Introduction

India’s clean energy sector has witnessed significant growth in recent times with steady progress towards the target of achieving 500GW of non-fossil fuel-based capacity by 2030 (committed as part of India’s Panchamrit goals introduced at the COP26 in Glasgow, United Kingdom). In the last financial year (2024-25), India has achieved a record renewable energy capacity addition of 29.52GW, taking the total installed renewable energy capacity to 220.10GW as of March 31, 2025.^[1]

One of the key growth drivers for India’s clean energy sector has been commercial and industrial consumers intending to decarbonize their energy consumption or the associated supply chain, thereby furthering renewable energy adoption. In this context, various models have emerged such as energy-as-a-service, round-the-clock power delivery, peer-to-peer transactions, etc. which also factor the diurnal nature of renewable energy.

The evolution of the renewable energy sector in India has led to the sector emerging as a global force with corporate power purchase agreements (“PPAs”) assuming the center stage in India’s energy transition and sustainability efforts. However, India’s regulatory framework has, for a considerable time, been ambiguous on virtual power purchase agreements (“VPPAs”) and the various structures that may be formulated around it. This has primarily been due to the lack of statutory recognition for VPPA structures, and a decade-long jurisdictional dispute between the central electricity sectoral regulator, i.e., Central Electricity Regulatory Commission (“CERC”) and the financial markets regulator, i.e., Securities and Exchange Board of India (“SEBI”) regarding forward and derivative contracts in the electricity sector (one of the ways in which a VPPA could be structured) (“Jurisdictional Dispute”). The Jurisdictional Dispute was finally resolved by the Supreme Court on October 6, 2021^[2] (“SC Order”), after the parties had agreed on the ambit of their jurisdiction (as discussed below).

What are VPPAs?

A VPPA is a financial settlement contract that is executed between the generator and the consumer outside of the power market, without involving any physical delivery of electricity generated. The generator, under a VPPA, continues to sell the power generated from its renewable energy project on the power exchange, while the green attributes are transferred to the consumer with whom the VPPA is executed. Therefore, the power that is sold on the power exchange is categorized as ‘brown power’, which is devoid of its green attributes.

In VPPAs, the ‘strike price’ is determined between the generator and consumer, which is compared with real-time prices of power in the power exchange where the generator sells the physical power or ‘brown power’. The difference between the two prices is settled between the parties through either of the two mechanisms:

• Two Way VPPA – If the market price is below the ‘strike price’, the consumer compensates the generator for the difference. If the market price is higher than the ‘strike price’, the differential needs to be paid by the generator to the consumer.
• One Way VPPA – Only the consumer is liable to compensate the generator, if the market price is below the ‘strike price’.

Why VPPAs?

In context of corporate consumers, VPPAs allow them to achieve their decarbonization goals by purchasing the environmental attributes associated with renewable energy, while retaining the flexibility to meet their power demands through the utilities or otherwise – this additionality is crucial for the buyer. It also enables the generator to hedge the risks of electricity price fluctuations through a pre-determined price fixed over a long-term contract, thereby improving the overall bankability of the project for favourable green financing opportunities.

Background for the Draft Guidelines in India

In order to address the jurisdictional overlap between the CERC and SEBI with respect to regulating ‘electricity derivatives’, the Ministry of Power, Government of India (“MoP”) had constituted a committee on October 26, 2018 – Committee on Efficient Regulation of Electricity Derivatives (“Committee”), which included representatives from CEA, CERC, POSOCO, SEBI and various power exchanges in India^[3]. The Committee had to “examine the technical, operational and legal framework for electricity derivatives” and provide its recommendations. The Committee submitted its report on October 30, 2019 (“Committee Report”), which included the following recommendations inter alia^[4]:

(a) All “Ready Delivery Contracts and Non-Transferable Specific Delivery” (“NTSD”) contracts^[5] in electricity, executed by the members of the power exchanges are to be regulated by the CERC, subject to the following conditions:

