1 INTRODUCTION TO VIRTUAL POWER PURCHASE AGREEMENTS
1.1 In terms of the Paris Agreement, India has submitted its updated Nationally Determined Contributions ("NDCs") outlining its climate action targets. As per the updated NDCs, India is required to reduce the emission intensity of its Gross Domestic Product (GDP) by 45% by 2030, from the 2005 level and achieve 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.
1.2 Despite high demand, renewable energy penetration in the Commercial & Industrial ("C&I") sector remains relatively low due to several challenges: inconsistent state policies, regulatory hurdles in open access, and intermittency of solar and wind resources. Further, traditional power purchase agreements are often hindered by high minimum load thresholds, unreliable delivery, and the absence of storage or banking mechanisms—making them inadequate for meeting the continuous, high-demand needs of C&I consumers across India. These challenges can be overcome under a virtual power purchase agreement regime.
1.3 Virtual power purchase agreements ("VPPAs") are financial contracts that enable corporations to scale renewable energy use without physical power delivery. The generator sells power on the exchange as conventional (brown) electricity but transfers the green attributes (e.g., renewable energy certificates) to the consumer. The characterisation of the power sold by the generator on the exchange as 'conventional' or 'brown' electricity is essential to prevent double counting of the associated green attributes. Enabling such separation between supply of power and green attributes is key to the functioning of VPPAs. Consumers retain flexibility to procure power via DISCOMs, exchanges, or captive sources. Since supply remains through local DISCOMs, utilities retain their customer base. A strike price is agreed upon and compared to real-time market prices; the difference is financially settled between the generator and the consumer, offering price hedging without disrupting physical power arrangements.
1.4 VPPAs are hybrid contracts combining elements of electricity transactions and derivative contracts, with their value linked to electricity prices. This dual nature has led to a regulatory overlap between the Central Electricity Regulatory Commission ("CERC") and the Securities and Exchange Board of India ("SEBI") (the statutory regulatory body to protect investors' interests in the Indian securities market). A jurisdictional dispute arose when Multi Commodity Exchange of India's electricity forward contracts were challenged by Power Exchange of India Limited before the Hon'ble Supreme Court of India. To resolve the jurisdictional dispute between CERC and SEBI, the Committee on Efficient Regulation of Electricity Derivatives constituted by the Ministry of Power in 2019 ("MoP Committee") recommended that all 'ready delivery contracts' and 'non-transferable specific delivery contracts' in electricity, as defined under the Securities Contract Regulation Act, 1956, entered into by members of power exchanges registered under the CERC (Power Market) Regulations, 2010, should be regulated by the CERC provided they satisfy certain conditions. The Hon'ble Supreme Court, in its final order, took note of the recommendations of the MoP Committee and accordingly, disposed of the matter without commenting further on the jurisdictional issue.
1.5 With regard to certain 'Obligated Entities', such as – DISCOMS, open access consumers, and captive consumers, consuming power from fossil fuel sources, Section 14 of the Energy Conservation Act, 2001, empowers the Central Government to specify the minimum share of consumption of non-fossil sources (i.e., renewable energy) by such Obligated Entities. Further, the specified renewable energy consumption targets are permitted to be met either directly or through Renewable Energy Certificates ("RECs") in accordance with the Central Electricity Regulatory Commission (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022 ("REC Regulations").2 The REC Regulations provide for the regulation of the grant, exchange, and redemption of RECs in India.
1.6 Furthermore, the CERC has notified the CERC (Power Market) Regulations, 2021 ("Power Market Regulations")3 to govern power exchanges, other market participants, and the over the counter ("OTC") market.4 The Power Market Regulations apply to all contracts transacted on the power exchanges, including contracts relating to RECs.5
1.7 Additionally, VPPAs would play a critical role in mobilising private capital for the development of new renewable energy capacity, as the long-term revenue commitments under these agreements enhance bankability and enable project developers to secure financing.
1.8 Recently, the Multi Commodity Exchange of India – one of India's leading commodity derivatives exchange – has received regulatory approval from SEBI to introduce electricity derivatives.
2. DRAFT VPPA GUIDELINES
2.1 The CERC vide the public notice dated May 22, 20256, has invited comments and suggestions on the Draft Guidelines for Virtual Power Purchase Agreements ("Draft VPPA Guidelines").7
2.2 We have reviewed the Draft VPPA Guidelines and provided our suggestions in Part 4 of this article. For ease of reference, the key provisions have been summarised under Part 3 of this article.
3. KEY PROVISIONS OF THE DRAFT VPPA GUIDELINES Table
1: Key Provisions
4. COMMENTS AND OBSERVATIONS ON DRAFT VPPA GUIDELINES
4.1 Restricting VPPAs to 'Long-Term' Contracts Restricts Contractual Freedom of the Parties:
Issue: The term 'long-term' as used in Para 5 of the Draft VPPA Guidelines (Refer Serial No. 5 of Table 1 above) has not been defined. Further, given that the duration of VPPAs can vary depending on the commercial objectives of the contracting parties, it is important that the Draft VPPA Guidelines do not restrict contractual freedom. Parties should retain the flexibility to structure VPPAs for short, medium, or long-term durations, depending on their individual requirements and the nature of the transaction.
Recommendation: The term "long-term" should be deleted from Para 5 of the Draft VPPA Guidelines.
4.2 Limitation of VPPAs to Renewable Transactions:
Issue: The current definition restricts VPPAs to contracts with RE Generators (Refer Serial No. 4 of Table 1 above), thereby limiting their application to green energy transactions. However, there appears to be no justification for such a limitation, particularly given that VPPAs primarily function as financial instruments for hedging electricity price volatility and need not necessarily be linked to renewable energy attributes.
