India: The Promise Of ‘Virtual' Power Purchase Agreements

INTRODUCTION

Given that your company needs/wants to acquire or generate renewable energy ("RE") - should, and can, you enter into a 'virtual' power purchase agreement ("PPA," and such 'virtual' PPAs, "VPPAs") in India?

Physical PPAs vs. VPPAs

While a PPA is usually the main contract in energy sector transactions where the 'offtaker' (often a state-owned electricity distribution company ("discom")) decides to buy power from a generating entity ("genco"), PPAs may also be entered into between two or more private parties, especially in jurisdictions where a competitive power market exists - such as the one increasingly emergent in India. In the context of renewable PPAs, parties specifically contract to procure/sell RE.

Further, a PPA for RE may be structured as: (i) a 'physical' PPA; or (ii) a VPPA. A physical PPA, as the name suggests, involves the actual/physical delivery of electricity from a power project to a buyer.¹ While the buyer actually receives electricity from a genco pursuant to a physical PPA, with respect to a VPPA, it does not. Instead, the genco sells the produced power that is notionally the subject of such VPPA in the open market, including through power exchanges (collectively, the "power pool"). Conversely, the buyer procures the electricity actually required to run its day-to-day business operations from someone/somewhere else in the power pool (including from a discom or via a separate PPA, as required) - i.e., through a separate transaction, independent of the VPPA.²

So, if VPPAs themselves do not involve power, why do companies enter into them?

Because, among other things, VPPAs serve an obvious economic function. Like physical PPAs, a VPPA provides a level of guaranteed revenue by hedging the power project against fluctuations/volatility in electricity prices with respect to both buying and selling. However, unlike a physical PPA, a VPPA is essentially a financial instrument: the genco produces and sells actual electricity in the spot market at a floating rate even while simultaneously entering into a derivative contract (structured as a fixed-for-floating swap,³ or as a 'contract for differences')⁴ where a buyer agrees to buy a notional quantity of such electricity at a fixed price (typically called the 'strike price')⁵ over the term of the VPPA. In exchange, the buyer is paid the floating price at which such electricity is (actually) sold in the spot market. If the market price⁶ exceeds the strike price, the buyer needs to be paid the difference. On the other hand, if the market price is lower than the strike price, the buyer must make up the difference.

Nevertheless, can you enter into VPPAs in India?

The legal status and applicable regulatory regime with respect to VPPAs in India are still somewhat uncertain. While conditions are ripe for the introduction of these contracts, a clarificatory initiative from the government could serve as a starting point. However, recent policy and legislative changes in the Indian electricity sector - such as those related to the power market, RE-linked certificates, and open access (discussed below) - may well be a harbinger of such proposed initiatives. Meanwhile, Indian companies might want to start planning their energy strategies accordingly.

In addition, VPPAs can be complicated contracts. Accordingly, issues related to pricing, accounting, projections, financing, changes-in-law, construction delays, etc. need to be carefully looked at, and as early in the process as possible. Information asymmetries between power projects and corporate buyers might complicate negotiations further. Irrespective, in the global context, it appears that virtual templates for the procurement of renewables are here to stay, and for good reason.

But should you enter into VPPAs in India, if and/or when permitted?

In a VPPA, there is no physical exchange of electricity. However, the aggregate effect of the underlying financial arrangement in a VPPA is such that the genco will always expect to receive, and the customer will always expect to pay, the strike price as agreed upon upfront, i.e., during contract inception.

Despite being financial instruments in essence, VPPAs offer some additional advantages for both buyers/consumers and sellers/producers of RE, as discussed below.

From a buyer's perspective

Generally speaking, when a genco (or other eligible entity) produces/purchases RE in excess of compliance requirements, it may be issued an Energy Attribute Certificate ("EAC") (e.g., renewable energy certificates (RECs) in India)⁷ by a designated agency (e.g., the National Load Despatch Centre (the "NLDC")⁸ in India) for each (additional) megawatt-hour ("MWh") of electricity generated/purchased.⁹ If such EACs are included in the terms of a VPPA, the genco (or other entity) may be contractually required to transfer those to the VPPA counterparty. In turn, the transferor can be compensated for the EACs so transferred through the fixed price that it receives from such counterparty.

