, VPPAs serve as an effective financial hedging instrument. As power markets often experience price volatility, securing long-term cost stability is crucial for energy-intensive industries. Through VPPAs, developers can partner directly with large corporates and industrial consumers, reducing their dependence on state utilities. VPPAs allow developers to scale operations by tapping into the growing corporate demand for clean energy.
Future outlook
The CERC’s draft guidelines on VPPAs represent a significant and timely intervention, and have elicited a positive response from industry experts. S. K. Soonee, former and founding chief executive officer, Grid Controller of India Limited (formerly Power System Operation Corporation Limited), notes, “The CERC’s draft guidelines on VPPAs mark a bold shift in India’s electricity market, effectively combining contract for difference-style financial settlements, participation through power exchanges and OTC platforms, REC transfer and hedging, enabling consumers to meet RCOs without physical delivery. This opens up flexible, location-agnostic procurement of renewables, allowing renewable energy developers to secure offtake and consumers to decarbonise through market-based instruments. It also opens up opportunities for voluntary renewable energy demand beyond mandated renewable purchase obligations. Key implementation areas, such as contract design, financial settlement, REC registry coordination and tracking, will mature with experience. Over time, VPPAs have the potential to become a core instrument for corporate renewable energy sourcing and price discovery in a deeper, more dynamic power market. This forward-looking move reflects the growing sophistication of India’s electricity ecosystem.”
Overall, although VPPAs are still at an early stage of adoption in India, they offer significant potential for corporates aiming to decarbonise their operations, support renewable energy deployment and protect themselves against future electricity price volatility. For renewable energy developers, VPPAs open up access to a wider pool of customers beyond power discoms. As India moves towards a more market-driven power sector and enhances its focus on green energy and decarbonisation, VPPAs are poised to become increasingly relevant. For VPPAs to succeed in the country, it is essential to not only implement the VPPA guidelines but also address potential issues such as over-invoicing and ensure transparency in the awarding and implementation of VPPAs.
Priyanka Kwatra
