Virtual Power Purchase Agreements As A New Contract Framework For Corporate Renewable Procurement

India's decarbonisation story has so far relied heavily on physical open access power purchase agreements, green tariffs and the market for renewable energy certificates. For large industrial and commercial consumers with multi-site load, grid constraints and evolving renewable purchase obligations, those tools are increasingly necessary but not always sufficient. Virtual power purchase agreement (VPPA) are now available as a new tool for corporate buyers to participate in the development of new renewable energy projects, while being able to lock in market pricing signals without taking on delivery risk associated with any one specific project, or with an open access arrangement.

On December 24, 2025, India has, for the first time with the Central Electricity Regulatory Commission's (CERC) Guidelines created a formal regulatory framework for Virtual Power Purchase Agreements. The establishment of this framework allows those involved in VPPAs to have a clearer understanding of the contractual structure and assignment of risks between renewable energy generators and commercial buyers.

Now, corporate buyers have access to a new type of renewable energy contract called a VPPA, allowing them to purchase renewable energy and secure price signals without having to worry about project delivery risks or access issues.

1. What the CERC VPPA guidelines actually create

1. How VPPAs are defined and regulated

The CERC guidelines define a virtual power purchase agreement as a bilateral, over the counter contract between a renewable energy generating station and a consumer or designated consumer, under which the parties agree to a financial settlement based on the difference between a negotiated strike price and a settlement price linked to market outcomes. The contract is non tradable and non-transferable and must have a minimum tenure of one year, distinguishing it from short term, tradable power market products. The guidelines make clear that only registered renewable energy generating stations that are eligible for renewable energy certificates under the prevailing REC Regulations can be VPPA counterparties, and that consumers must be in India and meet eligibility conditions that tie into state level RPO and RCO frameworks.

A key legal point that removes an early uncertainty is that such contracts are treated as non-transferable specific delivery contracts and therefore fall under CERC's jurisdiction rather than being classified as derivatives under the Securities Contracts (Regulation) Act. Current Commentary has acknowledged that plenty of cooperation has taken place between SEBI and CERC towards establishing that VPPAs, while possessing inherent financial settlement capacity, are to be viewed as tools of the power industry rather than either securities or derivatives traded on stock exchanges. This approach provides both generators and corporations comfort in knowing that they may enter into bespoke OTC agreements approved by CERC guidelines.

2. Separation of physical power and environmental attributes

At the heart of the VPPA design is a separation between physical electricity and environmental attributes. The guidelines require that electricity generated by the renewable energy generating station be sold through authorised mechanisms under the Electricity Act 2003 and CERC's Power Market Regulations 2021, such as power exchanges or bilateral contracts, but only for purposes other than fulfilling any renewable purchase obligation or renewable consumption obligation. The renewable energy certificates associated with the contracted capacity are to be issued to the generating station under the REC Regulations and then transferred to the VPPA buyer, who may use them to meet its RPO or RCO, upon which they are extinguished.

Financial settlement under a VPPA is built around the difference between a mutually agreed strike price and a settlement price derived from market outcomes, such as the price achieved by the generator in the power exchange or other agreed reference markets. If the settlement price exceeds the strike price, the generator pays the difference to the buyer. If it falls below that amount, then the buyer must pay the difference to the generator, but this is subject to the maximum and minimum limits (or caps and floor or collar) that were negotiated in the contract. The requirement in the guidelines stating that these do not have any ability to be traded and must have a minimum length of time in the future is intended to prevent people from buying these types of products with the intent of speculative trading based on fluctuations in prices in the short term.

2. Contract structure between RE generators and corporate buyers

1. Core commercial building blocks

From a contractual standpoint, a VPPA between a renewable generator and a corporate buyer needs to assemble several core commercial building blocks into a coherent whole. To begin, first, both parties need to define how much capacity they will offer and for how long they will offer it (usually stated as megawatts of installed capacity and for a number of years that corresponds with the project's financing horizon and buyer's decarbonisation initiatives). Second, they need to define the strike price and settlement price, including the reference market for determining the latter, whether it is a particular power exchange segment, a weighted average across multiple platforms, or a specific set of bilateral market outcomes.

Thirdly, the contract must specify the mechanics for the transferring of Renewable Energy Certificates (RECs). This includes timelines for the issuance of RECs under the REC Regulations, procedures for transferring certificates to the purchaser, and procedures for providing proof of extinguishment when the certificate has been utilised for compliance with the Renewable Purchase Obligation (RPO) or Renewable Certificate Obligation (RCO). Fourth, a clear provision of payment terms for both positive and negative differences between the strike and settlement price must be established (including invoicing, set-off and late payment interest), as well as any currency, tax and withholding requirements. The main difference between physical open access PPAs and VPPAs is that while physical open access PPAs require the buyer to physically take and pay for delivered energy, the corporate buyer in a VPPA's main responsibility is to settle finances and utilize RECs, whereas the physical delivery risk associated with the wholesale market is mainly with the generating entity.

