India has set an ambitious target of installing 175 gigawatts (GW) of renewable energy capacity by 2022. The rising trend of corporate purchase of clean energy has brought Virtual Power Purchase Agreements (VPPAs) into spotlight and their effective implementation in the domestic RE market can play a crucial role in driving India towards sustainability.
VPPAs function in the realm of risk management and provide stability by offering buyers a fixed price thus protecting them from market price volatility. By agreeing to take the long-term wholesale market price risk, the offtaker guarantees the developer a consistent revenue stream. This, in turn, leads to increase in sale of renewable power and takes off some burden from state discoms.
Although physical PPAs were the dominant form of transaction in the early years of the corporate renewable energy market, VPPAs have gained prominence in the past few years. Unlike a physical PPA, VPPAs do not involve physical transfer of energy but are purely financial transactions, exchanging a fixed-price cash flow for a variable-priced cash flow and environmental attributes known as renewable energy certificates (RECs).
Here’s why India should move towards VPPAs contract structure:
VPPA allows renewable energy generator to operate from any part of the world, opening the door for cross-border PPAs and preventing businesses from being limited to a particular geography. VPPA does not affect buyer’s relationship with its utility at retail level because the buyer will still need to meet its electricity load through traditional channels.
VPPAs are beneficial for corporate consumers, renewable energy developers, and society at large. It delivers a more decarbonized grid mix at no additional cost. VPPAs do not require physical delivery of power, they provide more flexibility to developers as well as corporate consumers. This can be effectively scaled to facilitate compliance of sustainability goals.
Initially, VPPAs were largely restricted to large corporations as smaller players did not find it feasible. However, developers are now dividing projects to attract multiple corporate buyers. Such aggregation paves the way for small scale buyers to partner with larger corporations and finance renewable energy projects.
It is imperative for open access regulators to devise rules while ensuring equal opportunities for all the stakeholders. The new development may pose utility related challenges for state discoms which can be addressed through a well-thought-out support system. Like physical PPAs, VPPAs also create environmental attributes or credits. These credits are vital to trace corporations’ progress towards using cleaner sources of energy and furthering their sustainability agenda.
Corporate RE investments also enables the power producer to transfer RECs to the offtaker as part of its carbon accounting commitments. As the virtual agreements do not necessitate an actual transfer of energy between the producer and the purchaser, it has become a critical enabling framework to promote and increase the consumption of renewable energy. India needs a policy framework that recognises and accepts RECs.
Also Read: JSW Energy signs PPA with Haryana Power Purchase Centre to supply 240 hydro power
By enabling widespread proliferation of VPPAs in India’s energy ecosystem, the government will take a decisive step towards its commitments of ensuring universal access to affordable electricity by 2030. VPPAs as a hedging strategy will attract more investors in clean energy sectors. Expanding infrastructure and upgrading technology to provide clean energy sources in India is a crucial goal that can both encourage growth and help reduce the carbon footprint.
As per the findings of Bloomberg New Energy Finance, more than 80% of PPA contracts signed in the US in 2019 were virtual PPAs. The adoption of VPPAs has sped up the process of energy sources becoming more sustainable. This further presents a great opportunity to develop clean energy projects in newer, developing markets like India. Although VPPAs appear to have a promising future, their smooth functioning could be subject to legal and jurisdictional uncertainties between SEBI and CERC, especially with respect to various forms of contracts on electricity. This necessitates further examination into the operational framework for electricity derivatives. A robust policy facilitating hassle-free adoption of VPPAs and quick transfer of RECs will go a long way in helping India meet its sustainability goals.
(This article has been written by Lalit Jain, President (Thermal), Hindustan Powerprojects. Mr Jain is an expert on strategic, commercial, regulatory and financial issues in Energy industry.)
