ELUSIVE HEDGE. In India, exchange prices and grid prices are not as correlated as in Western markets | Photo Credit: Galeanu Mihai

The Central Electricity Regulatory Commission (CERC) had in December 2025 notified guidelines for virtual power purchase agreements (VPPAs).

These norms help establish a financial instrument that could aid consumers — such as distribution companies and captive users — in meeting their Renewable Consumption Obligation (RCO) targets.

While the regulator’s ultimate objective in issuing these norms may have been to quicken India’s progress in achieving 500 GW non-fossil fuel capacity by 2030, they may in reality not move the needle too much.

A VPPA is a financial contract that allows a company to support renewable energy without physically buying electricity. Instead of taking power from a specific wind or solar plant, the buyer agrees on a fixed price, called ‘strike price’, for the electricity generated, while the actual power is sold to the grid at market rates. If the market price falls below the agreed price, the buyer pays the difference; if it rises above the agreed price, the buyer (in a typical contract) receives the surplus. In return, the company gets renewable energy certificates and can claim environmental benefits, such as reduced carbon footprint.

While the notification offers clarity around regulation, industry participants feel it may not be an immediate game-changer. Vibrant Energies CEO Vinay Pabba says that while the guidelines provide an enabling framework, the current market for VPPAs remains a small subset of the renewable space, estimated at roughly one gigawatt per year.

Pabba explains that even before the guidelines arrived, many multinational corporations used ‘workarounds’ to achieve net-zero commitments in India. Consumer firms would often float trading entities to strip green attributes from power before selling the “brown” electricity on the exchange.

“The new CERC guidelines make it possible for users to do this directly,” Pabba adds, noting that it simplifies the process for global players who were already finding ways to operate in this niche.

In Western markets, VPPAs serve as sophisticated financial hedges, as exchange prices and grid prices are highly correlated. That is not so in the Indian context. BCG India Managing Director and Partner Umang Shah remains unsure about the immediate impact on capacity rollout.

“Technically, the only thing that has changed now is that there is clarity on the billing attribute,” Shah explains. He points out that the financial hedge factor is considerably weaker in India than in the West, because “the exchange prices and grid prices are not much correlated” here. While exchange prices are volatile, distribution company (discom) tariffs are relatively stable and tend to increase only over time.

“If the exchange prices remain high, you make money. If they crash tomorrow, you actually have to pay money for nothing, every year,” Shah says. Because a VPPA counterparty’s actual discom bill does not drop when exchange prices fall, they could find themselves paying the “delta” to a developer without any offsetting saving on their physical electricity cost. For many, renewable energy certificates, or RECs, remain a “simpler, cheaper way” to meet green obligations without taking a ‘punt’ on electricity prices.

The Indian power market is rather unique — about 93 per cent of power is still sold under long-term, bilateral PPAs, leaving the exchange market with limited depth. Dynamic pricing is politically difficult due to the large subsidised segments of the population, says Pabba. Also, bankers remain wary of the merchant risk associated with such projects, making debt financing difficult for producers without a consumer committed to physical offtake.

Shah echoes this sentiment, noting that for most large industrial customers, group captive models remain more attractive because they allow for the waiving of cross-subsidy charges. He suggests that VPPAs will likely remain a niche for MNCs.

While the CERC guidelines represent a step toward market maturity, they are unlikely to trigger a surge in merchant renewable plants immediately.

‘Long-term certainty’

ICRA’s Ankit Jain, Vice President, Co Group Head-Corporate Ratings, says Indian VPPA uptake remains “fairly in nascent stages... VPPAs provide a route for long-term revenue certainty for merchant projects, which otherwise face offtake uncertainty and, thus, lack of investor interest. Key implementation issues include market price standardisation, and REC tradability”.

VPPAs may not become a mass-market solution in India, but they can widen the funnel, says Emmvee Photovoltaic CEO Suhas Donthi. “They make a few more renewable projects viable... Even modest adoption can make a difference by improving the risk profile of investable RE projects.”

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Published on January 5, 2026