India’s renewable energy boom is stunted by regulatory ambiguity, making companies reluctant to sign sales contracts

Mumbai: India’s fast-growing renewable energy sector, which sparked a gold rush among leading conglomerates, private equity funds and startups, continues to grapple with a regulatory ambiguity that’s limiting growth.

Renewable energy companies and their buyers are hesitant to sign virtual power purchase agreements (VPPAs), citing lack of regulatory clarity. They say these contracts - under which power is sold at a fixed price through an exchange and not a common grid - could run afoul of the Securities Contracts (Regulation) Rules (SCRA), 1957, which govern derivative contracts.

The SCRA guidelines are overseen by markets regulator Securities and Exchange Board of India (Sebi). However, the nation’s top court has ruled that contracts involving the physical delivery of power will be governed by the Central Electricity Regulatory Commission (CERC).

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Legal experts said VPPA contracts are valid under Indian law, but companies remain wary of potential disputes. Some have gingerly taken the first step and signed small VPPAs to test the waters.

VPPAs are an alternative type of power purchase agreement where the producer and commercial buyer agree upon a long-term fixed price. But, unlike regular power purchase agreements, there is no direct supply of power from the seller to the buyer through a common grid.

Financial contract

Instead, the power company sells electricity on a recognized exchange. If the prices on the exchange deviate from the agreed strike price, the excess or shortfall is made good for the affected party. Thus, instead of an agreement to supply electrons, VPPAs take the form of a financial contract. These contracts are beneficial as the buyer and seller do not have to be connected to a common grid. 

If small and fragmented industries can sign VPPAs, the total demand for such arrangements in India could be as high as 92 GW by 2030, according to a 2022 estimate by the World Wide Fund for Nature - India. For context, the total installed renewable energy capacity in India is 150 GW, as per the ministry of new and renewable energy.

"We are revisiting the whole VPPA construct with a legal consultant,” said Akshay Hiranandani, chief executive officer of Serentica Renewables, the green energy arm of the Vedanta Group.

Such contracts are popular in the west and have helped democratize the purchase of renewable energy beyond a few large corporate buyers. VPPAs can democratize renewable energy consumption in India too, experts say. Companies with relatively lower energy requirements and a wide geographical footprint can sign these agreements to cut down their net carbon footprint. It is difficult for such small and fragmented industries to sign regular power purchase agreements with large power producers as they are mostly connected to discoms or state grids.

Sunsure Energy, a renewable energy company backed by private equity firm Partners Group, has so far avoided signing VPPAs.

"Currently, we have signed direct bilateral agreements only to avoid the regulatory complications. However, we look forward to signing VPPAs as the regulations simplify,” said Shashank Sharma, founder and CEO of Sunsure Energy.

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Mumbai-based AMPIN Energy Transition has signed a 50-megawatt VPPA with an undisclosed corporate buyer, a senior company executive said. However, VPPAs continue to be a tough sell, he said.

“All the big companies, especially the listed ones, are waiting for someone to sign a VPPA in the public domain. They want to avoid being the first mover,” said Aditya Malpani, senior director for business development at AMPIN. “As soon as one or two big companies start, VPPAs will gain general acceptability.”

The ambiguity over VPPAs persists despite a 2021 Supreme Court ruling that affirmed contracts involving the physical delivery of electricity will be governed by the CERC. CERC and the Securities and Exchange Board of India (Sebi) were engaged in a decade-long legal dispute over the jurisdiction of derivative contracts involving electricity.

Sebi and CERC officials were yet to respond to Mint’s requests for their comments on the matter.

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Legal experts said the apex court’s ruling puts VPPAs squarely out of the purview of the SCRA guidelines. Nevertheless, lawyers are advising companies to toe the official line out of abundant caution.

"Power companies are hesitant to sign VPPAs due to the regulatory scenario,” said Deepto Roy, a partner at law firm Shardul Amarchand Mangaldas & Co. “We are advising them to comply with the SCRA even though it is not applicable to electricity. This can be done by signing non-transferable specific delivery contracts.”

Non-transferable specific delivery contracts are structured such that the parties involved cannot sell the rights or liabilities to a third party. Structuring VPPAs along these lines can prevent speculative trading in electricity futures.