• the contracts are to be settled only by physical delivery without netting;
• the rights and liabilities of parties to the contracts are to be non-transferable;
• no such contract is to be performed either wholly or in part in any manner which dispenses the requirement of actual delivery of electricity covered by the contract or payment of the full price;
• no circular trading is to be allowed and the rights and obligations of parties to the specific delivery contracts are not to be transferred or rolled over by any other means;
• trading is to be done only by authorised grid connected entities or trading licensees on behalf of grid connected entities, as participants; and
• contracts can be annulled or curtailed, without any transfer of positions, due to constraints in the transmission system or any other technical reasons, as per the principles laid down by CERC. However, once annulled, the same contract cannot be reopened or renewed in any manner to carry forward the same transaction.

(b) Electricity derivatives other than the NTSD contracts would be within the regulatory purview of SEBI.

Based on the Committee Report, it was agreed that the CERC would regulate all physical delivery-based forward contracts, whereas SEBI would regulate the financial derivatives – which was accepted by the Supreme Court, and subsequently, the petition was disposed through the SC Order. The Committee Report and the SC Order, therefore, paved the way for introduction of VPPA structures into the Indian renewable energy market and enabled its adoption through the necessary regulatory intervention. The Committee Report further culminated into the introduction of “term ahead contracts”^[6] in the CERC (Power Market) Regulations, 2021 issued on February 15, 2021 (“CERC Power Market Regulations”).

Once the jurisdictional ambiguity between CERC and SEBI was resolved, the regulatory recognition for VPPAs and clarification of its legal status was considered as a logical next step – long demanded by industry bodies since its absence (in spite of the SC Order) continued the uncertainty on the VPPA structures that could be adopted. The CERC had accordingly sought an opinion from SEBI on its regulatory jurisdiction over VPPAs and SEBI, through its letter dated January 31, 2025, had opined that:

• VPPAs are over the counter (“OTC”) contracts which are non-tradeable and non-transferrable; and
• The provisions of the SCRA would not apply to VPPAs or such other OTC contracts if they are considered as NTSD contracts, and

thus, the CERC would have the regulatory jurisdiction.

On March 3, 2025, the CERC was requested by the MoP to develop a suitable regulatory framework for VPPAs as NTSD based OTC contracts for facilitating renewable energy consumption obligation (“RCO”) by regulated entities. The CERC, thus, in exercise of its powers under the CERC Power Market Regulations, issued the Draft Guidelines for Virtual Power Purchase Agreements on May 22, 2025 (“Draft Guidelines”), as a significant step towards setting out a regulatory framework for VPPAs in India.

Key Features of the Draft Guidelines

• Recognition of VPPAs as OTC Contracts – VPPAs have been categorized as NTSD based OTC contracts, i.e., they are long-term, non-tradable and non-transferrable contracts, executed between a generator and consumer. The parties will mutually agree on a VPPA price (as discussed below) for the duration of the VPPA.
• VPPA Price – “VPPA price” has been defined to mean “the price of electricity as mutually agreed between a Consumer or a Designated Consumer and an RE generator either directly or through a trader or by listing on an OTC Platform.” This is akin to the ‘strike price’ concept typical in standard VPPA structures.
• VPPA Structure –
  (i) Long-term bilateral contract to be executed between a consumer^[7] or designated consumer^[8] at a mutually agreed VPPA price;
  (ii) The renewable energy generator is permitted to sell electricity from the project on the power exchanges or through any other mode as recognized under the Electricity Act, 2003 (“Electricity Act”) and the renewable energy certificates (“RECs”) will be transferred to the consumer or designated consumer who can use the RECs towards RCO compliance or for claiming the green attributes, as may be applicable;
  (iii) The difference between the VPPA price and the market price (i.e., the price at which the generator has sold the electricity) will be bilaterally settled between the parties under the VPPA.
• Issuance of RECs – The renewable energy contracted through VPPAs will be eligible for issuance of RECs under the CERC (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022 (“CERC REC Regulations”). Therefore, projects under the VPPA structure will have to register their projects with the National Load Despatch Centre. Since such projects will only be eligible for issuance of RECs, international RECs (“IRECs”) are effectively excluded from the purview of the VPPA structures contemplated under the Draft Guidelines.
• RECs to be Extinguished – The consumer or the designated consumer is required to communicate the receipt of RECs to the registry, after which the registry will extinguish such RECs.