Further, EACs may be treated as the equivalent of RE under a specific regulatory regime.¹⁰ Thus, EACs could count towards RE-based procurement mandates (e.g., renewable purchase obligations ("RPOs") in India).¹¹ As a result, VPPAs can be useful for such entities which are required by law or policy to meet such mandates (e.g., to purchase a prescribed minimum percentage/quantum of RE), especially in locations where renewable resources are unevenly distributed or intermittently available.

In addition, from a corporate buyer's perspective, a VPPA can help speedily scale up renewables in the company's power mix - not just for reasons of costing and branding, but also for compliance and reputational reasons - given expected future trends. Large Indian companies with significant exports and/or global operations, in particular, might want to 'green up' their products/services to maintain acceptability in climate-conscious markets. Further, the VPPA model particularly suits large companies which have fragmented demand in different locations and/or maintain operations across diverse geographies.

From a genco's perspective

On account of VPPAs, a genco can sell the energy it produces as well as the EACs related to such energy. By using this complementary income stream to their advantage, gencos can thus secure the economic viability of RE projects, including by providing extra comfort to lenders for the purpose of obtaining financing. This is particularly useful for new projects, since gencos can then show lenders guaranteed revenue streams upfront in respect of both its 'products' (i.e., electricity as well as its attributes). In other words, even while a genco continues to sell its main product through power exchanges,¹² it could transfer the 'green' attributes of such product to the consumer with which it has signed a VPPA. In turn, this consumer can now own such EACs for its own benefit and/or for compliance/branding purposes.

Further, VPPAs are not directly impacted by changing regulations and prices in the electricity sector. Instead, these contracts can be structured and adapted for a wide range of purposes: for instance, to underwrite the financing of large-scale RE projects.

CURRENT TRENDS AND FUTURE POTENTIAL

In the US in particular (but elsewhere too), VPPAs have appealed to a wide variety of corporate buyers, including for the purpose of meeting renewable mandates and/or targets quickly - especially in order to woo stakeholders via a sustainability-driven platform. In fact, more than 80% of all PPAs signed with corporate buyers in the US are estimated to be virtual. Publicizing compliance with 'green' targets (by procuring renewables through a VPPA) has become an important element of business branding across the world.

Recent reports¹³ in respect of India appear to conclude that, given the country's large (and expanding) commerce and industry ("C&I") segment,¹⁴ VPPAs are essential to meet corporate RE demands, consistent with India's climate goals.¹⁵ To be sure, C&I consumers could meet their RE obligations/needs through physical PPAs alone, especially under India's newly-democratized 'open access' regime.¹⁶ However, physical PPAs have certain limitations.

For instance, if and when, on account of low RE prices relative to (high) coal-based tariffs, or in response to customer/investor demand with respect to environment, social, and governance ("ESG") standards, a company seeks to shift completely - and speedily - to RE, it may not be able to do so for various reasons, including on account of seasonal, technological, and/or other variabilities inherent in RE generation.

Further, despite relaxed transactional thresholds pursuant to the new open access rules in India,¹⁷ physical PPAs are not viable for projects below a logistical minimum¹⁸ due to economies of scale. Accordingly, consumers in the C&I segment with lower load requirements and/or fragmented demand across separate regions¹⁹ may not have a meaningful option or a cost-effective mechanism to procure RE. On the other hand, a single VPPA may be able to aggregate demand across a diversity of consumers and locations. Further, aggregated VPPAs can help smaller buyers get together under a single contract without a specific 'anchor tenant' and reap benefits of scale.

BUNDLED AND UNBUNDLED EACs

To be sure, EACs may/need not always be included in a VPPA. Further, EACs can be traded separately,²⁰ independent of, and apart from, a VPPA. Thus, 'bundled' EACs are those which are sold together with their associated energy. On the other hand, 'unbundled' EACs are not tied to the underlying power and do not lead to new RE being generated.²¹ Since most 'voluntary' purchasers (as opposed to 'compliance' purchasers) seek to procure additional RE because of stakeholder demand, unbundled EACs offer them limited opportunity to distinguish their brand. When bundled, the vintage and source of EACs are clear. When unbundled, it can be more difficult to verify such factors, potentially compromising ESG- and sustainability-related claims.

PROMISING DEVELOPMENTS BUT UNCERTAINTIES REMAIN

While India has witnessed some promising regulatory developments in recent times which could collectively create a viable ecosystem for VPPAs in the future, certain residual issues and uncertainties nevertheless persist.

