An estimated 80 per cent of corporate power purchase agreements (PPAs) in the US are ‘virtual’. In India, virtual PPAs (VPPAs) are absent.
What is a VPPA?
A VPPA is a financial instrument: while the buyer agrees to pay a fixed price for a notional quantity of electricity, the power generator sells actual electricity in the spot market to someone else at a floating rate. If the market price exceeds the fixed price, the buyer is paid the difference, and vice versa. Accordingly, a VPPA may be characterised as a ‘contract for differences’ (CFD) or as a fixed-for-floating swap. CFDs are legal in India.
In the US, a buyer under a VPPA is not required to obtain authorisation from the Federal Energy Regulatory Commission (FERC) — the equivalent of India’s Central Electricity Regulatory Commission (CERC). Instead, VPPA transactions are typically structured as ‘swaps’ — a type of over-the-counter (OTC) derivative — and is subject to the Dodd-Frank Act with reporting, record-keeping, and registration requirements.
Since a VPPA may involve transfer of renewable energy certificates (REC), such transactions can also be structured as commodity forward contracts where RECs are priced at the difference between floating and fixed prices.
When an eligible entity produces/purchases RE in excess of compliance requirement, it may be issued an REC from a designated agency for each (additional) MWh of electricity generated/purchased. If such RECs are included in a VPPA (‘bundled RECs’), the seller might be contractually required to transfer them to the buyer. In turn, the transferor can be compensated for such RECs through the fixed price it receives.
Erstwhile regulations related to RECs allowed dealing in unbundled RECs only, via CERC-approved power exchanges. In May, the CERC issued new regulations, which allow trading of RECs through traders as well as on exchanges; but they do not clearly provide for the sale of bundled RECs through bespoke bilateral arrangements that might make VPPAs effective.
After the Multi Commodity Exchange of India (MCX) began trading in electricity derivatives in 2009, a war broke out between the securities market regulator, SEBI, and the electricity regulator, CERC, over jurisdiction.
It was settled by the Supreme Court in October 2021. Accordingly, non-transferable specific delivery contracts (NTSDs) — as defined in the Securities Contracts (Regulation) Act, 1956 (SCRA) — will be regulated by CERC, while commodity derivatives in electricity other than NTSDs will be regulated by SEBI.
The SCRA defines a ‘derivative’ to include commodity derivatives, which, in turn, includes CFDs that derive value from the price of underlying goods. On the other hand, NTSDs are defined as commodity derivatives that provide for the actual delivery of specific goods.
Since VPPAs do not involve actual delivery of electricity, it appears that if and when VPPAs are interpreted to be non-NTSD commodity derivatives, SEBI, rather than CERC, might be the appropriate regulatory body.
However, since VPPAs are neither intended for trading on exchanges nor meant to be transferred to third parties, it may be argued that they are untraded OTC contracts and hence outside SEBI’s ambit. Further, the 2021 power market regulations and the 2022 REC regulations appear to indicate CERC jurisdiction.
The government should clarify.
(The writer is a lawyer with S&R Associates, a law firm)