Virtual power purchase agreements (VPPAs), a financial tool for energy-intensive industries seeking to meet their renewable energy obligations, have not gained momentum in India despite their seemingly promising nature.

The Central Electricity Regulatory Commission (CERC) recently released draft guidelines to enable designated consumers to meet their renewable commitments. Under these guidelines, a VPPA or a designated consumer may enter into long-term bilateral virtual agreements with a renewable energy generator at an agreed-upon price.

These guidelines aim to help India achieve its goal of 500 GW of installed capacity from non-fossil fuel sources.

VPPAs have been available in the market for a few years. While these guidelines are a positive first step, the absence of a regulatory stamp for the VPPA framework has raised doubts about its success in India. Industry insiders point out that the CERC draft is non-binding in nature.

What are VPPAs?

A VPPA is a signed contract between a renewable developer and a consumer seeking renewable energy certificates (RECs) or green credits without any actual exchange of power. The VPPA market initially opened in 2021 following a jurisdictional dispute involving two regulators that was settled.

These agreements primarily fall within the realm of bilateral financial transactions. They are designed to provide consumers with renewable attributes, such as RECs, along with potential earnings on the exchange through the sale of power.

According to the guidelines, VPPA contracts are non-transferable and non-tradable, and the terms of the entire contract period are binding on both parties.

Most bulk electricity consumers, large corporates, and industrial consumers with large renewable energy obligations and environmental, social, and governance (ESG) commitments are potential VPPA offtakers.

“There are companies that would like to purchase green electricity but are unable to execute group captive arrangements due to internal compliance issues related to the requirement of making a 26% equity investment in the project, which will also be part of the target market for these contracts,” said Aditya Malpani, Senior Director and Regional Business Head – West, AMPIN Energy Transition.

Multinational corporations, data centers, IT companies, and heavy industries with RE100 commitments will find VPPAs particularly suitable for meeting their sustainability goals.

Lack of Clarity

Industry experts say that VPPAs are attractive for many, but the government framework hinders their growth.

Ambrish Kumar Khare, Vice President and Head of Business Development, Power Exchange India, said, “The main reason lies in the nature of the notification. It is not a regulation, it is just a set of guidelines. Additionally, guidelines, by definition, cannot be enforced.”

He added that many developers looked to regulatory commissions to formalize the introduction of the VPPA, following the considerable buzz around it. However, the authorities merely issued non-binding guidelines instead of taking clear responsibility. These guidelines do not address many critical issues.

“In other countries, VPPAs succeeded because either the government or a central agency took responsibility for risk mitigation. But under the current Indian structure, if the arrangement fails, there is no fallback,” said Khare.

According to Gautam Mohanka, CEO, Gautam Solar, the Indian market is gradually exploring mechanisms such as VPPAs as it builds a more mature framework for open access, power trading, and renewable energy integration.

He believes that, with regulatory clarity continuing to improve and market mechanisms developing further, there is significant potential for VPPAs to become a more viable and attractive option for Indian developers and consumers.

Malpani said, “Since VPPAs are deemed as derivatives, there has been ambiguity on regulatory jurisdictions for these contracts. Since most RE100 companies are listed entities following strict compliance norms, they have been seeking clarity on regulatory oversight.”

The CERC draft guidelines bridge the gap in the industry to a certain extent. “We estimate that at least 4 GW to 5 GW of capacity will be added under the VPPA framework in the next few years,” added Malpani.

Developers opined that a more formalized framework might give VPPAs in India the much-needed push.

“The draft guidelines from CERC are certainly a positive start. It needs to be formalized in certain aspects to address implementation issues from the perspective of the entities involved in VPPAs. Providing clearer provisions on contract settlement, REC mechanisms, and accounting of renewable consumption will certainly strengthen confidence for large consumers,” said Mohanka.

The guidelines suggest a structure but do not provide a mechanism for determining the strike price.

“They say traders or over-the-counter (OTC) platforms can handle it, but there is no defined role for the government or even the power exchanges. Exchanges are designed to ensure transparent and scientific price discovery through pre-approved mechanisms. In contrast, trader-led or OTC price discovery has many grey areas that can distort outcomes. Without scientific price setting based on real demand and supply, you end up with a win-lose scenario, which doesn’t work in the long run,” said Khare.

Risk of Greenwashing

According to Khare, as green credits become more active in the market, some level of stability can be expected in these agreements.

“But again, it heavily depends on each VPPA’s structure. You have seen companies like Amazon or Microsoft using these to position themselves as green leaders, which has inspired others, especially data centers and IT firms, to follow suit. So, the trend is already gaining ground,” he said.

Although VPPAs are a useful market instrument for energy-intensive industries in meeting their renewable purchase obligations, they also pose the risk of greenwashing.

Corporations prefer the “green company” label due to ESG commitments or funding needs. The tag also holds global significance, especially when companies raise funds or access specific markets.

Khare said, “If companies are purchasing green energy or green credits without a meaningful shift in operations, that opens the door for greenwashing. And unless those credits are traded transparently, and the green energy is generated and consumed (or offset properly), it can become more of a branding exercise than a real climate solution.”

“We are in a catch-22 situation, where companies might acquire green credits to meet ESG metrics, but the emissions might continue at the same or even higher levels. If not managed well, it could cause a whole new set of environmental problems. In that sense, it can become counterproductive,” he added.

Mohanka said, “There are greenwashing risks associated with consumers simply claiming consumption of renewable energy without genuine decarbonization efforts. Strong regulatory frameworks and clear disclosure norms will be necessary to ensure that VPPAs lead to actual sustainability.”

While CERC’s draft guidelines on virtual PPAs mark a welcome first step, their non-binding nature casts a shadow of uncertainty on the market. Without a formal set of regulations that gives a clear picture of price discovery mechanisms and market regulations, VPPAs may not gain momentum in the country.