REC Regulations

Erstwhile regulations related to EACs in India ("RECs", and such regulations, the "2010 REC Regulations")²² had introduced dealing in unbundled EACs. Such dealing could only be done, however, on power exchanges approved by the Central Electricity Regulatory Commission ("CERC"). In May this year, on account of perceived deficiencies in the 2010 REC Regulations,²³ the CERC issued new ones (the "2022 REC Regulations").²⁴ Among other changes, the 2022 REC Regulations permit the use of electricity traders by eligible entities for exchanging/selling RECs, including via bilateral transactions.²⁵ However, the new regulations do not clearly provide for the sale of bundled RECs through bespoke arrangements, as Indian corporate buyers looking to enter into VPPAs might seek/need.

While, pursuant to the 2022 REC Regulations, RECs can be issued by the NLDC (the designated central agency in this regard)²⁶ to eligible entities (subject to restrictions/qualifications),²⁷ such centralized issuance itself may not be enough for the purpose of making VPPAs viable. Commercially speaking, RECs need to be transferred by eligible entities²⁸ (or issued directly by the central agency) to private/corporate counterparties in order for both entities to derive maximum benefits from a VPPA. Therefore, the REC framework could be better articulated in light of such requirements.

In that context, in September this year, a detailed procedure with respect to implementing the 2022 REC Regulations (the "Procedure") was published on the website of the Indian REC registry.²⁹ Such Procedure requires electricity traders to have back-to-back arrangements with both buyers and sellers before applying for a trade request to the central agency. Thus, it is possible that bundled REC transfers will be expressly provisioned for in the future.

Power Market Regulations

Revised regulations related to the power market (the "2021 Power Market Regulations")³⁰ now include within their scope contracts related to RECs (those transacted on power exchanges)³¹ as well as delivery-based over-the-counter ("OTC") contracts.³² Further, the price and other terms of such OTC contracts can be determined, inter alia, through mutual agreement between the buyer and the seller.³³ Thus, customized bilateral transactions directly entered into between sellers and buyers (i.e., outside of power exchanges) - such as in VPPAs - appear to correspond with such characterization.

However, the 2021 Power Market Regulations require that OTC contracts be settled only through the physical delivery of electricity.³⁴ The regulations neither mention, nor presumably apply to, financially settled derivative contracts related to electricity, as transacted in the OTC market.

Reconciling Power Market Regulations with REC Regulations?

The delivery of RECs (as opposed to the delivery of electricity) could be expressly provided for in the future under the 2021 Power Market Regulations, along with applicable changes made to the 2022 REC Regulations. For instance, within a hybrid VPPA,³⁵ one component of the overall contractual structure could include a delivery-based forward contract in respect of purchasing RECs alone. The 2021 Power Market Regulations contemplate bilateral transactions³⁶ in respect of OTC contracts related to the physical delivery of electricity anyway.³⁷ In addition, agreements between sellers and buyers for the sale and purchase of RECs are included within the definition of a 'contract' under such regulations.³⁸ Thus, if RECs are considered 'electricity' by appropriate authorities and exchanged by sellers and buyers through electricity traders (and not via power exchanges),³⁹ such forward contracts or purchase agreements involving RECs might be possible.

VPPAs WITHOUT RECs

On account of concerns related to double counting, certification/tracking issues, 'greenwashing,'⁴⁰ or otherwise, the Ministry of Power (the "MoP") might be slow to introduce a bundled REC regime in India. Even then, VPPAs might be useful. Here's why:

From the government's perspective

As a matter of national interest, VPPAs will be useful in light of India's ambitious climate-related targets, pursuant to which domestic RE capacity-addition and procurement both need significant scaling up, including through increased private sector participation. In case the government wishes to have a greater supervisory role over the entire VPPA process, it could designate, and/or require, state bodies/nodal agencies to act as counterparties in respect of VPPAs entered into with private gencos. In this model, such designated bodies/agencies can be empowered to conduct auctions for the purpose of determining the strike price in respect of a proposed VPPA, while also, in parallel, require the selected bidder (a genco) to enter into a physical PPA with a discom.

