From PPAs to Market-Linked Mechanisms: Understanding India’s Contract for Difference (CfD) Framework

Parveen Arora and Ishaan Chopra

India is advancing towards an ambitious target of 500 gigawatts of installed non-fossil energy capacity by 2030, which requires the continuous deployment of solar, wind, and hybrid energy systems. As the nation scales this infrastructure, the contractual framework supporting it is evolving as part of a necessary and consequential process. For a long time in India, the Power Purchase Agreement (“PPA”) has been the standard instrument for long-term electricity procurement, providing revenue certainty and ensuring project financing.  

However, as the grid modernises and variable renewable penetration deepens in India, the structural limitations of the PPA model have become apparent, giving way to financially settled mechanisms that better align generator incentives with real-time market signals in mature global markets. Simply put, the PPA model, for all its merits, is showing its age. 

To overcome the challenges of PPA and to provide alternative mechanisms, the Ministry of New and Renewable Energy (“MNRE”) introduced the pilot “Contract for Difference” (“CfD”) Scheme, marking a significant regulatory development in India’s power sector and with important implications for project developers, distribution licensees, and institutional lenders. 

Power Purchase Agreements and Their Limitations 

Medium- and long-term electricity contracts in India have historically been structured as physical PPAs — bilateral agreements between generators and distribution companies (“DISCOMs”) or large consumers, typically spanning fifteen to twenty-five years. Governed by the Electricity Act, 2003, these contracts operate under either Section 62 for cost-plus tariffs determined by regulatory commissions or Section 63 for competitively bid tariffs. Under this framework, renewable energy projects receive a fixed, single-part tariff and are accorded “must-run” status under the Grid Code, protecting them from commercially motivated curtailment. 

While this model has attracted substantial private investment and reduced the levelised cost of electricity, it has structural limitations for a modernising grid. PPAs bind generation resources to specific DISCOMs through rigid bilateral arrangements, suppressing participation in short-term power markets. Because generators receive a fixed tariff irrespective of real-time market conditions, they have no financial incentive to offer surplus capacity on the public exchanges, resulting in exchange-traded volumes that represent only a small fraction of total national generation. The single-tariff structure also provides weak signals for maintenance scheduling, as generators receive equivalent compensation regardless of whether the system faces scarcity or surplus. 

The Contract for Difference: The Instrument Defined 

A Contract for Difference is a financially settled instrument, distinct from a physical delivery contract. Rather than obligating the delivery of electricity to a nominated off-taker, a CfD allows the generator to sell power on the open exchange at prevailing market prices. The contract settles the monetary difference between a competitively determined, pre-agreed “strike price” and a fluctuating “reference market price”, typically benchmarked to Day Ahead Market (“DAM”) rates. When market prices fall below the strike price, the CfD pool (i.e., a dedicated settlement account through which pay-ins and pay-outs under the CfD mechanism are administered) provides a “top-up” payment to the generator; when they exceed it, the generator remits the excess through a “clawback” mechanism. This structure preserves the revenue certainty required for bankability while incentivising market participation, improving system liquidity and scheduling efficiency. 

The SECI CfD Pilot Guidelines 

By Office Memorandum dated March 30, 2026 (No. 238/3/2026-P AND RA), the MNRE conveyed the Competent Authority’s approval for the pilot CfD scheme, designating the Solar Energy Corporation of India (“SECI”) as the "designated nodal agency responsible for implementing the CfD mechanism, including operation of the CfD pool." The pilot is scoped for 500 MW × 3hr supply, procuring 1,500 MWh of RE power each day during the non-solar hours, with SECI retaining flexibility to specify a band within those hours seasonally. The table below sets out the principal parameters of the approved Guidelines: 

Parameter	Details under the SECI Pilot CfD Guidelines
Capacity & Scope	500 MW capacity supplying 1,500 MWh of RE power daily during non-solar hours.
Contract Term	12 years on a Build-Own-Operate basis, and generators thereafter free to operate in the merchant market or enter a PPA.
Strike Price Discovery	Transparent reverse bidding on a bucket-filling basis; individual bid capacity capped at 125 MW.
Profit/Loss Sharing	30:70 sharing ratio daily between the generator and the CfD pool, and monthly reconciliation.
Stabilisation Fund	₹76 crore provided by the Government of India as a revolving buffer; Government outgo capped at this corpus.
SECI Income & Moratorium	Up to 25% of pool profits retained by SECI, subject to a 2-year moratorium from the date of first transaction.
Renewable Energy Certificate (“REC”) Treatment	RECs issued for electricity sold in brown markets must be monetised and revenues deposited into the CfD pool.

Three aspects warrant particular legal attention. First, the 12-year contract term marks a significant departure from historical norms and serves a dual purpose in a power plant’s lifecycle. While a traditional PPA typically locks a generator and a buyer into a fixed tariff for 20-25 years, the newly proposed 12-year term is calibrated to cover project debt repayment while preventing long-term dependence on price guarantees (especially government-backed guarantees). From a business and investment perspective, twelve years is generally more than sufficient to ensure the steady, uninterrupted cash flows required to secure, service, and fully repay the initial project debt, thereby keeping the project highly bankable and attractive to institutional lenders. However, by intentionally capping financial support at twelve years, the government is strategically pushing these renewable energy generators to transition into fully independent, merchant power plants much earlier in their operational lifecycles. 

