Virtual power deals

Raju Misra | Updated on: Jul 30, 2022
Virtual power purchase agreements enable industrial consumers obtain green energy attributes without having to set up power projects

Virtual power purchase agreements enable industrial consumers obtain green energy attributes without having to set up power projects | Photo Credit: Jorisvo

Virtual power purchase agreements — the face of clean, green and cost-effective electricity procurement

A virtual power purchase agreement (VPPA) is a bilateral contract that allows a financial transaction between a generator of renewable power and a consumer, with the physical transaction handled by distribution companies (DISCOM). This enables procurement of power with financial and strategic advantages since the price of the transaction is based on the difference between the market price and the strike price.

If it’s a two-way VPPA, the difference between market price and fixed price would establish which party compensates the difference — if the market price is below the fixed price, the consumer compensates; if the fixed price is below the market price, the generator compensates. In a one-way VPPA, the liability falls on the consumer alone to compensate the generator if the market price is below the strike price. These agreements allow parties to assess the risks, overcome the price volatility of the electricity market, determine the settlement mechanism, and help the consumer achieve green certificate.

Given the benefits, commercial and industrial (C&I) consumers are more likely to adopt two-way VPPAs. They help C&I consumers receive green energy attributes without having to set up the power projects themselves, or enter into agreements with multiple projects to provide renewable energy to nationwide company projects since the power is directly added to the grid.

The derivative nature of the contract makes the jurisdiction the primary challenge to its adoption in India since the Central Electricity Regulatory Commission (CERC) does not recognise derivative contracts, and it is the Securities and Exchange Board of India (SEBI) that deals with such contracts.

The Supreme Court on October 6, 2021, provided a resolution of jurisdiction.

Given certain limitations and conditions, the Central Electricity Regulatory Commission (CERC) would regulate ready delivery contracts and ‘non-transferable specific delivery’ (NTSD), and the contracts as defined in the Securities Contracts (Regulation) Act, 1956 (SCRA), entered into by members of the power exchanges that are registered under CERC (Power Market) Regulations, 2010.

SEBI would regulate commodity derivatives in electricity other than NTSD and contracts as defined in SCRA.

A strict and clear set of guidelines would further streamline the jurisdictional issue and provide the electricity market with an effective redressal mechanism and registration system. Indian lawmakers must make space for VPPAs in the long run to help companies meet their 100 per cent RE sustainability goals.

The writer is Partner at King, Stubb and Kasiva, a law firm

Published on July 31, 2022
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