Virtual Power Purchase Agreements are increasingly becoming a popular instrument to execute electricity market transactions. They enable both parties to hedge their risks of fluctuating markets and execute transactions.

1. Virtual Power Purchase Agreements
Prepared by:
Sounak Mukherjee

2. VPPA and PPA
• C&I consumers in India avail RE power mainly through
signing physical PPA (rooftop/open access). Due to
variability of RE power, C&I consumers fail to replace 100%
of their consumption using physical PPA route.
• VPPA is a bilateral agreement signed between the power
producer (RE generator) and the C&I consumer with no
physical delivery of power.
• Generator sells the power in the power exchange at
market price but transfers the green attributes to the
consumer with whom they have signed the VPPA.
• A strike price is determined between the generator and
consumer which is then compared with real-time prices in
power exchange.
• When the market rate is higher than the strike price, the
power producer pays the difference to the consumer
whereas when the market price is lower, the consumer
pays the difference.
Consumer
VPPA
Brown Power
INR/kWh
CERC
PX
settlement
based on CFD
INR/kWh

3. Importance and key elements
Pricing structure
• VPPAs may have varying pricing
structures depending on the
corporate entities. They may
include fixed escalation rate or
indexed with inflation. The price
may also be linked to real time
market price with a discount or
with benchmarks (floor and
ceiling price).
Settlement mechanism
• VPPAs arecustomized, untraded
contracts. Globally it is
considered as a swap
instrument. Commodities’ Act
of various countries impose
reporting, record-keeping,
clearing, margining, and other
compliance obligations on these
transactions.
Issuance of Green Certificate
• Different countries have their
own REC certifications such as
Guarantees of Origin (EU) and
national RECs.
• Currently, most of the VPPAs
globally are issued International
RECs. I-RECs are recognized by
large corporates to meet their
renewable purchase obligations.
• Energy consumption by C&I consumers constitutes around 50% (660 BU) of total energy consumption which is expected to cross
1000 BU by 2030. C&I consumers are primarily meeting their green power requirement through physical RE PPAs under the Open
Access regime
• VPPAs are unique power transaction tools which involve physical trade, financial accounting, and transfer of green energy credits
simultaneously between a generator and a consumer.
The key elements are described below-

4. Regulatory framework ofVPPA
There are 4 key aspects of VPPA regulation-
• CERC Availability Based Tariff Regulation, 2000, appropriately defines the energy accounting
and scheduling procedure in which 15-minute scheduling, metering, accounting, and
settlement system was introduced
Energy accounting
• As per Supreme Court order dated 6th October 2021, all physical delivery-based forward
contracts is regulated by CERC whereas commodity derivatives in electricity other than NTSD
contracts as defined in SCRA would be regulated by SEBI. However, the regulatory clarity is
needed for monitoring and arbitration of VPPAs.
Financial regulation of the swap
contract
• RECs in a VPPAs must be 1. issued directly to the consumer, 2. must be linked back to the
original project to declare additional RE project. As per section 11, clause 4 of CERC REC
Regulations, 2022, has allowed bilateral trading of RECs through electricity traders.
REC certification
• VPPAs are long term financial contracts even as the generators sell power in the merchant
market. CERC General Network Access Regulations, 2022 defines the open access as
Temporary GNA and lays down the eligibility and applicability for connectivity.
Open access approval

5. Benefits ofVPPA
• In VPPA, green credits usually in the form of RECs are traded between the RE generator and consumer. It addresses
several challenges that physical PPA’s otherwise face.
• The benefits of VPPA instrument to different stakeholders have been tabulated below:
Stakeholder Benefit
C&I consumer • As there is no physical delivery of power, there is no constraint regarding demand
and supply mismatch. Thus, VPPA enables the consumers to attain 100% RE target
in combination with other RE procurement models.
• It allows demand aggregation of consumers’ facilities located across diverse
locations.
RE generator • VPPA provides firm revenue stream to the RE developer.
• Encourages RE development by ensuring better cashflow and providing firm
revenue.
DISCOMs • Eliminates the energy settlement process for the consumer and discoms as the
green certificates are procured directly.
• Consumer continues to procure power from Discoms as there is no physical delivery
of power inVPPA.

