The search for credible renewable energy procurement mechanisms has intensified as corporates, both domestic and international, face binding regulatory obligations and environmental, social and governance (“ESG”) commitments. Virtual Power Purchase Agreements (“VPPAs”) have emerged as a promising tool in this landscape. If implemented properly, they can provide a structured pathway for corporates to meet compliance requirements and advance sustainability goals. In this article I explore the mechanics of VPPAs, their global evolution, the regulatory journey in India, the draft guidelines issued by Central Electricity Regulatory Commission (“CERC”), and the role of VPPAs in enabling corporates to meet ESG and RE100 commitments. The article also examines the importance of a regulatory sandbox, as the real test of the framework will lie in its implementation and in how effectively regulators can refine the design through pilot transactions.
Decrypting the mechanics of VPPA
A VPPA is an agreement that may sound like a variation of the traditional Power Purchase Agreement (“PPA”), but its core concept is different. A PPA is usually signed between a generating company and a distribution company, where the distribution company agrees to purchase electricity at a fixed tariff and then supply it to consumers. A VPPA, on the other hand, is not a direct supply contract. It functions as a financial arrangement under which the buyer supports renewable energy projects and secures the environmental attributes of generation without physically receiving the power. Although at first it may sound like a fancier or digitised version of a PPA, the VPPA is fundamentally distinct from the conventional model.
In a VPPA, the parties agree on a fixed strike price for electricity. The generator continues to sell its physical power, often referred to as brown power, in the power exchange at the prevailing market price. The difference between the strike price and the market price is settled financially between the generator and the consumer.
Under a two-way VPPA, if the market price falls below the strike price, the consumer compensates the generator for the shortfall. If the market price rises above the strike price, the generator pays the consumer the difference. In a one-way VPPA, the arrangement is limited to the consumer compensates the generator if the market price is below the strike price, but the generator has no obligation to pay the consumer when the market price is higher.
For example, suppose corporation XYZ enters into a VPPA with a renewable generator at a strike price of ₹4 per unit. If the generator sells power on the exchange at ₹3, corporation XYZ pays the generator ₹1 per unit to bridge the gap. If the exchange price rises to ₹6, then under a two-way VPPA the generator pays corporation XYZ ₹2 per unit, while under a one-way VPPA no payment is made to the consumer.
In the context of corporate consumers, VPPAs create a structured route to decarbonisation. The buyer does not change its physical supply. It continues to procure power from the distribution company or any other chosen supplier. What the consumer gains are the renewable attributes of the project which allows the consumer to demonstrate renewable consumption.
While VPPA is making headlines in the Indian electricity market today, such arrangements have existed in other jurisdictions for a long time.
BloombergNEF reported[1] in January 2022 that in the United States the VPPAs, which operate in the nature of a financial hedge, dominated the market with 12 GW of deals, while green tariffs with regulated utilities accounted for 3.2 GW in the same period. Media reports also record a surge in VPPAs in Europe.[2] Spain has led the European market, with more than 1 GW of VPPAs publicly disclosed in 2024 and 289 MW already concluded in 2025. Over the last five years, the Spanish PPA market has contributed more than 58% of all virtual deals in Europe. The growth has been driven by the availability of low-cost solar and the possibility of structuring cross-border PPAs.
Indian venture into VPPA- delayed by regulatory tussles
The VPPA has entered the Indian market against the backdrop of a prolonged regulatory discord. The CERC (which is the key regulator of the Indian power sector) and the Securities and Exchange Board of India (“SEBI”) have been at loggerheads over the nature of forward and derivative contracts in electricity. The crux of the tussle lay in whether electricity could be treated as a commodity for the purpose of derivative trading.
The Ministry of Power, by its order dated 26.10.2018, constituted a committee to examine the technical, operational and legal framework for futures, forwards and derivative contracts in electricity. The committee submitted its report on 30.10.2019 and recommended that (a) all Ready Delivery contracts and Non-Transferable Specific Delivery (“NTSD”) contracts in electricity entered into by members of the power exchanges be regulated by CERC, (b) commodity derivatives in electricity other than NTSD contracts be regulated by SEBI, and (c) a Joint Working Group of SEBI and CERC be set up to coordinate on these issues.
The issue was also pending before the Supreme Court in a batch of appeals filed by Power Exchange of India Ltd. These appeals arose from proceedings before the Bombay High Court and pertained to the jurisdiction over futures and forward contracts in the electricity sector. The question before the Supreme Court was whether such contracts fall under the jurisdiction of the CERC, or under the jurisdiction of SEBI.
On 06.10.2021, the Supreme Court in Power Exchange of India Ltd. v. Securities and Exchange Board of India and Ors.[3] disposed of the matter and recorded a joint agreement between SEBI and CERC. It was decided that CERC will regulate all physical delivery based forward contracts, while SEBI will regulate all financial derivatives. This order ended a long-standing dispute between the two regulators.
The resolution of this discord has paved the way for new instruments in the power market, including VPPAs. Fast forward to 2025. SEBI, vide its letter dated 31.01.2025 addressed to CERC, clarified its position on the regulatory character of VPPAs. It stated that VPPAs are bilateral Over The Counter (“OTC”) contracts which are non-tradable and non-transferable. If VPPAs or similar OTC contracts are treated as NTSD contracts, the provisions of the Securities Contracts (Regulation) Act, 1956 would not apply. In such a case, these contracts would fall under the exclusive regulatory jurisdiction of CERC.
