14 March 2024

VPPA – Regulatory Regime In India

Phoenix Legal


Phoenix Legal is a full service Indian law firm offering transactional, regulatory, advisory, dispute resolution and tax services. The firm advises a diverse clientele including domestic and international companies, banks and financial institutions, funds, promoter groups and public sector undertakings. Phoenix Legal was formed in 2008 and now has 14 Partners and 65 lawyers in its two offices (New Delhi and Mumbai) making it one of the fastest growing law firms of the country.
India ranks 4th globally in terms of the installed renewable energy capacity and about 42.3% of our total installed capacity is based on renewable energy sources (such as, solar, wind, hydro, waste to energy, etc.).
India Energy and Natural Resources
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India ranks 4th globally in terms of the installed renewable energy capacity1 and about 42.3% of our total installed capacity is based on renewable energy sources (such as, solar, wind, hydro, waste to energy, etc.)2. Importantly, India has ambitious targets with respect to clean energy, such as, (i) to achieve 500 GW of installed capacity from non-fossil sources by 2030; (ii) source about 50% of its power from non-fossil fuel-based energy resources by 2030; (iii) to reduce emission intensity to 45% below 2005 levels by 2030; and (iv) achieve Net Zero Emissions by 2070.3

The global focus to reduce carbon footprint and our aggressive clean energy targets has increased the demand for renewable energy in India. Additionally, a number of commercial & industrial ("C&I") consumers are increasingly moving towards procuring green power (as against conventional power) for its operations. This seems to be mainly on account of tariff for renewable power achieving grid parity and green mandates of these corporates.

Currently, the modes for procuring green power by C&I consumers are limited to physical delivery of power under bilateral power purchase agreements ("PPAs"), onsite plants, PPAs on open access basis, captive PPAs, group captive PPAs etc. Another option, albeit at a nascent stage (and not that popular currently), is procuring green power through green power exchange/trading market in India. Importantly, the conventional PPAs for green power procurement has its challenges; mainly, the availability of evacuation arrangements, transmission constraints and disruption of existing arrangements with distribution companies ("DISCOMs"). Perhaps, these are some of the reasons for low penetration of renewable energy in the energy utilisation by C&I consumers.

To enhance the penetration of renewable energy, one model that Indian market has been toying with for the last couple of years is the virtual power purchase agreements ("VPPAs").

Global Concept of VPPAs

Before we discuss the concept of VPPAs, it is pertinent to mention that renewable energy generation consists of two integral components: the "electricity component", often referred to as the 'brown component', and the "environmental attribute", known as the 'green component'. Under conventional PPAs, green power (i.e., combination of the two components above) is sold.

Globally, a VPPA is understood to be a contract between a generator and a buyer of clean energy, without any physical delivery of energy. Instead, the generator sells power as 'brown power' on the power exchange and sells green attributes or green energy certificates, such as renewable energy certificates ("RECs") in the Indian context or international-RECs ("I-RECs"), to the consumer at a fixed price. Relevantly, the sale/purchase of RECs are regulated in India and need to be sold in accordance with the prescribed regulations4. I-REC sale is also to be undertaken in accordance with the process specified under the I-REC standard.

The buyer in this arrangement continues to procure power from its utility/DISCOMS. Thus, VPPAs are non-disruptive to the existing relationships between buyer/consumers and DISCOMs.

Importantly, the generator and the buyer agree to a strike price under the VPPA. If the market price at which the generator sells power at the power exchange is lower than the agreed strike price, the buyer compensates the generator for the difference. Conversely, if this market price exceeds the agreed strike price, the excess received is paid from the generator to the consumer. Such a contract is known as Contracts for Difference ("CfD") and serves as an effective hedge against power price fluctuations for both parties. This structure is mainly called a 'two-way VPPA', which is more prevalent than a 'one-way VPPA' in which the buyer alone bears the responsibility to compensate the generator if the market price falls below the strike price.

Regulatory Position - Electricity and Electricity Derivatives

A VPPA has two important pieces – (i) electricity; and (ii) derivative contracts/CfD. In the Indian context, both electricity and derivatives are heavily regulated.

For electricity, Electricity Act, 2003 is the primary legislation and Central Electricity Regulatory Commission ("CERC") and State Electricity Regulatory Commissions ("SERCs") are the main regulators.

