Virtual PPAs

An innovative solution to corporate renewable power procurement woes

Apoorva Santhosh, Senior Expert – Climate and Renewables Policy, WWF India
Varun Agarwal, Advisor, WWF India
Vidya Soundarajan, Director, Ecological Footprint, WWF India

 

 

 

 

 

 

 

 

 

“Climate Change” is no longer just a buzzword but has been widely acknowledged as a global threat. Limiting warming to around 1.5°C would require global greenhouse gas emissions to peak around 2025, and be reduced around 40 per cent by 2030. The shortness of this timeline necessitates urgent action by nations around the globe to change the trajectory of carbon emissions as the point of no return looms ahead. India has recently updated its Nationally Determined Contributions (NDCs), enhancing India’s targets to incorporate the principles of ‘Panchamrit’ which were first announced at Climate Change Conference in Glasgow (COP26). India has also made a commitment to go net zero by the year 2070. The goal is to decouple India’s economic growth from carbon emissions and embrace sustainability as a lifestyle.  However, one of the immediate challenges in climate change mitigation lies in moving from high level goals at national and global level to effecting implementation on the ground.

In the Indian perspective, a group with high potential of transitioning to renewable energy are commercial and industrial players. Not only are they are responsible for over half of India’s overall electricity consumption but many of them are currently lining up to procure renewable power. Green power is often economically competitive with conventional sources, and businesses are facing increasing pressure from investors, shareholders and consumers to move towards net zero. Despite this, only around 5 per cent of corporate energy demand is being met by renewable energy currently.

The discrepancy between the demand and actual uptake of renewables has been attributed to the limited avenues for green power procurement in the country right now. Most renewable power uptake is through open access procurement, rooftop solar installation and purchase of renewable energy certificates (RECs). However, it has been observed that most of these models face resistance from discoms. In India, commercial and industrial consumers are subject to significant cross subsidy charges, making them the highest paying consumers and discoms fear losing them to renewable developers. In the current scenario, it is not unheard of for corporates to commit to 100 per cent renewable power procurement but find that they are unable to reach anywhere near their targets due to a lack of viable procurement models.

It is clear that there exists a need for an innovative alternative procurement options for corporates in India that will work for all stakeholders. It makes sense to look at what has worked in other countries to come up with a workable solution in India. Virtual power purchase agreements (VPPAs) are an instrument that have been successfully adopted internationally by many large corporates to meet their green mandates.

A VPPA is essentially a financial contract signed between a renewable energy developer and a consumer for the purchase of environmental attributes or RECs. However, it is still important to understand that framework for VPPAs varies significantly from country to country, in a manner suited to that particular market structure. For example, in the UK and Spain, there are no regulatory compliances for VPPAs beyond balance sheet recognition. On the other hand, the United States implements more stringent regulations, specifically, compliance with the Dodd-Frank Act. Despite this, in all cases, VPPAs cause no interruption to the physical purchase of electricity, which is key to its success in the Indian context because this is likely to pre-empt any resistance from discoms.

This model also simplifies renewable energy procurement and provides advantages for both developers in this space as well as consumers. The developer can be assured of a fixed-price cash flow for the duration of the contract while the consumer gets a long term and reliable source of environmental attributes needed to meet their sustainability goals. This model is also less likely to be impacted by changing power sector regulations because it is a bilateral contract. Another advantage of VPPAs is that they are highly customisable to meet the needs of the consumer. While most VPPAs are signed for a fixed price, there are many different mechanisms. The strike price could be subject to an escalation mechanism, which would mean that the buyer gets the benefit of a lower cost in the initial years. Similarly, ceilings and floors can be introduced to the strike price to act as a safeguard mechanism for both the developer and the consumer and mitigate future risk.

Large corporate groups like Microsoft, Google and Amazon have successfully adopted this instrument to meet their renewable targets internationally. United States corporations in particular have dominated when it comes to power purchase agreements (PPAs) in general, accounting for around two thirds of the record 31.1 GW of clean energy deals signed in 2021. The VPPA model has dominated the US market for the last couple of years, likely because it provides a smooth transition to renewable energy procurement for large corporations. McDonald’s in 2020 signed three VPPAs totalling a whopping 1,130 MW, 583 MW of which came from solar and the rest from wind. Other corporations which have opted for VPPAs in US include Facebook, Kellogg’s and Pepsi among others.

There is a huge potential for VPPAs within India. Currently, most large consumers are meeting their green power requirements through multiple physical PPAs under the open access model. Allowing them to switch to VPPAs would allow them to aggregate their demand and procure green attributes in a consolidated manner. It could also open up renewable energy procurement to medium and smaller fragmented consumers.  WWF’s report on “Virtual Power Purchase Agreement for C&I consumers in India’ found that the total estimated demand for VPPAs in India by 2030 could be as high as 104 GW which will go a long way towards supporting India’s NDCs.

However, implementation of VPPAs in India faces some challenges, especially taking into consideration the complexity of the regulatory environment. While a VPPA is a financial contract, it involves components of both physical and financial trading of electricity, resulting in some doubt regarding which regulatory body would be responsible. The debate has been ongoing between the Securities and Exchange Board of India (SEBI), which is the financial market regulator and the Central Electricity Regulatory Commission (CERC), which acts as the key power regulator in India.  The Supreme Court has provided some clarity in this matter last year, stating that CERC will regulate all the physical delivery based forward contracts whereas the financial derivatives will be regulated by SEBI.

While there is still some discussion between different parties about the extent to which CERC and SEBI should be involved in a bilateral contract, we believe that the best approach, especially in the Indian regulatory environment, would be to engage with both regulatory bodies, clearly defining the role that each would play in regular operations as well as resolution of disputes.  It might be beneficial to bring the mechanism under the preview of CERC, while SEBI establishes the necessary checks and balances for the financial aspects. Ease of adoption through a single window clearance should also be targeted.

VPPAs in particular could go a long way towards India’s newly announced NDC target of procuring 50 per cent cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030. The government has also announced the introduction of a green tariff policy and notified the Promoting Renewable Energy Through Green Energy Open Access Rules, 2022, which is a very encouraging sign that the Indian government is open to innovative solutions for renewable energy procurement. The time is right for India to explore new avenues, including VPPAs. Recent changes to the REC mechanism also allows for bilateral trade of RECs, which should simplify the path forward for VPPAs.

The Renewable Energy Demand Enhancement (REDE) initiative by WWF- India and CII was set up to address the existing challenges in the regulatory ecosystem and act as a national forum to develop practical and commercially viable solutions. This initiative seeks to build an alliance among corporate buyers to increase commitment to renewable energy procurement and catalyse solutions to address challenges to large scale renewables procurement. REDE has been actively engaging with government for the last year, providing recommendations for enabling renewable energy procurement by C&I consumers, and exploring new avenues like VPPAs, green tariffs, and peer-to-peer trading of electricity among others.

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