2. Implementation agreements and eligibility conditions

The guidelines contemplate that VPPAs will be executed as over the counter contracts between consumers or designated consumers and eligible renewable generators. Only grid connected renewable energy generating stations that comply with REC eligibility conditions can participate, and electricity sold under the VPPA must be for purposes other than the buyer's RPO or RCO. Corporate buyers are required to fulfil their obligations by using RECs transferred to them through the VPPA. This means that project selection will not be based solely on commercial consideration, but will also take into account the following: 1) The REC eligibility associated with the project; 2) The project's status with respect to being connected to the grid; 3) Whether or not the generator is able to access the available market platforms to sell its power.

These requirements also interact with state open access, captive generation and group captive policies. A corporate that already has physical PPAs or captive plants in certain states will need to assess how VPPAs fit within its wider power procurement and RPO/RCO strategy and whether state level restrictions or incentives might affect the economics of a VPPA. In practice, parties may need an implementation agreement or side letter that connects the VPPA's terms to state level regulatory filings, energy accounting processes and the buyer's internal sustainability and reporting structures.

3. Risk allocation under VPPAs ( price, volume, REC and regulatory risk)

1. Price and volume risk

The structure of a VPPA shifts the price and volume risks from both the generator and buyer in a manner that is usually, but not always, different than what exists in both a physical PPA and/or the purchases of pure REC's. The physical generator sells electricity at a given price through the market, thereby bearing all operational risks associated with its facilities as well as market price fluctuations. The VPPA settlement then transfers a portion of revenue volatility to the buyer by effectively fixing the generator's net revenue at the strike price while exposing the buyer to upside or downside relative to its own benchmark.

Corporate buyers therefore have room to negotiate collars, floors or caps around the strike and settlement prices. The buyer may agree to share the upside to a certain limit and/or place a cap on the downside payment for a severely low purchase price to be able to manage their budget risk. The guidelines do not specify any certain collar design, leaving it to contract design, but do say that contracts must be either non speculative or linked to verified renewable resource capacity. Volume risk arises from generation shortfall, grid curtailment or outages. Here, parties typically distinguish between causes that are within the generator's control and those that are not, with force majeure provisions and grid related carve outs playing a key role in determining when shortfall results in reduced settlements, make good obligations or no liability.

2. REC and RPO/RCO risk

The REC chain under a VPPA has several steps, each of which can generate legal and commercial risk if not managed carefully. Renewable energy certificates are issued to the generating station based on actual generation and compliance with REC Regulations. They are then transferred to the VPPA buyer through the designated registry, and finally, they are extinguished when used to demonstrate RPO or RCO compliance. The guidelines require undertakings that the contracted capacity under a VPPA will not be double counted for REC issuance or RPO/RCO purposes by other parties, recognising the risk that the same megawatt output might otherwise be claimed by multiple consumers.

Delays or failures in this chain can leave the buyer short of RECs or expose both parties to regulatory inquiry. The contract should assign responsibility and liability to each party for fulfilling their obligations which includes obtaining RECs, transferring them correctly, and ensuring they are valid and do not have competing claims. If RPO or RCO compliance is not achieved because the generator did not get the RECs within the time frame allowed, or did not transfer them per their obligations, the parties may include in the contract consequences for the generator, such as penalties or payment of damages. Conversely, if the buyer fails to use or extinguish RECs properly, it may bear resulting regulatory consequences. The guidelines' emphasis on undertakings against double counting reinforces the need for careful covenant drafting and audit trails around REC related actions.

3. Change in law and regulatory risk

VPPA regulations interact in a compelling way with a variety of other regulations, including REC Regulations, 2021 Power Market Regulation, CPO and RPC Regulations, Open Access and Captive Policies and as well as the overall broader goal of decarbonizing the country and climate change policies in India. Changes in any of these layers such as amendments to REC eligibility, revisions in RPO trajectories, new rules on corporate emissions disclosure or changes in the treatment of VPPAs in sustainability reporting frameworks can materially affect contract economics.

Robust change in law clauses are therefore a core part of VPPA risk allocation. Parties need to decide which regulatory changes will trigger adjustments in pricing, allocation of additional costs, or even renegotiation rights and how to handle overlapping changes at central and state levels. Tax pass through mechanisms, particularly in relation to GST on settlements or RECs and any future carbon pricing, also need to be addressed explicitly. Corporates and generators who have used traditional PPAs will recognise these themes, but the multi layered nature of VPPA regulation means that they need to be revisited with a fresh lens tailored to the REC and market settlement overlay.

