While PPAs are undoubtedly the most popular instruments for meeting the sustainability goals, the emergence of virtual PPA or synthetic PPA (VPPA) is on the rise.
The need for clean energy is ever rising as businesses across the globe want to have in place a robust renewable energy strategy and focus on sustainable business practices reducing their carbon footprint. Reliance on clean energy resources also provides a reputational boost to organizations as stakeholders and consumers recognize them as businesses also contributing for society’s welfare. The goals are usually achieved by sourcing power in the most traditional way of power purchase agreements (PPAs). In third-party PPAs, a developer owns, operates, and maintains the renewable (PV/Wind/Hybrid) system, and the offtaker purchases the renewable system’s electric yield for a pre-determined period at a pre-determined price. The arrangement allows the offtaker to receive stable and low-cost electricity.
While PPAs are undoubtedly the most popular instruments for meeting the sustainability goals, the emergence of virtual PPA or synthetic PPA (VPPA) is on the rise. Simply put, VPPAs are a kind of contracting structure which provide a financial hedge against any future energy fluctuations. These VPPAs help in meeting an organization’s sustainability goals with benefits as they function in the realm of price discovery and risk management.
Under a VPPA arrangement, the offtaker agrees to purchase a project’s renewable attribute at a pre-agreed price, while the renewable project receives the market price for energy sold in electricity exchange on day ahead/real time basis. If the market price is greater than the pre-agreed price, the offtaker receives the difference. On the other hand, if the market price is less than the pre-agreed price, the offtaker pays to the project to make up for the difference. Therefore, a VPPA works out to be a financial hedge against volatile electricity prices. Since there is no physical delivery of power, the offtaker receives the project’s renewable energy attributes, or renewable energy certificates (RECs) or international RECs which allows the offtaker to make claims regarding its greenhouse gas reductions and renewable energy purchase, while the offtaker continues to pay its utility bills. RECs are market-based instruments certifying the bearer owns one megawatt-hour (MWh) of electricity generated from a renewable energy resource. Further, these promote renewable energy and facilitate compliance of sustainability goals.
There are indeed many similarities between a traditional PPA and a VPPA, like the tenure, project performance, generation profile and credit risk, but the most glaring and distinguishing factor in a VPPA is that there is no physical supply of energy. Where a PV system or solar power plant is not able to supply 100% of the physical power required by the offtaker through open access or captive solar plant due to various policy or regulatory caps or due to location or transmission line constraints, in such cases a VPPA comes handy albeit the structure demands a very efficient and liquid exchange-based market with market price parity between the points of power generation and consumption.
The advantages associated with VPPAs are manifold. A VPPA guarantees the solar project a fixed price for its output and can help organizations aggregate their carbon footprint to a single renewable energy project under a single agreement, regardless of where their individual facilities are located. VPPAs do not even affect the traditional electricity supply for an organization as the organization continues to purchase electricity from the utility, and in addition enters into a VPPA for renewable energy. By entering into a VPPA and locking in a low fixed energy price, organizations realize substantial financial advantages over the span of time and with the transfer of RECs as part of the arrangement, organizations are able to make legitimate claims for use of clean energy and carbon reduction.
Though VPPAs appear to have a promising future, the legal and regulatory uncertainties are proving to be the show-spoilers. The tussle over regulatory jurisdiction between FMC (now SEBI) and CERC is a major cause of concern for the developers. The issue has its roots in the writ petitions filed before the Bombay High Court wherein these two regulatory authorities, FMC (now SEBI) and CERC, both claimed to exercise jurisdiction over forward contracts and futures in electricity. The Writ Petition was against certain orders passed by the CERC in 2009 and 2010, and also challenged validity of the Central Electricity Regulatory Commission (Power Market) Regulations, 2010 notified by the CERC in January, 2010, claiming to exercise jurisdiction over forward contracts and futures in electricity. The High Court in 2011 inter alia held that both SEBI and CERC cannot have exclusive jurisdiction to control and regulate the futures/forwards and derivative contracts in electricity, unless the statutes and the corresponding regulations are amended. High Court further ruled that Union Government and the concerned authorities are free to revise and reframe the rules and regulations and amend the concerned statutes. The High Court order was appealed in Supreme Court and still is pending. In October 2018, during the pendency of the appeal in Supreme Court, Ministry of Power constituted a Committee on ‘Efficient Regulation of Electricity Derivatives’ in light of observations of Bombay High Court. The Committee had its members from Ministry of Power, CERC and SEBI, and primarily concerned with resolving the jurisdictional issues between SEBI and CERC in relation to various forms of contracts of electricity and to further examine the operational and legal framework for electricity derivatives. Despite the Hon’ble High Court of Bombay observing that the Union of India and/or concerned Commission or Regulatory authorities were free to revise or reframe the rules and regulations and amend the statute, reforms in this sphere are dismal and have not progressed since 2011 primarily on account of the differences between the regulatory bodies.
One may argue that so long as VPPAs are structured as consensual contracts and not traded on any platform, the requirement of an approval from a regulatory body or a capital market body may not be required. India has an ambitious renewable capacity roadmap with a target of 175 gigawatts (GW) of renewable capacity by 2022, and the futures trading option may prove to be the hallmark of all upcoming markets. Though India needs to embrace this change, but the fate of VPPAs hangs in balance as the jurisdictional uncertainties are yet to be decided by Supreme Court. An unambiguous legislation in this direction is required to overcome the issue of jurisdiction between the two authorities, SEBI and CERC, and for the smooth functioning of VPPAs in India.
[This piece was authored by Rakshika Kaul Padora, GM – Legal, Amp Energy India]
