Virtual PPAs Get Regulatory Backing as CERC Sets Ground Rules

The Central Electricity Regulatory Commission (CERC) has now introduced a framework to regulate Virtual Power Purchase Agreements (VPPAs). The new norms are being hailed by power sector experts as a maiden and significant step toward governing this segment, which had lacked regulatory clarity until now.

Background

The framework enables large consumers such as data centres, Commercial & Industrial (C&I) units, and others to fulfil their Renewable Consumption Obligations (RCOs). In October 2023, the Ministry of Power introduced a new obligation—Renewable Consumption Obligation (RCO)—to ensure that obligated entities consume a minimum share of their energy from renewable sources.

As per the Ministry of Power’s October 2023 framework, the obligated entities under the RCO regime include distribution companies (discoms) and consumers whose electricity consumption exceeds the threshold specified under the Energy Conservation Act, 2002. This category includes open access consumers and captive power plant users.

Why VPPA

Virtual VPPAs are a mechanism under which renewable energy generators (REGs) and buyers enter into a contract. However, unlike conventional PPAs, the buyer does not physically consume the green power supplied by the renewable generator for its energy needs.

Instead, a virtual PPA functions as a financial instrument under which the buyer pays the renewable energy generator based on a pre-agreed “VPPA Strike Price,” benchmarked against the power market settlement price. In return, the buyer receives Renewable Energy Certificates (RECs), which are used to comply with RCO requirements when physical consumption of green power is not feasible.

In its latest framework, the CERC stated: “Based on the study of international practices, it emerges that the Virtual Power Purchase Agreement (VPPA) could be evolved as another instrument to enable the Designated Consumers to meet their RCO targets.”

The Commission framed these norms after the Ministry of Power requested the regulator, on March 3, 2025, to issue a framework in this regard.

The following are some of the key takeaways from CERC’s framework on virtual PPAs:

1. Applicability

As per the CERC framework, the norms apply to parties entering into Virtual Power Purchase Agreements. This means designated open access consumers, captive power users, and discoms that do not wish to physically take delivery of renewable power—either wholly or partially—and instead intend to procure RECs through virtual PPAs for RCO compliance must adhere to this framework.

2. Minimum One-Year Duration

The CERC norms specify that a VPPA must have a minimum duration of one year. This provision is intended to provide both buyers and sellers with a defined time horizon for advance planning and effective compliance.

3. Electricity Act and Power Market Regulations

Under the CERC norms, renewable energy generators may sell electricity through any mode authorised under the Electricity Act, 2003, and the Power Market Regulations, 2021. The framework also clarifies that the CERC (Terms and Conditions for Renewable Energy Certificates) Regulations, 2022, will apply to the implementation of VPPAs.

These provisions indicate that the VPPA regime will primarily be governed by these two Acts and related regulations, as required.

4. Non-Tradable and Non-Transferable

The framework states that RECs issued under this regime will be issued to renewable energy generators, who will then transfer them to the designated consumer that pays for the RECs through the VPPA. It also specifies that a VPPA will be a bilateral, over-the-counter, non-tradable and non-transferable contract.

5. Strike Price and Payments

As per the CERC norms, payments between the seller and buyer under a VPPA will be governed by the terms of the agreement. The framework defines how the difference between the VPPA strike price and the market settlement price will be settled, with such settlement to be carried out in accordance with the provisions agreed upon by both parties.

“The REGS shall sell electricity through a power exchange or any other mode authorised under the Electricity Act, 2003, or the Power Market Regulations, 2021, and such sale shall be for purposes other than RPO/RCO compliance. The difference between the VPPA Strike Price and the Settlement Price shall be settled bilaterally between the contracting parties in accordance with mutually agreed terms and conditions,” the CERC norms stated.

6. REC Registry to Avoid Double Accounting

The framework requires generators to submit an undertaking to the REC Registry for the capacity contracted under a VPPA to avoid any double counting of renewable energy capacity. It further states that the RECs issued to renewable energy generators must be transferred to the consumer or designated consumer with whom the generator has entered into a VPPA.

7. Dispute Resolution

The norms specify that any disputes arising out of a VPPA shall be resolved mutually by the contracting parties in accordance with the provisions of the agreement.

Why It Is Important and Its Implications

The introduction of a formal framework provides much-needed regulatory clarity in a segment that had remained ambiguous for several years. The framework is also expected to empower state electricity regulatory commissions to issue more robust and consistent regulations on VPPAs.

By prescribing a minimum contract duration, the new norms improve confidence for buyers, while providing obligated entities with greater clarity on meeting their RCO targets. The strike price mechanism offers renewable energy developers a degree of price certainty, strengthening project bankability. The framework also establishes an alternative to physical power procurement under conventional PPAs.

This development is particularly significant as obligated entities such as data centres, open access consumers, and corporates can now meet their compliance requirements without relying extensively on physical grid-based renewable power supply.

Before the VPPA framework was introduced, entities in India were already procuring Renewable Energy Certificates (RECs), but largely through fragmented and indirect routes that were not tied to long-term arrangements with renewable power producers. Virtual Power Purchase Agreements bring structure to these practices by formally linking REC procurement to a defined financial contract between buyers and generators.