From a discom's perspective

Such an arrangement may produce certain advantages, other than that of greater 'additionality'.⁴¹ For example, it may help cash-strapped discoms distribute RE more easily among retail customers (thereby promoting renewables consumption across the country, and leading to greater RPO compliance among obligated entities). At the same time, this arrangement can protect discoms against procurement, price, and supply-related risks, as typically associated with RE.

From a buyer's and a genco's perspective

Designated government bodies/agencies can also enter into similar arrangements with C&I customers (instead of with discoms).⁴² That way, while continuing to provide price and offtake assurance to gencos (with which VPPAs are entered into), the designated government bodies/agencies can transfer the benefit of the fixed price in the VPPA to a C&I customer for a fee.⁴³ Further, this arrangement may alleviate government concerns about VPPA-associated risks, including those related to a lack of familiarity among (smaller) C&I buyers in respect of power market dynamics, accounting complexities, and RE variability.

THE WAY AHEAD

A year ago, pursuant to a Supreme Court order (the "SC Order"),⁴⁴ a new era in the Indian power market⁴⁵ began when a long-standing turf battle between the Securities and Exchange Board of India ("SEBI") and the CERC was finally resolved. Among other things, the dispute involved ascertaining the appropriate regulatory jurisdiction with regard to forward and derivative contracts in the electricity sector. Pursuant to the SC Order, the CERC and SEBI decided that the former would regulate physical delivery-based forward contracts,⁴⁶ while financial and commodity derivatives in electricity⁴⁷ would be regulated by the latter. Despite the SC Order, however, it remains unclear as of date whether the physical and financial aspects of VPPA-based transactions have been clearly addressed in India.⁴⁸

In light of such persisting uncertainties, the appropriate regulatory jurisdiction in respect of VPPAs could be jointly clarified by both such authorities (i.e., the CERC and SEBI), including through the issuance of separate regulations in this regard, if necessary.

Footnotes

1. Physical PPAs can be structured as: (i) a tripartite agreement between the customer, the genco, and the discom (a 'sleeved' PPA, where the power produced by the genco is delivered from the grid to the customer through a discom); or (ii) an integrated bilateral agreement between the genco and the consumer/buyer/discom.

2. Alternative procurement options could include a discom, a power exchange, separate bilateral arrangements (signing a physical PPA with a different power producer), or even a 'captive' mode.

3. Where fixed rate payments are swapped for floating rate payments

4. As used for electricity, a 'contract for differences' ("CFD") is an instrument/mechanism that converts the risk of a variable price into a fixed price. CFDs are legal in India, as well as in most countries of the world. In India, the Securities Contracts (Regulation) Act, 1956, as amended (the "SCRA") defines a 'derivative' to include commodity derivatives, which, in turn, include CFDs that derive their value from the price of underlying goods. However, characterizing VPPAs as CFDs remains problematic in the US. For instance, CFDs that are not 'swaps' could be illegal there. In the US, (i) documentation related to VPPAs is often formulated as long-form confirmations under an International Swaps and Derivatives Association (ISDA) Master Agreement (the standard contract used for over-the-counter (OTC) derivatives transactions), and (ii) transactions related to VPPAs are typically structured as swaps - i.e., a type of OTC derivative regulated by the Commodity Futures Trading Commission (the "CFTC"). Further, swaps are subject to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") with reporting, record-keeping, and registration requirements. Specifically, the parties are required to, inter alia, report on the terms of the swap and file quarterly reports to entities designated by the CFTC in this regard (in fact, in the aftermath of the 2008 financial crisis, the Dodd-Frank Act enhanced the regulatory authority of the CFTC to oversee the swaps market). In addition, records of the swap transactions need to be maintained pursuant to the Dodd-Frank Act.

5. While VPPAs are typically signed for a fixed price, there are possible variations: for example, the strike price could be floating (with a discount on the market price or not), hybrid (involving both fixed and floating components, whether in terms of percentage value of output or in respect of time/term), and/or be subject to an escalation mechanism (in nominal/percentage terms or indexed to inflation). Further, ceilings and floors can be introduced to act as an additional safeguard.