Analysis and the Way Forward

The Draft Guidelines are a much-needed step in the right direction and intend to provide a regulatory recognition to VPPAs, however, in their present form, the Draft Guidelines are predominantly skeletal in nature and require scrutiny on few critical aspects. The stakeholders have the opportunity to guide the final framework, as the Draft Guidelines are open for comments, suggestions and objections till June 6, 2025.

We have set out below some of the key aspects which will require more clarity in the final framework:

• Waivers and Concessional Charges – According to the Draft Guidelines, renewable energy contracted through VPPA will be eligible for issuance of RECs, upon registration and in accordance with the eligibility conditions specified in the CERC REC Regulations. However, under the CERC REC Regulations read with the Procedure for Implementation of REC Mechanism, 2022, projects that avail any waiver of or concessional transmission charges/ wheeling charges are ineligible for issuance of RECs. If the VPPA structures are intended to increase renewable energy adoption, at least projects which have entered into VPPA arrangements should be allowed to avail such waivers.
• Price Volatility and Settlement Price – The VPPA structure contemplated under the Draft Guidelines indicates that the VPPA structures would essentially be ‘contracts for difference’. Since the price of electricity determined on the exchanges may vary across exchanges and also be based on the time of the day, the Draft Guidelines do not provide any clarity on which price will be applicable for settling the ‘contract for difference’ price gap in VPPAs. For example – The per unit price of electricity determined on the energy exchanges can vary significantly – in December 2024, the ‘market clearing price’ in the Day Ahead Market was INR 3.89 per unit (at the Indian Energy Exchange), and on May 25, 2024 (from late morning to mid-afternoon), the weighted market clearing price declined to INR 2.81 per unit (at the Indian Energy Exchange) in the real-time market.

In this context, the CERC Power Market Regulations provide that in case of ‘day ahead contracts’ and ‘real-time contracts’, the price discovered for the unconstrained market will be a ‘uniform market clearing price’ for all buyers and sellers who are cleared. The final guidelines should clarify if a ‘uniform market clearing price’ will also be applicable for settling the VPPA price gap, for electricity sold in the power exchanges through a VPPA structure. This will address the price volatility risks inherent in VPPA structures which are in the nature of ‘contracts for difference’.

The Draft Guidelines essentially allow for a price determination of the RECs on bilateral basis under the VPPA arrangement. Whereas the CERC REC Regulations state that “price of Certificates shall be as discovered in the Power Exchange(s) or as mutually agreed between eligible entities and the electricity traders.” In this context, the CERC REC Regulations should be amended to clarify that the pricing of RECs under the CERC REC Regulations are only applicable for RECs traded in the power exchange, and consequently, the pricing mechanism set out under the Draft Guidelines would be applicable to bilateral contracts executed for sale of RECs through the VPPA structure.