6. Challenges and mitigation
VPPA pose unique
challenge for monitoring
and regulatory compliance
as it involves both physical
and financial transactions
of power. While the
Supreme Court has
resolved the jurisdictional
issue of power markets,
further clarity is required
the framework for
approval and associated
compliances to be
followed for CERC and
SEBI
Monitoring regulatory
compliance
Currently, there is no
standard document
regarding this kind of
power transaction. A
standard PPA document
will serve as a guiding
document and provide
clarity to key provisions
related to settlement
period, settlement
mechanism, events of
default, obligation of
parties, financial
accounting, and
associated compliance
documents.
Standard PPA
document
Globally, VPPAs are
registered under I-REC
because it allows C&I
consumers to utilize the
certificate across multiple
countries. Allowing VPPA
projects in India to
register under I-REC will
enable multinational
corporations to tap into
the huge international
market. Indian entities
with RPO may also opt for
CERC defined REC
certificates. Accordingly, a
generator could set up a
VPPA project under REC
mechanism.
Registration under
I-REC
Market Clearing Price
(MCP) is key element in
VPPA contract. In India,
the MCP varies across the
multiple power exchanges
currently operating which
adds to uncertainty. The
Ministry of Power in June
2023 has advised CERC to
initiate Market Coupling
of power exchanges.
Appropriate and effective
mechanism for the same
will encourage the
adoption of VPPAs.
Standard Market
Clearing Price

7. Positioning against GT and RECs
• Physical PPAs are the most common procurement tool used by the C&I segment. Approximately 40% of the total C&I
demand could be met using this tool.
• VPPA will enable C&I consumers to meet their demand for green power. It can complement existing RE procurement tools
such as RECs and Green Tariffs to assist C&I consumers in their energy transition.
The table below displays the possible positioning of VPPAs vis-à-vis GTs and REC purchase.
RE procurement tool Benefits Positioning
GreenTariff Meets sustainability goals and keeps a
safety net-load on grid by larger C&I
consumers.
Mainly useful for C&I consumers with
smaller loads but who prioritize going
green. However, only a few states have
come out with GTs with high
premiums.
Direct REC Purchase Meets RPO of obligatedC&I entities
like captive power plant users
Mainly for renewable power obligated
entities (like thermal captive power
plants) as per the RPO guideline.
Virtual PPA Makes 100% RE a viable solution for
corporates
All power that cannot be met through
physical PPA will be signed under
VPPAs

8. Case study- Novartis
Country United States of America
Corporate entity Novartis
RE Developer Invenergy
RE project under
VPPA
302 MW Santa Rita East Wind
farm
Capacity signed 100 MW
Duration 12 years
ERCOT- It is the power grid operator in Texas and
manages majority of the electricity spot market.
Dodd-Frank Reporting- Entities involved in the swap
transaction (VPPA) are required to report different kinds of
information at the execution of the contract and on an on-
going basis to a swap data repository (SDR). Regulators
(CFTC) have established a framework for determining
which party is responsible for reporting. The order is Swap
Dealer (SD), Major Swap Participant (MSP) and Non-
SD/MSP. VPPAs are often between a RE developer and a
C&I consumer. In this case, generally, both parties are
considered non-SD/MSPs.
Framework-
• As per VPPA terms 100 MW of power from Invenergy’s wind farms is supplied to the organized spot market of Texas i.e.,
ERCOT.
• Novartis receives RECs from Invenergy for the 100 MW of power.
• A floor and a ceiling price for the agreement tenure has been set mutually. Invenergy pays Novartis if electricity prices are
above the ceiling price. Novartis pays the project the difference if the market price falls below the floor price.
• Novartis’s actual electricity usage or the geographic location of its actual off-take has not been affected.
Settlement period-
• VPPA is settled monthly for the contracted capacity of 100 MW.
Dodd-Frank reporting-
• As both entities are considered non-SD/MSPs, accordingly VPPA specifies the reporting entity.

9. Thank you