Innovations For Sustainable Energy Transition- Virtual Power Purchase Agreements

Published On :

25 February 2022

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India has one of the most ambitious renewable energy programs in the world. With a target to add ~450 GW of renewable energy capacity by 2030, India is looking to meet Paris Climate Accord commitments. While, utility scale projects have seen significant scaling up (backed by access to solar parks, stable module prices & financing availability), much is needed to be done for corporates in going green.

Over last 2-3 years, large corporations across India with substantial energy needs are looking to transition to greener power sources through bilateral RE procurement. Leading RE developers in the country are offering high CUF innovative solutions (hybrid) which offer high reliability of power while maximizing savings. Recently, a leading chemical player in Gujarat was able to replace 60% of energy consumption by renewable sources while saving 25% of the energy costs. While such solutions can replace majority of energy consumed via renewable sources, however, for corporations looking to achieve 100% greening or with fragmented demand characteristics, such solutions need augmentation.

One such augmentation is “Virtual Power Purchase Agreement (vPPA)” which is a contract for difference under which a power producer sells the power from a RE project in the wholesale market (IEX, PXIL) while transferring the green attributes of power to vPPA counter party (consumer). In exchange vPPA counterparty will underwrite the selling price of power (“Strike Price”) from the project with upside/ downside adjustment based on difference of open market price vs. strike price. The entire transaction is financial and would not require actual physical transfer of power from generator to consumer.

Pioneered in the United States, vPPAs are quickly gaining traction in advanced markets and becoming the preferred mode of RE procurement by corporates. The arrangement allows corporates to achieve 100% greening while allowing benefits through upside. For developers, the arrangement provides a bankable agreement while assuring returns through strike price. For the sector, vPPAs also do not affect the pricing in the market as they do not involve the sale of power (including RECs) traded on any exchange. Accordingly, these arrangements have the potential to significantly aid development of the RE sector in India.

Currently, vPPA concept is in a nascent stage in India, however with introduction of derivatives and forward contracts in power trading future seems bright. Speaking on this subject, Prabhat Mishra, SVP and Head of B2B Business at ReNew, stated that “ReNew is the largest renewable player in the country with over 10 GW of RE projects under operation and implementation. ReNew has 600 MW+ of B2B capacity and is in talks with leading corporates on achieving 100% greening through vPPA instrument. However, some regulatory clarity is needed for ensuring growth. Such transactions do not involve the physical delivery of power and thus, in our understanding would not be within the purview of MoP/ CERC. Further, since the vPPA will not be traded on an exchange or transferrable to a third party, we understand that it will not be regulated by SEBI. A formal clarity on these aspects would be very helpful in giving comfort to our clients.”

VPPAs provide an alternative and effective means for India’s corporate to go green. It is also a natural evolution of RE market with financial transaction and physical sale of power desegregated. It is imperative that adequate policy clarity and benefits are provided to developers and consumers looking to utilize the instrument for achieving higher targets of sustainability, which in turn would help India achieve overall carbon emission targets.