The Encouraging Development of Virtual Corporate PPAs in India

In 2014-15, I was part of an assignment for a private industrial manufacturer in South India looking at procuring renewable solar power. Its facility was located within the premise of a large state-owned steel plant and the private manufacturer wanted us to investigate and execute the direct purchase of solar power from an outside source through open access to intra and inter-state transmission networks. The local state distribution franchisee, in this case, the state-owned steel plant, did want to lose the private manufacturer since it was a well and reliable paying customer. And the tug of war began with intermediation from state transmission companies and the State Electricity Regulatory Commission (SERC). The tussle continued for 2 years till a resolution occurred when the industrial manufacturer was allowed direct power procurement but had to build a parallel grid link to the interstate sub-station.

In the Indian electricity market, the generation sector is fully deregulated while the distribution segment is gradually being liberalized via the Electricity Act of 2003 and subsequent 2016 amendments. Although much of the wholesale power sale/purchase happens between generators (IPPs and quasi-state owned or federally owned entities) and state distribution companies (discoms), large industrial or commercial consumers can source power directly from independent power producers through various mechanisms since liberalization. But such an option often comes with the challenges that I mentioned about in my assignment with the industrial manufacturer. Industrial customers can move to renewable open access and captive generation to reduce their power purchases from the grid. But they are also the highest-paying consumers for a distribution licensee (discoms), and discoms do not like to lose out on these customers.

Of late, virtual power purchase agreements (VPPA) have also occurred between corporate entities as consumers and private power producers and this is helping them overcome the bureaucratic and much politicized – “who buys power from whom at what rates”- hurdles.

The arrangement of purchase is facilitated through an “aggregator” model under a virtual PPA. Corporate entities (auto OEM, pharmaceutical companies, textile retailers, etc.) procure electricity from private independent power producers (IPPs) and wheel that power to their supplier facilities or factories that are spread out nationally.

In this arrangement, the corporate entity gets into a long PPA for the renewable generation quantum with a private IPP at a fixed tariff. Then post wheeling and consumption across factories in different states, the entity and IPP look at spot wholesale market prices so that the difference between the spot price and PPA tariff can be settled bilaterally, helping both parties to hedge. Since the VPPA involves a non-physical arrangement for the flow of power settled in the spot market (illustrated in the above Exhibit), the IPPs and corporate aggregator entities can circumvent standard open access and physical wheeling norms. This is beneficial since those norms may vary among states (i.e., wheeling of physical power from a RE plant in one state to a production facility in another requires inter-state transmission and distribution open access approvals).

There are signs of encouragement such as solar or other renewable VPPA purchases in the ongoing RE100 initiative in certain states, such as Tamil Nadu, Gujarat, and Uttar Pradesh where diverse factors such as shortage of power from the grid, lack of support from discoms, and high industrial and commercial tariffs are making individual state regulators (so-called, SERCs) that work in tandem with the Central Electricity Regulatory Commission (CERC) at the central level) to facilitate new guidelines. This will help industrial facilities to uptake more renewable power independent of the local discom.

As per WBCSD, by August 2020, India's construction, infrastructure, automotive, and textile companies have been procuring more than 165 MW of renewable power. Through the VPPAs, the cumulative corporate PPA purchase may exceed 500MW by Q2 of 2022. Balancing the interests of the state, IPPs, as well as industrial or corporate stakeholders, is going to be the key determinant of success of this emerging model.