Saur Energy Explains: Decoding India's VPPA Framework - A Game-Changer or Regulatory Half-Measure?

Virtual Power Purchase Agreement, or VPPA, is emerging as a new financial instrument aimed at helping consumers meet renewable energy obligations and trade power. 

The Central Electricity Regulatory Commission (CERC) has argued that the VPPA can serve as an enabling instrument for Designated Consumers to meet their RCO targets. In addition to releasing draft guidelines for VPPAs, CERC even sought SEBI’s opinion on the regulatory jurisdiction over VPPAs.

Through this short explainer, we will explore VPPAs; what are they? Their viability in the Indian context? What issues need resolving before VPPAs are set for adoption in India?

What are VPPAs?

VPPA is a financial contract for difference (CfD) between a renewable energy generator, such as a solar or wind project developer, and a corporate buyer. However, there is no physical delivery of electricity to the buyer in this case. 

The consumer guarantees payment of the mutually agreed price, also called the VPPA price, to the RE generator for the entire duration of the agreement.

Notably, the arrangement is purely financial, meaningthe buyer pays a fixed price for the environmental attributes, typically Renewable Energy Certificates (RECs), linked to a project, while the generator sells the electricity into the market at market prices. 

What is a Strike Price?

The financial settlement between the two parties depends on the difference between the fixed VPPA price, also known as the strike price, and the market price at the time the energy is sold. 

In this arrangement, if the market price is higher than the strike price, the buyer receives the difference. Conversely, if the market price is lower, the buyer pays the generator the difference.

This agreement allows corporates to hedge against price volatility, contribute to renewable energy growth, and meet sustainability or compliance goals without changing their actual physical power supply or transitioning to the local grid.

Indian VPPA Framework

CERC defines VPPA as Non-Transferable Specific Delivery (NTSD) based Over-the-Counter (OTC) contracts between a Designated Consumer and a RE generator. By June 2025, CERC clarified the VPPA framework’s jurisdiction, finalising rules to accelerate India’s 500 GW non-fossil fuel goal by 2030.

Decoupling of Environmental Attributes: 

Corporations can purchase the environmental attributes (IRECs), while the power itself is sold into the open market. This enables companies to meet their Renewable Energy Consumption Obligations (RCOs) under national law.

Renewable Energy Certificates (RECs): 

Under the framework, VPPAs facilitate REC transfers for compliance but bar resale or trading. This is expected to enhance the integrity of green claims.

Mutually Agreed VPPA Price: 

A long-term bilateral contract is to be executed between a consumer or designated consumer at a mutually agreed VPPA price. Furthermore, the difference between the VPPA price and the market price has to be bilaterally settled between the parties under the VPPA. The market price is the one at which the generator has sold the electricity. 

Notably, the renewable energy contracted through VPPAs will be eligible for issuance of RECs under the CERC (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022 (CERC REC Regulations). 

Thus, projects under the VPPA structure must be registered with the National Load Despatch Centre. Since such projects will only be eligible for issuance of RECs, international RECs (IRECs) are effectively excluded from the purview of the VPPA structures contemplated under the Draft Guidelines.

Sales and Compliance: 

The renewable energy generator is permitted to sell electricity from the project on the power exchanges or through any other mode as recognised under the Electricity Act, 2003. To that effect, the renewable energy certificates (RECs) will be transferred to the designated consumer. The consumer can use the RECs towards RCO compliance or for claiming the green attributes.

CERC has the regulatory oversight and retains the authority to inspect and audit exchanges and platforms.

Whom Does VPPA Serve?

The VPPAs have the potential to serve three key types of Indian stakeholders, including Designated Consumers, Renewable Energy Developers, and over the counter (OTC) Platforms and Traders.

VPPAs help Designated Consumers, including large industrial entities and DISCOMs, access renewable energy capacity without the logistical and operational constraints of physically receiving power. This is a great relief as it is a more agile and cost-effective path to compliance. Notably, these Designated Consumers must meet their Renewable Energy Consumption Obligations (RECOs) under the Energy Conservation, which is a minimum share of their electricity consumption from non-fossil sources. Failing to meet them incurs penalties. VPPA is, thus, especially beneficial in regions with limited renewable infrastructure.

On the other hand, for Renewable Energy Developers, a VPPA arrangement may help provide a broader buyer base. Through long-term financial commitments, VPPAs may help provide revenue visibility and bankability. This makes it easier to attract investments.

The OTC Platforms and Traders also get benefits, especially after the CERC regulations, which enable the listing and facilitation of VPPAs through registered over-the-counter platforms.

Regulatory and Framework Challenges

While the VPPA system existed in India for some time now, the new CERC draft guidelines are a welcome first step toward its regulation and acknowledging it as a dependable instrument. However, several challenges still need resolving for seamless adoption of VPPAs in India.

Non-Binding Guidelines Framework

The CERC's VPPA guidelines remain non-binding, creating significant uncertainty for market participants. Industry experts emphasise that guidelines, by definition, cannot be enforced, leaving parties without legal recourse if contracts fail. This lack of regulatory backing has raised doubts about VPPA's success in India, as there is no fallback mechanism if arrangements fail.

Price Discovery and Settlement Mechanisms

The guidelines lack scientific price discovery mechanisms. Unlike exchanges that ensure transparent and scientific price discovery through pre-approved mechanisms, VPPAs rely on trader-led or OTC price discovery, which may have grey areas. For one, the absence of defined strike price determination mechanisms creates market uncertainty.

Grid Balancing Challenges

VPPAs incentivize "plain vanilla" renewable projects without energy storage requirements, potentially worsening India's grid flexibility challenges.

The absence of any requirement for pairing VPPAs with energy storage has alarmed experts. 

VPPAs may encourage continued investment in basic renewables without enabling dispatchable clean power, undermining system flexibility needs, Ember's analysis notes.

Limited REC Transferability

Under the 2025 framework, RECs transferred through VPPAs are non-tradable and non-transferable, severely limiting market liquidity and flexibility. This restriction prevents the development of a secondary market and limits risk mitigation options for participants.

Missed Opportunity for System-Level Reform

While the draft allows virtual transactions via power exchanges, experts argue that it does little to promote systemic reforms needed to expand renewables. In other words the introduction of new clean energy into the system is missing when it comes to VPPAs. 

Moreover, India’s current renewable growth is largely driven by government tenders and financial distribution reforms (FDRs), not market-based instruments like VPPAs.

Greenwashing and Compliance Risks 

Industry analysts warn of significant greenwashing risks, where corporates can claim 100% renewable usage through RECs while their actual consumption remains fossil fuel-based. This converts renewable procurement into an accounting business rather than driving genuine clean energy adoption.

Financial and Bankability Concerns

The nascent VPPA market limits access to competitive financing for developers. Financial institutions remain cautious due to regulatory uncertainties and the untested nature of these contracts in the Indian context.

Technical Limitations

VPPAs are restricted to projects registered under CERC REC Regulations 2022, limiting eligible capacity. Additionally, there's no clarity on minimum REC guarantees, creating risks for buyers if generators face grid curtailment.

In addition, the framework lacks comprehensive dispute resolution mechanisms and clear settlement procedures. Market players expect clearer provisions on contract settlement, REC mechanisms, and accounting of renewable consumption. Furthermore, the guidelines provide insufficient clarity on handling unforeseen events like regulatory changes or cost escalations post-contract signing, potentially making VPPAs unreliable for developers.

Thus, while the VPPA may come as a new tool to bolster renewable energy investment and compliance by the corporates, the underlying challenges must be tackled first to make it an instrument of ease rather than the one bypassing actual renewable compliance or raising avoidable complications as discussed.