The statute regulating the securities markets in India is the Securities (Contracts) Regulation Act, 1956 ("SCRA") with the Securities and Exchange Board of India ("SEBI") being the regulator. The SCRA regulates contract for sale and purchase of securities, which amongst others includes CfDs (being part of the definition of 'commodity derivatives'). Relevantly, the SCRA defines commodity derivatives under Section 2(bc) of the SCRA as:

commodity derivative means a contract

  1. for the delivery of such goods, as may be notified by the Central Government in the Official Gazette, and which is not a ready delivery contract; or
  2. for differences, which derives its value from prices or indices of prices of such underlying goods or activities, services, rights, interests and events, as may be notified by the Central Government, in consultation with the Board, but does not include securities as referred to in sub-clauses (A) and (B) of clause (ac).

Pertinently, 'electricity' came within the fold of this definition (and thereby a CfD) when the same was classified as a 'good' under the SCRA pursuant to Ministry of Finance's notification dated September 27, 2016.5

Further, SEBI exercising its power under Section 16 of the SCRA to prevent undesirable speculation in specified securities had issued a notification dated October 3, 20136. The said notification basically states that all contracts for sale or purchase of securities except for the specifically allowed contracts (to the extent and in the manner specified therein) would require approval from SEBI. Accordingly, all commodity derivates (such as, electricity derivatives) which do not fall under one of the specified exceptions would require SEBI approval7.

There are certain exceptions prescribed to commodity derivates, namely, ready delivery contracts8 and non-transferable specific delivery contracts9 (both these entail physical delivery of the underlying good).

CERC and SEBI Tussle10

The introduction of electricity forward contracts occurred when the Multi Commodity Exchange of India ("MCX") sought approval from the Forward Market Commission11 ("FMC") to introduce electricity forward contracts on March 19, 2005. The FMC granted its approval on January 7, 2009 and expanded the scope of financial instruments in the electricity sector. However, this move was opposed by the Power Exchange of India Limited ("PXIL"), which challenged this approval before CERC. PXIL was of the view that CERC has exclusive jurisdiction over regulating electricity matters.

Subsequently, CERC issued an order dated April 28, 2009, asserting that MCX could not launch electricity forward contracts without obtaining CERC's consent. This decision was challenged by MCX and upon review CERC reiterated its decision pursuant to its order dated January 11, 2010. CERC highlighted a perceived conflict between the Forward Contract (Regulation) Act, 1952 ("FCRA")12, and the Electricity Act, 2003, leading to regulatory ambiguity.

In response to CERC's determinations, FMC filed a writ petition before the Bombay High Court ("HC"), seeking a resolution to the jurisdictional clash. Unfortunately, the HC's decision in 2011 left the matter inconclusive. The HC mainly held that "the futures contract in electricity cannot be exclusively dealt with by the authority under the FCRA. Similarly, in view of the specific provisions under the FCRA, CERC also cannot deal with the futures contract on its own and have no power to deal with the same in the futures contract, unless appropriate enactment has been made by way of statutory provision regulating the futures contract, giving powers only to one authority out of the aforesaid two authorities".

This unclear order was challenged by both the parties before the Supreme Court of India. The moot point before the Supreme Court of India was whether CERC or SEBI should wield authority over these electricity forward contracts. Amidst these deliberations, the Ministry of Power took a proactive step by forming the 'Committee on Efficient Regulation of Electricity Derivatives on October 26, 2018'. Entrusted with examining the technical, operational, and legal framework for electricity derivatives, this committee delivered its recommendations on October 30, 2019.

This committee mainly proposed that all 'ready delivery contracts' and 'non-transferable specific delivery contracts' in electricity, each as defined under the SCRA, entered into by members of the power exchanges, registered under CERC (Power Market) Regulations, 2010, be regulated by CERC subject to following conditions, namely:

  • the contracts are settled only by physical delivery without netting;
  • the rights and liabilities of parties to the contracts are not transferable;
  • no such contract is performed either wholly or in part by any means whatsoever, as a result of which the actual delivery of electricity covered by the contract or payment of the full price therefor is dispensed with;
  • no circular trading is allowed and the rights and liabilities of parties to the specific delivery contracts would not be transferred or rolled over by any other means whatsoever;
  • the trading would be done only by authorised grid connected entities or trading licensees on behalf of grid connected entities, as participants;
  • the 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 in this regard. However, once annulled, the same contract cannot be reopened or renewed in any manner to carry forward the same transaction; and
  • all information or returns relating to the trade, as and when asked for, would be provided to CERC, who shall monitor the performance of the contracts entered into on the power exchanges.