CERC’s Draft guidelines on VPPA
On 22.05.2025, the CERC issued Draft Guidelines for Virtual Power Purchase Agreements (“VPPA Guidelines”) and invited public comments. Several stakeholders have submitted comments and a public hearing was held on 18.08.2025.
The VPPA Guidelines define a VPPA to mean NTSD based OTC contracts entered into between a Consumer[4] or Designated Consumer[5] and a renewable energy generator. Under this arrangement, the Designated Consumer guarantees payment of the mutually agreed VPPA price for the duration of the agreement. The renewable energy generator sells electricity through power exchanges or other modes authorised under the Electricity Act, 2003 (“Electricity Act”), and the difference between the VPPA price and the market price is settled bilaterally between the contracting parties as per mutually agreed terms. The “VPPA Price” is defined as the price of electricity mutually agreed between the Consumer or Designated Consumer and the renewable energy generator, either directly or through a trader or by listing on an OTC Platform.
Guideline 5 provides that a Consumer or Designated Consumer may enter into a long-term bilateral VPPA with a renewable energy generator at a mutually agreed price. Where the renewable energy generator sells electricity through power exchanges in the Day Ahead Market (DAM) and/or Real Time Market (RTM), or any other authorised mode, the Renewable Energy Certificates (“RECs”) received shall be transferred to the Consumer or Designated Consumer, who can use them for Renewable Consumption Obligation (“RCO”) compliance or for claiming green attributes. Such RECs shall not be tradable.
To place this in context, the REC mechanism is a market-based instrument designed to promote renewable energy and enable compliance with Renewable Purchase Obligations (“RPO”)[6]. RPO is a statutory mandate that requires certain entities such as distribution licensees, open access consumers, and captive power producers to procure a minimum percentage of their total electricity consumption from renewable energy sources.
In addition to the RPO under the Electricity Act, the Energy Conservation Act, 2001 (as amended in 2022) (“Energy Conservation Act”) introduces the RCO. By way of an amended in 2022, sub-section (x) was inserted in Section 14 of the Energy Conservation Act, empowering the Central Government to specify a minimum share of consumption of non-fossil sources by Designated Consumers, with penalties for non-compliance.
Guideline 6 of VPPA Guidelines allows a Consumer or Designated Consumer to enter into a VPPA directly, through a trader, or by listing on an OTC Platform registered with CERC. The project must be registered under the CERC (Terms and Conditions for REC for Renewable Energy Generation) Regulations, 2022 (“REC Regulations”). The renewable energy generator is allowed to sell electricity through exchanges or other authorised modes, and the RECs received shall be transferred to the Consumer or Designated Consumer for RCO compliance or claiming green attributes. VPPAs are expressly non-tradable and non-transferable, and the contracting parties remain bound by the contract terms for the entire period.
Guideline 8 provides that RE capacity contracted through VPPA is eligible for issuance of RECs upon registration in accordance with the REC Regulations. Such RECs shall be transferred directly by the renewable energy generator to the Consumer or Designated Consumer. The Consumer or Designated Consumer must then communicate receipt to the REC registry, which shall extinguish the certificates. These extinguished RECs can only be used by the Consumer or Designated Consumer for RCO compliance or claiming green attributes.
Guideline 9 addresses dispute resolution. It provides that any disputes arising out of a VPPA shall be settled mutually by the parties in accordance with the terms of the contract.
These VPPA Guidelines will ultimately be judged by how they work in practice. The legal and technical design appears robust, but the real test lies in implementation once corporates and generators begin entering into VPPAs. Market instruments of this kind often face challenges of liquidity, transparency, and enforcement in their early years.
This is where the concept of a regulatory sandbox becomes relevant. A regulatory sandbox allows a regulator to create a controlled environment where a new market instrument can be tested on a limited scale. Participants operate under relaxed conditions, while the regulator observes how the product works in practice. In the context of VPPAs, a sandbox would let CERC approve a small set of pilot transactions with select corporates and renewable generators. These transactions could be monitored for accuracy of REC transfer, efficiency of strike price settlement, accounting treatment, and interaction with RPO and RCO frameworks.
VPPA as a tool for ESG commitments
Once the VPPA Guidelines are finalised, they will mark a turning point for the renewable energy market. The primary beneficiaries will be bulk energy consumers such as large corporates and industrial undertakings. These entities carry significant renewable energy obligations and are bound by ESG commitments. The VPPA framework gives them a direct mechanism to discharge statutory obligations while also advancing their voluntary sustainability goals.
VPPAs are not limited to serving domestic corporate consumers. They also have the potential to draw international interest. Many global corporations have operations in India and are signatories to international sustainability initiatives such as RE100. (RE100 brings together businesses that have committed to sourcing 100% of their electricity from renewable sources).
The VPPA framework will provide these corporations with a regulated and credible mechanism to source renewable energy locally. The success of VPPAs will depend on how quickly the VPPA Guidelines are finalised and how effectively they are implemented.
*Author – Ankitesh Ojha is a Senior Associate in the Disputes practice at AZB & Partners
[1] Link to access the Bloomberg NEF report: https://about.bnef.com/insights/finance/corporate-clean-energy buying-tops-30gw-mark-in-record-year/
[2] Link to access the Pexapark article: https://pexapark.com/blog/prmc-virtual-ppas-state-of-play-in-2025/
[3] Civil Appeal Nos.5290-5291 of 2011.
[4] See Section 2(15) of the Electricity Act, 2003.
[5] See Section 2(g) of the Energy Conservation Act, 2001
[6] See Regulation 2(1)(q) of Central Electricity Regulatory Commission (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022.