• Accounting – There are two critical elements in the settlement mechanism for a VPPA – (A) the real-time financial accounting, carried out as per the pricing interval in the market; and (B) the frequency of submission of the financial reports which evidences these real-time transactions. Since VPPA structures can be complex where there is no physical delivery of electricity and are often structured as ‘fixed-for-floating swap’ or ‘contracts for difference’, the accounting principles must be clearly outlined in the final guidelines.
• Role of Nodal Agencies – The Draft Guidelines do not specify the role of the nodal agencies and whether the nodal agencies would verify any RCO compliance through VPPAs.
• Dispute Resolution – The Draft Guidelines state that disputes arising out of VPPAs should be mutually settled by the parties in accordance with the terms of the contract. While pure contractual disputes between the parties may be resolved through the dispute resolution mechanism under the relevant contracts, the CERC will have regulatory jurisdiction on these transactions. Considering that VPPAs have been recognized as NTSD based OTC contracts in accordance with the CERC Power Market Regulations, the final guidelines should specify the extent and the scope of CERC to adjudicate on disputes arising from VPPA transactions such that the regulatory intervention of CERC is limited in bilateral contracts.
• Non-Transferability – The VPPA structure proposed under the Draft Guidelines contemplates only NTSD based OTC contracts – the contracts are to be non-tradeable and non-transferable. It prevents buyers from trading, selling, assigning or re-allocating surplus RECs after meeting their emission reduction targets. In contrast, the Carbon Credit Trading Scheme (“CCTS”), as set out in the Carbon Credit Trading Scheme Rules, 2023, explicitly provides for open-market trading of carbon credits, allowing entities to monetize any excess credits after meeting their emission reduction needs. While it can be argued that non-transferability of RECs eliminates any jurisdictional overlap between CERC and SEBI and the possibility of double-counting, it is pertinent to note that global carbon offset standards such as the Verified Carbon Standard (“VCS”) and the Gold Standard for the Global Goals (“Gold Standard”) incorporate robust measures to prevent double counting and yet, ensure additionality.
• Other Key Aspects – Several other key aspects remain unaddressed or untested at this stage, such as, use of RECs by group entities, the tax implications of VPPAs in India, and whether any amendments are required in the SCRA or if any clarification is required from SEBI to ensure that NTSD based OTCs are exempted from the SCRA.

Impact of the VPPA Guidelines

• Broader Renewable Energy Adoption – Globally, VPPA structures have resulted in considerable improvement in renewable energy adoption, especially since decoupling of the green attributes from the physical electrons generated from the project allows corporate consumers to achieve their sustainability mandates without taking any physical delivery of power. In the Indian context, where the renewable energy sector has developed exponentially, the ‘decoupling model’ for purchase of the environmental attributes of green power has also been adopted, albeit limited only to IRECs.

The transactions are usually structured in a manner where the foreign entities invest in Indian companies engaged in production of renewable energy and execute agreements for purchase of the underlying green energy attributes and registering them as IRECs, issued by the International Carbon Exchange in India, while the physical power is separately sold as ‘brown power’ either through physical PPAs or on the power exchanges. The investors in such projects also have the advantage to control the quality of the underlying project and the renewable energy generated from it, ultimately to ensure the integrity of the IRECs being issued. Given that IRECs convey underlying information on the location of the renewable energy generated as well as its nature, it allows companies to show additionality in the respective country in whose registry the certificate will be considered cancelled/retired.

The Draft Guidelines, once finalized, will provide regulatory sanctity to VPPA structures in India, and as a result, once the VPPA structures are implemented: (a) consumers will continue to procure physical power from distribution companies to meet their energy needs without impacting the distribution companies; (b) renewable energy projects will have a firm revenue stream through the sale of green attributes under a VPPA, which will improve the bankability of the projects; and (c) the decoupling of the green attributes will allow the electricity generated by such projects to be sold as ‘brown power’ (generated from renewable energy projects), effectively phasing out the need for thermal generation and ensuring broader renewable energy adoption.

• Battery Energy Storage System (“BESS”) – The VPPA model, once implemented in India, will promptly accelerate the need for development of greenfield renewable energy projects and re-powering or capacity enhancement of the existing projects. While VPPAs do not require buyers to invest in storage themselves, the collective impact of VPPA-driven renewable energy growth will require enhanced grid integration to reduce the intermittency of renewable energy. The success of the VPPA model will, therefore, require systemic need for comprehensive battery storage solutions to address the grid stability risks, manage peak demand, and ensure the supply of firm and dispatchable power. While the BESS ecosystem is still at a nascent stage in India, there are concerted governmental efforts directed to promote the adoption of BESS technology for renewable energy projects.^[9] However, at present, BESS technologies are capital intensive, requiring significant upfront investment for equipment, installation, and integration.

Since VPPA structures allow renewable energy developers to monetize the additionality of environmental attributes through long-term contracts as well as the underlying ‘brown power’, it will encourage investment in projects that integrate renewable energy and battery storage technology – due to the increased bankability that this structure offers and the need for firm power that this structure will require. The additionality in revenue will further aid renewable energy generators to off-set the high capital cost involved in BESS projects.