And, commodity derivatives in electricity, excluding 'non-transferable specific delivery contracts' under the SCRA, were recommended to fall under SEBI's regulatory purview.

Upon adopting these recommendations, both SEBI and CERC mutually agreed to a bifurcation of regulatory oversight, with CERC regulating physical delivery-based forward contracts and SEBI overseeing financial derivatives. Subsequently, the Ministry of Power issued an office memorandum dated July 10, 2020, on this subject ('OM'). The Supreme Court, relying on these agreements and the OM, issued an order on October 2, 2021, directing adherence to the terms and conditions outlined by the said committee and the OM.

Way forward

The expectation, post the Supreme Court decision in 2021 was that the market for VPPAs in India would open up. However, it appears that not much has happened in this space (though, there is a lot of interest from both developers and C&I consumers in this structure). Last September, Cleantech Solar through its press release announced that it has operationalized its maiden VPPA13. However, no details of this VPPA agreement are available in the public domain, except that it involved I-REC sale and sale of power from the solar plant in the energy exchange.

While, the regulatory jurisdiction between CERC and SEBI was finally resolved with the decision of the Supreme Court of India, unfortunately it proved to be inadequate for VPPAs; as VPPAs didn't squarely fit into either bucket. On one side, VPPA can be termed as a pure financial instrument as it is primarily used for hedging the price risk and the buyer doesn't receive electricity in physical form. On the other hand, the fact that the buyer purchases RECs/I-RECs from the generator at an agreed price prevents it from being categorized as a purely financial contract.

Ideally, CERC and SEBI should clarify the position on VPPAs by amending the existing regulations/notifications to clarify how the VPPAs would be regulated in India.

Until such regulatory clarity is issued, breaking down the steps contemplated to achieve the aim of a VPPA construct merits consideration. Primarily, it is worth deliberating if in a VPPA construct, sale and purchase of electricity or an electricity derivative is taking place between the buyer and the generator. As discussed above in this article, electricity derivative is a contract for purchase and sale of electricity that may be discharged either by delivery of electricity or may be discharged by payment of differences in the price contracted by the contracting price and the market price. Further, related to this, it needs to be considered, if a contract achieving the intent of a VPPA really falls under the jurisdiction of and needs to be regulated by either SEBI or CERC. Perhaps, it is time for innovative structures to be deliberated upon to increase the renewable energy penetration in the country and as a result help achieve our clean energy targets!


1. Ministry of New & Renewable Energy press release dated January 3, 2024, see,Financial%20Assistance%20during%20this%20period.

2. Ministry of Power, Power Sector at a Glance (as on January 31, 2024), see

3. Cabinet press release dated August 3, 2022, see

4. Central Electricity Regulatory Commission (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022.

5. SEBI circular dated September 28, 2016 - List of Commodities Notified under SCRA by Ministry Finance's gazette notification dated September 27, 2016, see

6 .SEBI Notification dated October 3, 2013, see

7. Currently, none of specified exceptions pertain to electricity derivatives.

8. As defined under Section 2(ea) of the SCRA.

9. As defined under Section 2(ca) of the SCRA.

10. Multi Commodity Exchange of India Limited & Another v. Central Electricity Regulatory Commission & Ors. (Writ Petition No. 1197 of 2010) and Power Exchange of India Ltd. through Vice President v. Securities and Exchange Board of India etc. (Civil Appeal Nos. 5290-5291 of 2011).

11. This was subsumed into SEBI in 2015.

12. The forward contracts were governed by this statute back then which were then bought under the jurisdiction of SEBI sometime in 2015.

13. Cleantech Solar press release dated September 11, 2023, see

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

14 March 2024

VPPA – Regulatory Regime In India

India Energy and Natural Resources


Phoenix Legal is a full service Indian law firm offering transactional, regulatory, advisory, dispute resolution and tax services. The firm advises a diverse clientele including domestic and international companies, banks and financial institutions, funds, promoter groups and public sector undertakings. Phoenix Legal was formed in 2008 and now has 14 Partners and 65 lawyers in its two offices (New Delhi and Mumbai) making it one of the fastest growing law firms of the country.
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