VPPAs in India, A New Tool for Renewable Price and Market Risk Management

What a VPPA is and why it matters

Virtual Power Purchase Agreements (VPPAs) are financial instruments under which the contracting parties agree to settle the difference between the VPPA strike price and the settlement price,being the price discovered in the Power Exchange or through any other mode authorized. VPPAs have been in operation since the early 2000s in the U.S. and European electricity markets and have played an important role in managing electricity price risk.In India, as renewable energy penetration and electricity procurement through power markets increase, the need for instruments to enhance liquidity for renewable energy generating stations (REGS) and manage market risk has emerged; accordingly, CERC issued guidelines for VPPAs in December 2025.

How VPPA is structured

• Electricity generated by a Renewable Energy Generating Station (REGS) shall be physically injected into the grid to ensure that the generation is real and measurable. However, a VPPA does not require physical delivery of electricity to the VPPA counterparty; the injected power may be delivered to another consumer, while the financial VPPA may be executed with a different consumer.

• A VPPA shall be a bilateral, OTC, non-tradable and non-transferable contract and shall be treated as a Non-Transferable Specific Delivery (NTSD) contract; accordingly, the provisions of the Securities Contracts (Regulation) Act, 1956 shall not apply and come under the regulatory purview of CERC.
  
• Minimum for a VPPA contract shall be one year. This commitment provides better revenue visibility for the REGS.
  
• The VPPA strike price shall be mutually agreed between the REGS and the consumer at the time of executing the VPPA. The strike price shall be a single, uniform price determined after considering factors such as prevailing and expected market prices, the renewable generation profile, and risk allocation between the parties.

How RECs work under a VPPA

Renewable Energy Generating Stations (REGSs) are eligible for issuance of RECs where the electricity generated is sold to consumers for non-RPO/RCO compliance purposes. Such RECs may be transferred to a consumer with whom the REGS has entered into a VPPA and may be used by that consumer for RPO/RCO compliance. Also, the RECs once transferred to the consumers shall stand extinguished.

To avoid double counting REGS shall declare or register the capacity contracted through VPPA to the REC registry. In case, the RECs issued are over the RPO compliance needed for the designated consumer, they can be carried forward for future and their validity will be governed by REC regulations.

What the generator gains

A VPPA provides financial reassurance to REGSs and enables revenue generation through the issuance of RECs to the consumer or designated consumer. In the absence of such arrangements, REGSs would have to sell RECs in the open market, where demand and price certainty remain limited due to the underdeveloped state of the REC market in India.

What the consumer gains

VPPAs mitigate market risk in both electricity and REC markets and enable obligated entities to procure RECs more easily through bilateral sourcing with assured traceability and predictable availability. For consumers procuring electricity from the market and entering into a VPPA with a REGS, the settlement price is the market price. Accordingly, if the market price exceeds the strike price, the consumer receives a payment from the generator, and vice versa. VPPAs provide designated consumers with the flexibility to procure RECs independently, avoiding the need for bundled power purchase agreements at higher tariffs.

What could hold adoption back

1. The major challenge to address would be the double counting of data. The consumer could be participating in different markets like Carbon, RECs, I-RECs, and others, and the generation or consumption data could be used to report compliance across markets that can create a lot of overlap if the data management systems are not streamlined or disclosed properly.

2. Given that most REGSs are already contracted under PPAs with DISCOMs and other entities, identifying suitable REGSs for VPPA execution may be challenging.
3. Agreement of the strike price between consumer and the REGS especially in case of electricity procured through the market.

What needs to happen next

As VPPAs are OTC based bilateral contracts, there is a need for development of OTC trading platforms which enable both REGS and Consumers to align with each other’s requirements and execute a VPPA.As electricity markets mature, advanced AI-based analytical models are needed to predict VPPA strike prices effectively. Furthermore, the operational framework for VPPAs, as governed by CERC regulations, should be continuously updated. This would allow the mechanism to evolve from an initial focus on REC procurement to a more advanced role in price and risk management as the electricity market matures.