6. Real-time prices in the power exchange

7. RECs are a type of EACs. Globally and generally, an EAC is a contractual instrument that represents information about the origin of the energy generated. It allows markets to track RE production and permits consumers to make credible claims of RE use. Each certificate acquired and then 'retired' (i.e., indicating that it is taken out of the marketplace) certifies the use of a specific quantity of renewable electricity (typically 1 MWh). In most markets with an EAC scheme in place, attribute certificates can be acquired "bundled" (the electricity and the certificates are sold and delivered together) or can be purchased "unbundled" (the certificates are purchased separately, independent of any specific purchase of physical electricity). The most widely used energy attribute systems are guarantees of origin (GOs) in Europe and RECs in the US. Another popular scheme for unbundled EACs is the International Renewable Energy Certificates ("I-RECs") program. The Green Certificate Company Limited ("GCC") issues I-RECs in India, which can be traded internationally. Thus, India-based gencos can transfer I-RECs to entities outside India.

8. The NLDC has been designated as the 'Central Agency,' pursuant to Regulations 2(b) and 3 of the Central Electricity Regulatory Commission (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022 (the "2022 REC Regulations").

9. For instance, pursuant to recently notified regulations in India, RECs may be issued by a central agency to RE-based gencos, captive power plants/ generating stations, distribution licensees, as well as 'open access' consumers, subject to eligibility and other requirements.

10. One (1) REC is equivalent to green attributes from one (1) megawatt-hour (MWh) of RE generation.

11. Pursuant to Section 86(1)(e) of the Electricity Act, 2003, as amended from time to time (the "Electricity Act"), certain categories of 'obligated entities' (such as discoms, open access consumers, captive power producers) are required to purchase a minimum percentage of electricity from RE sources as a percentage of their total consumption of electricity (Renewable Purchase Obligations, or "RPOs"). Moreover, when such obligated entities face procurement-related issues due to variations in (i) RE quality, and/or (ii) RE potential across different states, RECs may be used to meet RPOs. Such statutory RECs are market-based tradeable instruments that represent the environmental attributes of RE (but not the actual power itself). Thus, RECs allow obligated entities to meet their RPOs without actual procurement. In addition, a bill that seeks to amend the Electricity Act (the Electricity (Amendment) Bill, 2022) was introduced in Parliament this August (the "Electricity Bill"). The Electricity Bill imposes penalties for non-compliance with RPOs.

12. With the approval of the Central Electricity Regulatory Commission (CERC), power exchanges launched the Green Term Ahead Market (GTAM) in August 2020 and Green Day Ahead Market (GDAM) in October 2021, where the consumer can procure 'green' power from power exchanges on a day-ahead basis. These are short-term power transactions.

13. See, for example, "Virtual Power Purchase Agreement for C&I Consumers in India," WWF-World Wide Fund For Nature (formerly World Wildlife Fund) Report, June 2022 (prepared by WWF-India with research and inputs from ICF India).

14. Estimated to be in excess of 50% of the country's aggregate power consumption base.

15. India has set a target of 500 GW of RE installation by 2030 and 'net-zero' emissions by 2070, among other things.

16. The Electricity (Promoting Renewable Energy Through Green Energy Open Access) Rules, 2022, notified on June 6, 2022 (the "Open Access Rules"), reduce transactional thresholds in respect of RE from 1 MW to 100 kW, thus paving the way for small consumers to purchase RE easily. Earlier, on account of higher eligibility thresholds in respect of load, only large C&I establishments found open access feasible. Pursuant to the new relaxation, however, even small and medium-sized enterprises with modest energy requirements can procure RE via open access. Since C&I consumers constitute more than 50% of the aggregate power demand (and consumption) in India, a more democratized and inclusive open access regime will significantly increase RE procurement through the use of (even) physical PPAs. Further, the Open Access Rules stipulate a uniform regime of RPOs for multiple categories of obligated entities in respect of a particular electricity distribution area - which include open access customers, along with discoms and captive power producers.

17. As mentioned above, the Open Access Rules have reduced transactional thresholds in respect of RE to 100 kW.

18. Usually 5 MW.

19. Consumers with offices, plants, factories, data centers, hubs, manufacturing facilities, etc. across different geographies are required to sign multiple (physical) PPAs.