Therefore, upon expiry, the generator is "free to continue in the market without a CfD or enter into a PPA/bilateral contract." Second, the Guidelines mandate a cascading bidding sequence:  

• First, the generators must bid into the Green Day Ahead Market (GDAM), a specialised, forward-looking trading window explicitly designed to prioritise and clear verified renewable energy transactions before any conventional fossil-fuel power is processed.  

• Second, if, for any technical or commercial reason, the generated power is not fully sold in the aforementioned initial green window, the generator must automatically carry forward any unsold/uncleared power via Order Carry Forward (OCF) to the DAM, where the renewable power will then compete directly on price alongside all other conventional and thermal energy sources in the grid. Finally, if any power remains uncleared in the DAM, or if the generator experiences unexpected generation adjustments closer to the actual time of delivery, the generator must mandatorily bid any remaining power volume in the Real Time Market (RTM) ensuring maximum renewable absorption and minimising curtailment.  

• Third, the mandatory REC deposit mechanism prevents double-counting and safeguards the CfD pool; the RECs arising from electricity sold in conventional brown markets must be liquidated, with proceeds deposited into the CfD pool, thereby reinforcing pool liquidity without additional government outgo. 

  
  

The CERC VPPA Guidelines: The Parallel Framework 

In December 2025, the Central Electricity Regulatory Commission (“CERC”) issued Guidelines for Virtual Power Purchase Agreements (published in the official gazette on January 28, 2026), establishing a financially settled contracting route for Designated Consumers seeking to meet their Renewable Consumption Obligation (“RCO”) under the Energy Conservation Act, 2001. A VPPA is defined as a "Non-Transferable Specific Delivery (“NTSD”) based OTC Contract" between a Consumer or Designated Consumer and a Renewable Energy Generating Station (“REGS”). The REGS sells electricity on a power exchange, the consumer pays the mutually agreed VPPA Strike Price, and the difference between the Strike Price and the Settlement Price is settled bilaterally. Following formal consultation with the Securities and Exchange Board of India (SEBI), CERC conclusively clarified that VPPAs, as NTSD-based OTC contracts, fall within its regulatory jurisdiction under the Electricity Act, 2003. RECs issued to the REGS are transferred to the consumer for RPO/RCO compliance and, upon use, are extinguished by the Central Agency. 

The Interplay: Complementary, Not Competing 

These two frameworks serve distinct market segments. The VPPA Guidelines will enable large commercial and industrial consumers to secure bilateral, consumer-driven financial settlements to discharge statutory obligations (RCO/RPO) upon CERC notification. For now, the SECI CfD pilot provides a centrally intermediated route for generators selling into public exchanges, backed by a Government of India stabilisation fund of ₹76 crore, which would serve as a revolving corpus fund to manage pay-ins and pay-outs under the CfD pool settlement framework, with Government's total outgo capped at this amount. The critical open question is whether DISCOMs, which still procure the substantial majority of India’s electricity, can be brought into a CfD or VPPA-equivalent structure, and whether thermal resources can be similarly contracted on financially settled terms. Neither framework explicitly addresses this gap, making it the defining regulatory challenge for the next phase of India's electricity reforms. 

Global Perspectives: The UK, Europe and Beyond 

Moreover, India’s approach aligns closely with established international practice. The United Kingdom has deployed two-sided CfDs as its primary mechanism for renewable energy financing since 2014. They are administered through the Low Carbon Contracts Company (LCCC), a government-owned counterparty. British CfDs are generally 15-year, project-specific contracts that require the generator to hold a licensed physical asset and have secured over 35 GW of capacity across six successive auction rounds. A notable structural distinction is that the UK model places the full price risk on the generator relative to the strike price, whereas the Indian pilot employs a 30:70 profit/loss sharing ratio between the generator and the CfD pool, thereby moderating developer risk while building pool reserves.  

Furthermore, across continental Europe, more than 100 GW of renewable capacity operates under CfDs or equivalent arrangements. For instance, Italy employs a reliability option (a call option variant) for dispatchable thermal resources in centralised capacity auctions; Colombia has operated a similar reliability option market since 2008. These examples confirm that self-dispatch market architectures, such as India’s, are fully compatible with financially settled contracting. 

Future Roadmap and Conclusion 

The approval of the SECI CfD pilot and the operationalisation of the CERC VPPA Guidelines will mark a structural shift in India’s power sector governance. However, the 500 MW pilot must be treated as an institutional proof of concept, as the settlement mechanics, pool liquidity, reference price selection, and generator conduct under the clawback obligation require rigorous monitoring before the framework is scaled.  

Regulatory priorities might include developing standardised CfD and VPPA contract templates. This also involves amending the CERC Power Market Regulations, 2021, to better support financial settlement of OTC contracts. Additionally, formally recognising CfD-backed capacity in national resource adequacy frameworks ensures fairness alongside PPAs. Finally, resolving the remaining jurisdictional questions between CERC and SEBI across all types of financially settled contracts will help create a cleaner, more efficient regulatory environment.  

Finally, the transition from PPAs to financially settled mechanisms is more than a contractual refinement. It could fundamentally reorient the system to reveal the real-time economic value of electricity, reward generators for availability when the grid needs them most, and establish the regulatory architecture necessary to support India’s energy future at scale.