India has a big goal for clean energy, aiming for 500 GW of installed renewable energy capacity by 2030, which necessitates innovative solutions. The usual deals i.e. Power Purchase Agreements (PPAs) work and have played a crucial role in driving India's renewable energy (RE) adoption, but they've got some downsides as well. That's where Virtual PPAs (VPPAs) come in - a new kind of clean energy buying option for businesses that's a win-win for everyone involved in the energy landscape (especially the corporate energy consumers and RE generators).

Understanding VPPAs

Unlike traditional PPAs where consumers directly receive electricity from a specific RE project, a VPPA operates differently. In a VPPA, there is no physical exchange of electricity. VPPA functions as a derivative contract1, where a consumer (buyer) and a RE generator (seller) agree on a fixed price (also known as 'strike price') for a predetermined amount of notional electricity, and the seller transfers the associated energy attribute certificate (EACs and commonly known as Renewable Energy Certificate (REC) in the Indian space) to the buyer. Further, the RE-generating entity sells the produced electricity (real) in the open market; while the consumer remains free to source its actual power requirement from other sources (independent of VPPA) such as distribution companies, PPAs, power exchanges (like IEX, PXIL), etc. at the prevailing market price, independent of the VPPA.

However, the core of the VPPA lies in the financial settlement mechanism. The contract is settled based on the difference between the strike price and the prevailing market price of electricity. For example, if the price of electricity is INR 10/kWh in the market; and the agreed-upon strike price is INR 8/kWh. Then the settlement will be done by the generating entity by paying the buyer the difference i.e., INR 2/kWh. Vice-versa, if the market price is lower than the strike price, then the entity buying will compensate the difference to the generating entity.

Moving on, VPPAs also offer additional advantages for both, those purchasing RE (consumer/buyer) and those generating it (generator/producer).

1. For a 'Consumer/Buyer':

  • Compliance with Renewable Purchase Obligations (RPOs): VPPA provides a credible and effective way for corporations to meet their mandatory RPOs, mandated by the Electricity Act, 20032.
  • Cost-Effective Green Procurement: VPPA offers a cost-competitive path in greening a company's energy portfolio and building a strong sustainability profile, attracting environmentally conscious customers and investors.
  • Hedging against Price Volatility: VPPAs offer price stability compared to the fluctuating nature of the electricity market, mitigating the risk of rising electricity costs.
  • Flexibility in Sourcing: Corporations can leverage VPPAs to group their clean energy needs from multiple locations into one deal, making it easier to buy RE.

2. For a 'RE Generator':

  • Secured Revenue Stream: VPPAs provide RE generators with a predictable and long-term revenue stream, independent of the volatile market prices, enhancing project bankability.
  • Improved Project Financing: Demonstrating pre-determined revenue streams from VPPAs strengthens project financing prospects, attracting lenders and investors for new RE projects.
  • Transfer of Green Attributes: VPPAs facilitate the sale transfer of EACs associated with the electricity to the buyer in addition to the sale of electricity. These EACs, often in the form of RECs in India, can be further traded or used by the buyer to meet their sustainability goals.

Current Landscape and Future Potential:

The concept is relatively new in India but India, with its rapidly expanding commerce and industry (C&I) sector, presents a vast potential for VPPAs to propel its clean energy transition. Given that, certain uncertainties do persist regarding the framework for VPPA in India.

Such as -

  • Unclear Regulatory Jurisdiction: The Hon'ble Supreme Court of India vide its order dated October 6, 2021 ended the ten-year jurisdictional quandary between the Central Electricity Regulatory Commission (CERC) and the Securities and Exchange Board of India (SEBI). You can read our earlier update on this decision here. Now coming to VPPAs, considering the peculiar structure and nature of the VPPA transactions, it is imperative that clear jurisdiction for matters dealt with under VPPAs are spelt out, in order to understand the regulatory framework that will become applicable to it.
  • Treatment of bundled RECs: The existing regulatory framework for RECs primarily caters to unbundled power3. VPPAs, on the other hand, might also involve bundled EACs (I-REC4 or REC) which are sold together with associated energy that would not have been generated in the absence of the said VPPA; also would help mitigate potential reputational damage for corporations, including allegations of greenwashing, by ensuring genuine environmental responsibility. Clear guidelines on the aforesaid arrangement are required for accounting credible transfer within the VPPA structure.
  • Practical limitations of Open Access (OA) Rules: Buying RE directly was previously limited to big business corporations. Though the new OA Rules allow smaller businesses to participate, with the reduced transactional threshold of 100 kW5, but project sizes might be too large for their individual needs to enter into a physical PPA in terms of economic viability, which VPPA can resolve. VPPA can address this by letting smaller businesses, group up, even across locations, to reach the minimum purchase requirement (in terms of project viability) and buy RE together under a single agreement6.

The Way Forward

While VPPAs do offer a promising path towards a clean energy future in India, overcoming certain challenges is crucial. As mentioned, it is imperative to have a clear regulatory framework governing the VPPAs. Additionally, streamlining how RECs are handled within VPPAs will incentivize participation. Loosening restrictions on consumer participation and geographical sourcing of energy will further boost VPPA adoption. Further, standardized contracts, aggregating platforms, and increased awareness through educational programs can significantly enhance the functionality and implementation.

Adding on, VPPAs are gaining significant momentum globally, particularly in the US and Europe, where major corporations7 are actively utilizing VPPA to meet their sustainability targets. As India strives towards a sustainable future, VPPA is here to stay and can serve as a powerful instrument for corporates, RE generators, and the entire energy sector collectively to achieve shared environmental and economic goals.

Footnotes

1. Under Section 2(ac) of the Securities Contract (Regulation) Act, 1956, Derivatives includes as follows:

"(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B) a contract which derives its value from the prices, or index of prices, of underlying securities; "

2. Under Section 86(1)(e) of the Electricity Act, 2003

3. Under Regulation 4(1)(b) of Central Electricity Regulatory Commission (Power Market) Regulations, 2021

4. International Renewable Energy Certificate (also another form of EAC)

5. Electricity (Promoting Renewable Energy Through Green Energy Open Access) Rules, 2022

6. In 2023, Microsoft entered into a 20-year VPPA with Shizen Energy to procure renewable energy from a solar project in Inuyama City of Japan, contributing to its goal of achieving carbon neutrality by 2030. Further last year, Merck (US), signed a 16-year VPPA with Recurrent Energy to source off-site RE for its electronic business in Texas, USA.

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