20. Central Electricity Regulatory Commission (Power Market) Regulations, 2021

21. What is known as 'additionality,' especially in the US. For instance, notional RE and bundled RECs, as acquired through a VPPA, are directly attributable to new 'additional' RE projects which add clean energy to the grid, displacing fossil equivalents: thus, in effect, such project would not have happened 'but for' the VPPA. Unbundled RECs are often used by large companies because they can be spread over several manufacturing locations. While unbundled RECs have the advantage of low prices, the disadvantage is that a company cannot claim any significant additionality. In fact, the use of unbundled RECs poses a potential reputational risk for large companies, including allegations of 'greenwashing'.

22. The Central Electricity Regulatory Commission (Terms and Conditions for Recognition and Issuance of Renewable Energy Certificate for Renewable Energy Generation), Regulations, 2010 (the "2010 REC Regulations")

23. The 2010 REC Regulations were intended to help obligated entities fulfill their respective RPOs. However, over time, price distortions arose in respect of RECs traded on power exchanges, essentially on account of a demand-supply mismatch. Further, there was sub-par compliance with the RPO regime among obligated entities. In effect, the erstwhile REC mechanism had been designed pursuant to market conditions at a time when RE prices were higher than those from conventional sources of energy, which situation has now drastically changed. With increased RE capacity installed across the country, as well as increased market-based products and procurement options introduced over the last few years, there has arisen a clear need to reform the Indian REC mechanism. Accordingly, in order to address some of these issues and in light of such changed circumstances, pursuant to public and stakeholder consultations, the CERC issued new regulations in respect of RECs which, inter alia, seek to (i) introduce a market-driven pricing, including by removing the erstwhile floor and forbearance prices related to RECs; (ii) allow trading of RECs through electricity traders (in addition to trading through power exchanges); (iii) extend the validity of RECs to perpetuity (until redeemed) (earlier, these were valid for 1,095 days only); etc.

24. The Central Electricity Regulatory Commission (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022 (the "2022 REC Regulations")

25. See Press Release, "Ministry of Power Redesigns Renewable Energy Certificate (REC) Mechanism: Floor and forbearance price limits removed: REC prices to be determined by Market conditions," Ministry of Power, September 29, 2021; available at: https://pib.gov.in/PressReleasePage.aspx?PRID=1759300

26. The National Load Despatch Centre (NLDC) has been designated as the 'Central Agency,' pursuant to Regulations 2(b) and 3 of the 2022 REC Regulations.

27. Regulation 4 ("Eligibility for Issuance of Certificates") of the 2022 REC Regulations.

28. Including (i) gencos, (ii) captive generating plants, (iii) distribution licensees, and (iv) open access consumers.

29. See Step-wise Description of the Procedure for Redemption through Electricity Trader(s) in "Procedure for Implementation of REC Mechanism in Compliance of Central Electricity Regulatory Commission (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022," Power System Operation Corporation Limited (POSOCO), September 2022, pp. 99-100, pursuant to Regulations 2(g) and 16 ("Detailed Procedure") of the 2022 REC Regulations; available at: https://www.recregistryindia.nic.in/index.php/publics/Reference_Documents

30. The 2021 Power Market Regulations.

31. Regulation 4(1)(b) of the 2021 Power Market Regulations.

32. Regulation 4(2) of the 2021 Power Market Regulations.

33. Regulation 7(1) of the 2021 Power Market Regulations.

34. Regulation 7(3) of the 2021 Power Market Regulations.

35. The right to purchase and receive RECs might be treated as a standalone forward contract, distinct from the VPPA. During the sale of bundled RECs, for example, a 'hybrid' VPPA structure might be deemed to include: (i) a non-financial host contract (i.e., the right to receive RECs), as well as (ii) an embedded price adjustment feature (i.e., a swap derivative).

36. For example, day-ahead bilateral transactions under Regulation 7(2)(i)(c), and bilateral transactions in a contingency under Regulation 7(2)(i)(d), of the 2021 Power Market Regulations.

37. Generally see Regulation 7 of the 2021 Power Market Regulations.

38. See Regulation 2(r) of the 2021 Power Market Regulations: "Contract" means an agreement between seller and buyer for sale and purchase of electricity or Renewable Energy Certificate or Energy Savings Certificate or any other product as may be decided by the Commission."

39. Pursuant to Regulation 2(an) of the 2021 Power Market Regulations, OTC contracts are those which are transacted outside of power exchanges.

40. 'Greenwashing' is an unsubstantiated claim to deceive consumers into believing that a company's products are environmentally friendly or have a greater positive environmental impact than what is true.

