What amended electricity rules mean for captive generating plants

The Ministry of Power (MoP) recently introduced the Electricity (Amendment) Rules, 2023, amending the Electricity Rules, 2005 (rules), in particular rule 3 dealing with captive generating plants (CGP). While apparently innocuous, a careful reading of the amendment shows it may cause serious disruption. Previously, captive users were collectively required to hold 26% of the ownership in CGPs, and consume 51% of a project’s electricity generation. The amendment may be interpreted to mean that each captive consumer has to hold at least 26% ownership in the project. The amendment revises rule 3(1)(a)(i), with the insertion of a proviso and use of the term, “captive user”, in place of “captive user(s)” while specifying the requirement for equity ownership. The term “captive user” in its singular and plural forms, is used at 10 places in rule 3. Unamended, the term used is either “captive users” or “captive user(s)”, but in the amended form the letter “s” is removed solely in rule 3(1)(a)(i). The use of plural, captive user(s), used elsewhere still suggests that the aggregate ownership of captive user(s) is to be at least 26%.

Moreover, the requirement of consumption by captive users in proportion to the shares in the ownership of the plant remains intact, thereby suggesting that the rules still contemplate the possibility of multiple captive users of a CGP together meeting the 26% threshold. In this context, the removal of the letter “(s)” in rule 3(1)(a)(i) is innocuous and is not meant to change the status quo. This is also supported by the general rule of statutory interpretation in the General Clauses Act, 1897, which provides that in central acts, unless repugnant to the context, words in the singular include the plural and vice versa. Therefore, the singular, captive user, in rule 3(1)(a)(i) can still be read as plural, particularly since the context of its use in rule 3 in its entirety supports such interpretation.

However, given the antagonism of some distribution companies (discoms) towards group CGPs, the amendment may allow them to argue that each captive user must hold 26% of the equity. This means there cannot be more than three captive users in a captive power project, with developers having a much-reduced role in the development of the project.

Rule 3(1)(a)(i) also introduces a proviso, which effectively provides that where an affiliate company is setting up a CGP, the captive user must hold at least 51% ownership in such “affiliate company”. The term “affiliate company” used in the proviso is defined neither in the Electricity Act, 2003, its rules nor the Companies Act, 2013. The term “associate company” under the Companies Act means, in relation to a company, another company in which the other company has significant influence, with control over at least 20% of the total share capital or business decisions under an agreement. Affiliate in a general sense includes holding companies, subsidiaries or companies under common control. If an affiliate company is equated with an associate company, ownership of 20% or more of the equity capital by the captive user in the special purpose vehicle (SPV) could make the SPV an affiliate of the captive user. This would mean that the captive user would need to own not 20%, but 51% of the equity in the SPV, although this does not appear to be the intent of the amendment.

Another proviso, added to explanation (b) to rule 3(2), clarifies that consumption by a subsidiary company of the captive user shall be considered as the consumption of the captive user. Also, consumption through energy storage systems shall also be considered as captive consumption. This has been the long standing demand of the industry and will allow holding companies to consolidate and integrate the demands of their group companies.

Until the position with respect to the ownership requirement in a CGP is clarified, if the state discoms and the regulators take the view that each captive user needs to hold 26% ownership in the SPV, it may cause massive disruption in the industry. Existing projects, in their yearly assessments, may be denied the status of CGPs unless they alter their ownership structure. Project lending will be adversely affected, with lenders even recalling loans. Small developers may find it difficult to develop projects.

The MoP must clarify ownership requirements as well as the import of ownership by affiliate companies in the CGPs. Without such clarification, regulators will have their task cut out while the consumers and developers argue with discoms.

Abhishek Tripathi is the managing partner and Rahul Bangia is an associate at Sarthak Advocates.