The development of BESS, both as part of integrated renewable energy projects and as standalone installations, also enhances the ability to store excess electricity generated during peak periods, which can then be dispatched during periods of low generation or high demand, effectively increasing the total dispatchable renewable electricity supplied to the grid, consequently, ensuring that the RECs are issued based on the optimised peak-performance capacity of renewable energy projects.

• Impact on the Grid Infrastructure – In the past decade, governmental and regulatory efforts have significantly incentivised renewable energy capacity addition in India across various sources and new technologies – the latest Draft Guidelines being amongst them, evidencing a regulatory response to the evolving market demands. As a result, India’s grid infrastructure – the critical backbone for India’s renewable energy success story, has been under significant pressure with grid stability and grid capacity constraints emerging as two key areas of concern. According to the report on “Transmission System for Integration of over 500 GW RE Capacity by 2030” issued by the Central Electricity Authority^[10] (“CEA Report”), in order to achieve the Panchamrit targets by 2030, the transmission infrastructure will require massive expansion which will include: (a) building 50,890 circuit kilometers (ckt km) of inter-State transmission lines and 433,575 MVA of substation capacity, to efficiently schedule and evacuate the additional wind and solar capacity; and (b) building additional inter-regional transmission corridors for a cumulative capacity estimated at 1,50,000 MW.

Therefore, a key challenge to the effective implementation of the VPPA model and the clean energy transition will depend on the continued upgradation, development and modernisation of India’s grid infrastructure which can effectively absorb the generation capacity with increased stability, continued grid safety and efficient scheduling of renewable energy in accordance with the regulatory framework.

Footnotes:

[1] https://www.pib.gov.in/PressReleasePage.aspx?PRID=2120729

[2] Power Exchange of India Ltd. through Vice President vs. Securities and Exchange Board of India [Civil Appeal Nos. 5290-5291 OF 2011].

[3] https://www.pib.gov.in/PressReleasePage.aspx?PRID=1761701

[4] https://www.cercind.gov.in/2020/draft_reg/EM-PMR-2020.pdf

[5] Regulation 2(ca) of the Securities Contracts (Regulation) Act, 1956 (“SCRA”) defines a “non-transferable specific delivery contract” to mean “a specific delivery contract, the rights or liabilities under which or under any delivery order, railway receipt, bill of lading, warehouse receipt or any other documents of title relating thereto are not transferable.” Regulation 2(ha) of the SCRA defines a “specific delivery contract” to mean “a commodity derivative which provides for the actual delivery of specific qualities or types of goods during a specified future period at a price fixed thereby or to be fixed in the manner thereby agreed and in which the names of both the buyer and the seller are mentioned.”

[6] Regulation 2(ba) of the CERC Power Market Regulations defines a “term ahead contract” to mean “a contract (including Green Term Ahead Contract) wherein transactions occur on day (T) and physical delivery of electricity is on a day more than one day ahead (T + 2 or more).”

[7] The Electricity Act defines a “consumer” to mean “any person who is supplied with electricity for his own use by a licensee or the Government or by any other person engaged in the business of supplying electricity to the public under this Act or any other law for the time being in force and includes any person whose premises are for the time being connected for the purpose of receiving electricity with the works of a licensee, the Government or such other person, as the case may be.”

[8] The Energy Conservation Act, 2001 defines a “designated consumer” means “…any user or class of users of energy in the energy intensive industries and other establishments as specified in the Schedule as a designated consumer for the purposes of this Act.”

[9] https://cea.nic.in/wp-content/uploads/notification/2025/02/Advisory_on_colocating_Energy_Storage_System_with_Solar_Power_Projects_to_enhance_grid_stability_and_cost_efficiency.pdf

[10] https://cea.nic.in/wp-content/uploads/notification/2022/12/CEA_Tx_Plan_for_500GW_Non_fossil_capacity_by_2030.pdf