VPPAs are fundamentally financial instruments intended to hedge electricity price volatility and can operate independently of renewable energy attributes. Restricting the definition to arrangements with RE Generators not only narrows the potential applicability of VPPAs in conventional power markets, but also introduces interpretational concerns, particularly where parties wish to enter into functionally similar price hedging arrangements involving non-renewable energy.
Recommendation: The term 'RE Generators' in the Draft VPPA Guidelines should be substituted with the broader term 'Generators' to reflect the fundamental nature of VPPAs as price hedging instruments.
4.3 Sale of Electricity – Determining Market Price:
Issue: Para 6.3 of the Draft VPPA Guidelines (Refer Serial No. 6 of Table 1 above) permits RE Generators to sell the electricity component through power exchanges or any mode authorised under the Electricity Act, 2003 ("Electricity Act"). This, inter alia, includes power purchase agreements for which tariff has been determined under Sections 62 and 63 of the Electricity Act, third-party open access and captive arrangements, which typically involve a fixed tariff and therefore do not experience price fluctuations. In terms of Para 7 (Refer Serial No. 7 of Table 1 above) of the Draft VPPA Guidelines (Refer Serial No. 7 of Table 1 above), the difference between the VPPA price and the market price is to be settled bilaterally between the parties. In light of the fixed-tariff nature of these other sale arrangements, it is unclear how the VPPA consumer would benefit from such a settlement mechanism and what purpose the VPPA would serve.
Recommendation: Clarity is required as to how fixed tariff arrangements can also benefit from VPPAs. This does not align with the core objective of VPPAs being financial instruments for hedging price volatility.
4.4 Lack of Clarity on the Term – 'Market Price':
Issue: Para 7 of the Draft VPPA Guidelines (Refer Serial No. 7 of Table 1 above) provides that the difference between the VPPA price and the market price is to be settled bilaterally between the contracting parties as per mutually agreed terms. However, the Draft VPPA Guidelines do not define the term 'market price'. Given the existence of multiple power exchanges in India (such as the Power Exchange of India and the Indian Energy Exchange), each of which may reflect different price levels at any given time, the absence of a clear definition of the term – 'market price' may result in interpretational ambiguity.
Recommendation: The term 'market price' should be clearly defined in the Draft VPPA Guidelines.
4.5 Conflict Between REC Transfer Mechanism in the Draft VPPA Guidelines and REC Regulations:
Issue: Para 8.2 of the Draft VPPA Guidelines (Refer Serial No. 8 of Table 1 above) states that the RECs issued must be transferred by the RE generator to the Consumer or Designated Consumer 'directly'. However, this requirement appears to conflict with Regulation 11(2) of the REC Regulations, which provides that "the Certificates shall be exchanged through power exchanges or through electricity traders in such periodicity as may be stipulated by the Central Agency in the Detailed Procedure". It is therefore unclear what is meant by 'direct' transfer under the Draft VPPA Guidelines, as direct bilateral transfers of RECs between generators and consumers are not currently permissible under the REC Regulations.
Recommendation: In view of the above, necessary regulatory clarifications are required.
4.6 Instruments such as I-RECs not covered:
Issue: The Draft VPPA Guidelines currently recognize only RECs issued under the REC Regulations and do not account for international instruments such as international renewable energy certificates ("IRECs"). The introduction of I-RECs will enable C&I consumers, including multinational corporations, to advance the achievement of their respective climate commitments.
Recommendation: The Draft VPPA Guidelines should explicitly recognize I-RECs within its scope.
4.7 Absence of Model Contractual Provisions for VPPAs:
Issue: The Draft VPPA Guidelines do not provide illustrative contractual provisions that parties may consider while drafting VPPAs. Given the relative novelty of VPPAs in the Indian context and the absence of a settled market practice, the lack of illustrative contractual provisions may create uncertainty in structuring bankable arrangements.
Recommendation: The Draft VPPA Guidelines should provide key illustrative clauses to promote standardisation and improve the bankability of VPPA-backed projects.
Footnotes
1 Order dated October 06, 2021 in Civil Appeal Nos. 5290 5291 of 2011, Supreme Court of India.
2 The REC Regulations can be accessed at: https://www.cercind.gov.in/regulations/REC-Regulations-2022.pdf.
3 The Power Market Regulations can be accessed at: https://www.cercind.gov.in/2021/regulation/161-reg.pdf.
4 Regulation 3 of the Power Market Regulations.
5 Regulation 4(1) of the Power Market Regulations.
6 Office Memorandum No. L-1/257/2020/(PMR-2)/CERC. Available at: https://www.cercind.gov.in/2025/draft_reg/Public-NoticeVPPAs.pdf
7 The Draft Guidelines for Virtual Power Purchase Agreements are available at: https://www.cercind.gov.in/2025/draft_reg/Draft%20Guidelines%20for%20VPPAs.pdf
8 Section 2 (ca) of the Securities Contracts (Regulation) Act, 1956 has defined 'Non-Transferable Specific Delivery Contract' as "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".
9 Regulation 2 (an) of the PM Regulations define the term 'Over the Counter Contracts' as "the contracts transacted outside the Power Exchanges".
10 Regulation 2 (ap) of the PM Regulations define the term 'Over the Counter Platforms' as "an electronic platform for exchange of information amongst the buyers and sellers of electricity".
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.
