India proposes virtual power purchase agreements for industrial companies

India's Central Electricity Regulatory Commission proposes a new financial instrument enabling industrial companies to meet renewable energy targets through virtual contracts, without physical electricity delivery, thus facilitating compliance management.

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India’s Central Electricity Regulatory Commission (CERC) recently proposed amending its electricity market regulations to introduce a new financial contract called Virtual Power Purchase Agreement (VPPA). This instrument will enable large industrial consumers to meet their renewable energy regulatory obligations without managing physical delivery of produced energy. According to the draft Electricity Market Regulations 2025, this virtual agreement will be negotiated directly between renewable energy producers and industrial consumers. The mechanism provides financial compensation for the difference between the contractually agreed price and the actual market price.

Principle and operation of the VPPA

In practice, the VPPA sets a reference price for electricity between the renewable energy producer and the industrial consumer. The producer then sells electricity on the open market, with the difference between the market price and the contracted tariff financially settled between the two parties. This mechanism allows companies to meet renewable energy commitments without logistical constraints related to physical delivery. The Indian regulator clearly specifies that these virtual contracts are considered over-the-counter (OTC) agreements, expanding the range of financial instruments available to industrial stakeholders.

The CERC emphasizes that the VPPA mechanism primarily aims to simplify compliance for industries with renewable energy obligations. This proposal comes as Indian companies face increasingly stringent regulatory requirements regarding renewable energy consumption. This new instrument could thus reduce administrative complexities associated with these legal constraints.

Criticism and other market developments

However, certain analysts, notably from the organization Ember, have highlighted that such contracts could become mere compliance tools, allowing companies to declare full renewable energy consumption without actual operational changes. The public consultation on this regulatory proposal is open by the CERC until July 14, during which stakeholders may submit their comments.

Additionally, India’s two major exchanges, the National Stock Exchange and the Multi Commodity Exchange of India (MCX), recently announced the imminent launch of electricity derivative contracts. These financial products could complement VPPAs by providing industrial stakeholders with additional tools to manage their exposure to electricity market price fluctuations.

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