41. The RE so generated is directly attributable to a new 'additional' RE project, which adds clean energy to the grid by displacing fossil equivalents: thus, in effect, such RE project would not have happened 'but for' the VPPA.

42. A similar arrangement has already been proposed by the CERC under a Market Based Economic Dispatch ("MBED") related to the 'Day-ahead Market' ("DAM") (See "Discussion Paper on Market Based Economic Dispatch of Electricity: Re-designing of Day-ahead Market (DAM) in India," CERC, December 2018 (the "MBED Discussion Paper"); available at: https://cercind.gov.in/2018/draft_reg/DP31.pdf). More specifically, a system of settlement in respect of bilateral contracts ("BCS") has been contemplated under MBED (See "Minutes of the Commission Meeting on Implementation of Market Based Economic Despatch (MBED)," Paragraph 2(vi), CERC, August 25, 2022; available at: https://cercind.gov.in/2022/Minutes/MBED-Commission-Meeting-25-Aug-2022.pdf). Since BCS involves refunding the difference between the market clearing price and the contracted price, it is similar to a 'contract for differences' ("CFD").

43. This arrangement may be somewhat similar to a 'sleeved' PPA. Other than as integrated bilateral agreements between a genco and a consumer, physical PPAs can be structured as tripartite agreements as well - between the customer, the genco, and a discom. This tripartite agreement is known as a 'sleeved' PPA, where the power produced by the genco is delivered from the grid to the customer through a discom.

44. Power Exchange of India Ltd. (through its Vice President) v. Securities and Exchange Board of India & others, CIVIL APPEAL Nos. 5290-5291 of 2011 with C.A. Nos. 6311-6314 of 2021 @ SLP(C) Nos.17300-17303/2011 C.A. Nos. 5292-5295/2011, Supreme Court of India, October 6, 2021

45. See the Press Release entitled "Gate opened for the Power market reforms - 10 years long pending jurisdictional issue related to power market between CERC and SEBI resolved by Hon'ble Supreme Court," issued by the Ministry of Power, posted by the Press Information Bureau, Government of India, October 7, 2021, 1:11PM, New Delhi (the "Press Release"); available at: https://pib.gov.in/PressReleasePage.aspx?PRID=1761701

46. Forward contracts are referred to as term-ahead contracts under the Central Electricity Regulatory Commission (Power Market) Regulations, 2021 (the "2021 Power Market Regulations"), and as Non-Transferable Specific Delivery contracts ("NTSDs") under the SCRA.

47. Except NTSDs as defined in the SCRA.

48. At present, according to a report dated October 30, 2019 and submitted by a committee on the 'Efficient Regulation of Electricity Derivatives' - as set up by the MoP with the purpose of addressing jurisdictional issues (such report, the "Committee Report," as approved by the SC Order) - NTSDs, as defined in the SCRA, ought to be regulated by the CERC, while commodity derivatives in electricity other than NTSDs ought to be regulated by SEBI. The SCRA defines a 'derivative' to include commodity derivatives (Section 2(ac)(C) of the SCRA), which, in turn, include CFDs that derive their value from the price of underlying goods (Section 2(bc)(ii) of the SCRA). On the other hand, NTSDs are defined as non-transferable commodity derivatives which provide for the actual delivery of specific goods over a specified term at a fixed price (Section 2(ca) read with Section 2(ha) of the SCRA). Since VPPAs do not involve the actual delivery of electricity to counterparties, it appears that if and when VPPAs are constructed as non-NTSD commodity derivatives (pursuant to the Committee Report and the SCRA), SEBI, rather than CERC, might have regulatory jurisdiction over such contracts. However, since VPPAs are neither intended for trading on exchanges (as forward contracts in the secondary market) nor meant to be transferred to third parties - it could be argued that these are privately settled, bespoke, and untraded OTC contracts - and hence do not fall within SEBI's regulatory ambit either. On the other hand, pursuant to the 2021 Power Market Regulations, (i) REC contracts can be traded on power exchanges (Regulation 4(1)(b) of the 2021 Power Market Regulations), and (ii) REC transactions can be undertaken pursuant to the Procedure related to the 2022 REC Regulations (Regulation 5(4) of the 2021 Power Market Regulations) - both of which are under the CERC's sphere of influence.

This insight/article is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.