The global focus to reduce carbon footprint and our aggressive clean energy targets has increased the demand for renewable energy in
Currently, the modes for procuring green power by C&I consumers are limited to physical delivery of power under bilateral power purchase agreements ("PPAs"), onsite plants, PPAs on open access basis, captive PPAs, group captive PPAs etc. Another option, albeit at a nascent stage (and not that popular currently), is procuring green power through green power exchange/trading market in
To enhance the penetration of renewable energy, one model that Indian market has been toying with for the last couple of years is the virtual power purchase agreements ("VPPAs").
Global Concept of VPPAs
Before we discuss the concept of VPPAs, it is pertinent to mention that renewable energy generation consists of two integral components: the "electricity component", often referred to as the 'brown component', and the "environmental attribute", known as the 'green component'. Under conventional PPAs, green power (i.e., combination of the two components above) is sold.
Globally, a VPPA is understood to be a contract between a generator and a buyer of clean energy, without any physical delivery of energy. Instead, the generator sells power as 'brown power' on the power exchange and sells green attributes or green energy certificates, such as renewable energy certificates ("RECs") in the Indian context or international-RECs ("I-RECs"), to the consumer at a fixed price. Relevantly, the sale/purchase of RECs are regulated in
The buyer in this arrangement continues to procure power from its utility/DISCOMS. Thus, VPPAs are non-disruptive to the existing relationships between buyer/consumers and DISCOMs.
Importantly, the generator and the buyer agree to a strike price under the VPPA. If the market price at which the generator sells power at the power exchange is lower than the agreed strike price, the buyer compensates the generator for the difference. Conversely, if this market price exceeds the agreed strike price, the excess received is paid from the generator to the consumer. Such a contract is known as Contracts for Difference ("CfD") and serves as an effective hedge against power price fluctuations for both parties. This structure is mainly called a 'two-way VPPA', which is more prevalent than a 'one-way VPPA' in which the buyer alone bears the responsibility to compensate the generator if the market price falls below the strike price.
Regulatory Position - Electricity and Electricity Derivatives
A VPPA has two important pieces - (i) electricity; and (ii) derivative contracts/CfD. In the Indian context, both electricity and derivatives are heavily regulated.
For electricity, Electricity Act, 2003 is the primary legislation and
The statute regulating the securities markets in
commodity derivative meansa contract —
- for the delivery of such goods, as may be notified by the Central Government in the
Official Gazette ,and which is not a ready delivery contract; or - for differences, whichderives its value from prices or indices of pricesof such underlying goods or activities, services, rights, interests and events, as may be notified by the Central Government, in consultation with the Board, but does not include securities as referred to in sub-clauses (A) and (B) of clause (ac).
Pertinently, 'electricity' came within the fold of this definition (and thereby a CfD) when the same was classified as a 'good' under the SCRA pursuant to
Further, SEBI exercising its power under Section 16 of the SCRA to prevent undesirable speculation in specified securities had issued a notification dated
There are certain exceptions prescribed to commodity derivates, namely, ready delivery contracts8 and non-transferable specific delivery contracts9 (both these entail physical delivery of the underlying good).
CERC and SEBI Tussle10
The introduction of electricity forward contracts occurred when the
Subsequently, CERC issued an order dated
In response to CERC's determinations, FMC filed a writ petition before the
This unclear order was challenged by both the parties before the
This committee mainly proposed that all 'ready delivery contracts' and 'non-transferable specific delivery contracts' in electricity, each as defined under the SCRA, entered into by members of the power exchanges, registered under CERC (Power Market) Regulations, 2010, be regulated by CERC subject to following conditions, namely:
- the contracts are settled only by physical delivery without netting;
- the rights and liabilities of parties to the contracts are not transferable;
- no such contract is performed either wholly or in part by any means whatsoever, as a result of which the actual delivery of electricity covered by the contract or payment of the full price therefor is dispensed with;
- no circular trading is allowed and the rights and liabilities of parties to the specific delivery contracts would not be transferred or rolled over by any other means whatsoever;
- the trading would be done only by authorised grid connected entities or trading licensees on behalf of grid connected entities, as participants;
- the contracts can be annulled or curtailed, without any transfer of positions, due to constraints in the transmission system or any other technical reasons, as per the principles laid down by CERC in this regard. However, once annulled, the same contract cannot be reopened or renewed in any manner to carry forward the same transaction; and
- all information or returns relating to the trade, as and when asked for, would be provided to CERC, who shall monitor the performance of the contracts entered into on the power exchanges.
And, commodity derivatives in electricity, excluding 'non-transferable specific delivery contracts' under the SCRA, were recommended to fall under SEBI's regulatory purview.
Upon adopting these recommendations, both SEBI and CERC mutually agreed to a bifurcation of regulatory oversight, with CERC regulating physical delivery-based forward contracts and SEBI overseeing financial derivatives. Subsequently, the
Way forward
The expectation, post the Supreme Court decision in 2021 was that the market for VPPAs in
While, the regulatory jurisdiction between CERC and SEBI was finally resolved with the decision of the
Ideally, CERC and SEBI should clarify the position on VPPAs by amending the existing regulations/notifications to clarify how the VPPAs would be regulated in
Until such regulatory clarity is issued, breaking down the steps contemplated to achieve the aim of a VPPA construct merits consideration. Primarily, it is worth deliberating if in a VPPA construct, sale and purchase of electricity or an electricity derivative is taking place between the buyer and the generator. As discussed above in this article, electricity derivative is a contract for purchase and sale of electricity that may be discharged either by delivery of electricity or may be discharged by payment of differences in the price contracted by the contracting price and the market price. Further, related to this, it needs to be considered, if a contract achieving the intent of a VPPA really falls under the jurisdiction of and needs to be regulated by either SEBI or CERC. Perhaps, it is time for innovative structures to be deliberated upon to increase the renewable energy penetration in the country and as a result help achieve our clean energy targets!
Footnotes
1.
2.
3.
4.
5. SEBI circular dated
6 .SEBI Notification dated
7. Currently, none of specified exceptions pertain to electricity derivatives.
8. As defined under Section 2(ea) of the SCRA.
9. As defined under Section 2(ca) of the SCRA.
10.
11. This was subsumed into SEBI in 2015.
12. The forward contracts were governed by this statute back then which were then bought under the jurisdiction of SEBI sometime in 2015.
13. Cleantech Solar press release dated
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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