Understanding Virtual Power Purchase Agreements In India: Emerging Trends In The Energy Sector

Introduction

India's "Panchamrit" commitments, which were announced at the 26th Conference of Parties("COP26") held in Glasgow, United Kingdom, include reaching a target 500 GW of non-fossil fuel energy capacity by the year 2030. The said target has set a base for India's transition to a clean energy economy and India's commitment in reaching the said goal is clearly visible in its approach- including but not limited to change in renewable energy policies thereby, considerably relaxing the laws for land acquisition, among others. One such approach that has been adopted by India is the introduction of Virtual Power Purchase Agreements ("VPPAs"), which have become an essential instrument in facilitating India's commitment to reaching its target by balancing access to renewable energy with financial security. Although VPPAs are accepted worldwide, the Indian energy market has only recently taken steps to provide a structured regulatory framework for their implementation. This presents Indian companies with an opportunity to meet their sustainability goals with innovative strategies. However, such VPPAs come with its own set of challenges related to governance, compliance, and contract design.

What are Virtual Power Purchase Agreements?

In India, VPPAs offer great potential to corporates in achieving their decarbonization goals. A VPPA is in stark contrast to traditional Power Purchase Agreements ("PPAs"), which require the actual delivery of electricity, VPPAs separate the commercials from the actual electric power supply by not requiring the actual delivery of the electricity by acting as a financial hedge especially for the electricity generator. This offers flexibility to companies that intend to support clean energy initiatives but are either unable or unwilling to utilise electricity directly.

A VPPA comprises of a renewable energy developer/generator, distributing its output into the wholesale power market, either through recognized power exchanges or other platforms as permitted by the Electricity Act of 2003, in exchange for a fixed VPPA price, also known as the strike price, from a buyer. While the buyer hypothetically purchases the same quantity of electricity at the strike price, the generator continues to sell it in the spot market at a floating rate. The buyer benefits from the difference if the market price exceeds the strike price and the buyer makes up the difference if it drops below the agreed-upon price.

Additionally, the buyer receives the Renewable Energy Certificates ("RECs"), which is utilized by the buyer towards demonstrating its commitment and compliance with clean energy use and sustainability.

Jurisdictional Overlap

The development of VPPAs in India is closely tied to the history of electricity forward and derivatives regulations. The jurisdictional issue and overlap initially arose in 2009 when the Multi-Commodity Exchange of India ("MCX") sought authorisation from the Forward Markets Commission ("FMC") to introduce forward contracts in the energy sector. The Power Exchange of India then challenged this request before the Central Electricity Regulatory Commission ("CERC"). It was CERC's contention that the Electricity Act of 2003 granted it the authority to regulate all types of electricity trading, including forwards and futures. In contrast, FMC used the Securities Contracts (Regulation) Act of 1956 to argue that such products fell within the scope of its authority as financial instruments.

The Bombay High Court in 2010 in the case titled Multi-Commodity Exchange of India Limited v. CERC, recognized that the two authorities were operating under different statutes, but it failed to address the issue at hand. To resolve the problem, the Ministry of Power established a committee in 2018. The committee's 2019 recommendation was that CERC should regulate "ready delivery" and "Non-Transferable Specific Delivery" ("NTSD") contracts, which are physically settled on power exchanges and are subject to stringent safeguards, while SEBI should regulate all other electricity derivatives. These suggestions were formalised in 2020 and later supported by the Supreme Court in the case Power Exchange of India v. SEBI, which established the foundation for VPPAs to be categorised as NTSD over-the-counter transactions within the electricity regulatory framework and thereby, to be separated into appropriate jurisdictions.

In May 2025, the CERC published Draft Guidelines for VPPAs, marking a significant step in recognition of this fast-growing new model. These guidelines propose classifying VPPAs as NTSD over-the-counter contracts between a consumer (or designated consumer) and a renewable energy generator. This means that such agreements are bilateral and cannot be transferred or assigned to third parties, therefore, reducing the scope for speculation.

Since, VPPAs are over-the-counter contracts, they are privately negotiated between the parties, allowing flexibility in terms and structures. This classification provides VPPAs with regulatory certainty without confusing them with financial derivatives. This not only provides VPPAs a stronger legal foundation but also guarantees that they are treated separate from securities or other tradable financial instruments.

Grey areas and emerging challenges

Even though VPPAs have gained recognition, since the regulations surrounding them are yet to be finalised, they will continue to operate in a regulatory environment which will continue to evolve.

• The primary drawback remains that CERC has issued "draft guidelines". Even though the draft guidelines issued by CERC will provide some regulatory sanctity to VPPAs, it is in the nature of guidelines to be non-binding which allows a lot of flexibility. Therefore, this leaves VPPAs under a very broad jurisdiction of CERC in the absence of a strong implementation mechanism, thereby, leaving enough room for legal uncertainties.
• Issuance of RECs seemingly act as a smoke screen cover up for corporates to portray their commitment towards meeting sustainability goals, however, it may contribute very little towards actual meeting of such goals and decarbonization.
• Flowing from this, the lack of a precise definition of "market price" in VPPA structures is another concern. Although there are multiple power exchanges in India with distinct clearing rates, the draft guidelines issued by CERC do not specify which exchange or price index should be used for calculating settlements, which are intended to be determined by the difference between the strike price and the market price. This omission raises the potential of interpretational challenges and settlement disputes.
• According to the proposed VPPA guidelines, RECs obtained from the generator must be extinguished and provided directly to the VPPA buyer. However, the current REC Regulations, which typically require exchange- or trader-based transfers, might conflict with this direct bilateral transfer structure.

Conclusion

Virtual Power Purchase Agreements have the potential to significantly alter India's renewable energy ecosystem. Even though the Central Electricity Regulatory Commission's 2025 Draft Guidelines are a significant step toward addressing long-standing framework issues and developing a regulatory environment for such instruments, however, the strength of implementation of the draft guidelines will ultimately determine how effective they are. Considering the VPPA framework is still in its early stages in India, there might be constant need to upgrade the guidelines and eventually draft an effective policy framework to regulate the VPPA market.

That said, the VPPA structure once implemented will provide financial support to the renewable energy companies and will be crucial in helping India reach its Panchamrit target by 2030 and Net Zero targets by 2070.

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