4. Comparing VPPAs with physical PPAs and other instruments

1. Corporate buyer perspective

From the standpoint of a large consumer, VPPAs sit alongside physical open access PPAs, green tariffs and REC only purchases as tools for meeting renewable energy and emissions targets. Physical open access PPAs involve taking delivery of power at a specified injection or drawal point, bearing wheeling and transmission charges, cross subsidy surcharges and the risk of grid curtailment or regulatory changes in open access terms. Through green tariffs, consumers can receive renewable electricity from their local distribution licensee transferring a large number of those risks back to the utility but typically at regulated prices and with limited potential to support the construction of new renewable generation facilities. "REC only" strategies can assist in achieving RPO/RCO goals, but they may not be able to provide consumers with the same sense of addition and price certainty as a green tariff would.

VPPAs, by contrast, allow a consumer with complex load across multiple locations to contract with a single or limited set of renewable projects anywhere on the grid and to treat the VPPA as a financial hedge and certificate delivery mechanism rather than a physical supply contract. This can simplify internal procurement and reporting, and it can align better with global ESG frameworks that recognise contractual instruments for renewable procurement. There is a trade-off involved in that the buyer can remain exposed to volatility in the settlement price, and the buyer needs to have a good understanding of the accounting and risk management related to cash flow from the VPPA, which can look similar to derivative like exposures in some jurisdictions.

2. Developer and lender perspective

For renewable developers, VPPAs change the revenue stack relative to conventional PPAs. Instead of a fixed tariff from a distribution company or a corporate buying physical power, the project's cash flows may come from market sales of electricity plus VPPA settlements and REC monetisation. This adds opportunities upside in strong markets, access to a diversified corporate REC buyer base but also complexity in forecasting and structuring finance. Lenders will want to examine the robustness of VPPA counterparties, the certainty of REC flows and the stability of regulatory frameworks that underpin both.

Debt documents will need to be aligned with VPPA terms on payment priorities, security over receivables, and rights to step in if the generator defaults under the VPPA or if the buyer seeks to terminate early. From a project finance perspective, VPPAs may be most attractive where they complement, rather than replace, other revenue sources, such as a base load physical PPA with a utility and additional VPPA linked capacity or where the VPPA is used to underwrite price stability for a merchant exposed project. For both developers and lenders, the fact that disputes under VPPAs are to be resolved contractually as the guidelines envisage, highlights the need for enforceable, bankable dispute resolution and security structures.

5. Practical drafting and negotiation issues for 2026

1. Key clauses that need special attention

For in house and transactional counsel, several VPPA clauses merit closer attention because they sit at the intersection of regulatory requirements and commercial risk. Definitions of strike price and settlement price, together with the description of the reference market, must be precise enough to avoid disagreement over how settlement amounts are calculated, especially if power markets evolve or new products are introduced. Curtailment and force majeure provisions should distinguish between curtailment due to grid or system operator actions and generator side issues, and clearly set out when settlement volumes are adjusted and when neither party is liable.

REC delivery and related indemnities require careful drafting to reflect the guidelines' undertakings against double counting and the practical steps needed to obtain, transfer and extinguish certificates. Change in law and tax clauses need to allocate costs arising from future changes in REC, RPO or RCO regimes, power market rules and taxation, while termination and step-in rights must balance lenders' interests, generators' development risk and buyers' desire for long term certainty. Finally, dispute resolution and forum clauses should take into account the cross border or multi-jurisdictional dimensions of some corporate buyers, even though the underlying regulatory framework is Indian. Parties may still prefer Indian seated arbitration or courts with subject matter familiarity.

2. What boards and deal teams should do next

For corporate buyers, VPPAs are not just another contract but a new category of exposure that touches procurement, treasury, sustainability, tax and legal functions simultaneously. It is recommended that senior management and boards develop an internal policy outlining the types of VPPAs, including thresholds for exposure, suitable tenors, appropriate counterparty selection and its relationship with RPO/RCO and net zero strategies. Coordination between sustainability teams, who are focused on RE and emissions targets, and treasury teams, who must manage price and cash flow volatility, will be essential. Engagement with lenders and auditors at an early stage is also critical so that the accounting, risk and covenant treatment of VPPA obligations is agreed upfront rather than becoming a closing stage issue.

For developers, the priority will be to build a VPPA ready template that aligns with CERC's guidelines and that can be adapted to different buyer profiles and financing structures. Deal teams may wish to map how VPPA linked projects sit alongside their existing PPA, open access and REC portfolios, and to identify where VPPA capacity can be deployed most efficiently in terms of grid access and market prices. As the first wave of contracts under the 2025 guidelines is negotiated and implemented, market practice will evolve around settlement conventions, REC logistics and change in law responses.

Used thoughtfully, VPPAs can become an important part of India's corporate decarbonisation and renewable financing landscape, but their success will depend on whether parties take seriously the contract design and risk allocation choices that the CERC guidelines now force into the open.

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.