Top court provides clarity on captive power generation

The Supreme Court judgment in M/s Dakshin Gujarat Vij Company Limited v M/s Gayatri Shakti Paper and Board Limited and Anor (Dakshin Gujarat) settles long-standing issues related to captive generation plants and the use of electricity.

The Supreme Court considered three issues: the eligibility criteria for a captive generation plant (CGP) or captive user under the 3(1)(a) rule of the Electricity Rules, 2005; the meaning of the second proviso to that rule and in particular the words “association of persons”, and whether a company set up as a special purpose vehicle (SPV) to generate electricity is an “association of persons” in the second proviso.

To take advantage of the benefits available to a captive generator under section 9 read with section 2(8) of the Electricity Act, 2003 (act), the requirements in paragraphs (i) and (ii) of the rule must be satisfied. The captive user must have a minimum ownership of 26% in the CGP and at least 51% of the electricity produced must be consumed by the captive users meeting the ownership requirement.

Considering the transfer of ownership of the CGPs, the Supreme Court analysed key sections of the act including section 2(8), captive generating plant, section 2(49), person, and section 9, captive generation. The court held that the term “set up” in section 2(8) is not confined to the initial setup. It accepted the reality that an ownership transfer may occur post-establishment and held that the party operating the CGP need not be the one responsible for its construction and maintenance.

The Supreme Court adopted the reasoning of the Appellate Tribunal for Electricity in the case of Kadodara Power Pvt Ltd and Ors v Gujarat Electricity Regulatory Commission and Anor that decided a CGP retains its captive status even after a transfer of ownership, provided that the new owner complies with the eligibility criteria in rule 3 of the Electricity Rules.

The court found the minimum threshold of ownership of 26% must be held throughout the entire financial year, rather than only at the end. It found a correlation between paragraph (i) and (ii) of the rule that the minimum electricity consumption by captive users depends on the minimum ownership in paragraph (i). Continuous minimum ownership is required throughout the financial year from 1 April to 31 March as well as the minimum electricity consumption.

Determining the meaning of “association of persons” in the second proviso to the rule, the court held that where the captive users are an association of persons, they must hold not less than 26% of the ownership of the plant in aggregate and shall not consume less than 51% of the electricity generated on an annual basis. The proportion of the shares held by the captive users must be in proportion to the consumption of electricity generated, varying by not more than 10%.

The court held that the later part of the second proviso to the rule introduces the concept of a unitary qualifying ratio, defined as the consumption requirement divided by the shareholding requirement, that is 51% divided by 26%. This implies that for each 1% ownership of the CGP, the owner must consume at least 1.96% of the electricity generated by the plant, plus or minus 10%. The unitary qualifying ratio must fall within the range of 1.764% to 2.156%.

This interpretation of rule 3(1)(a) prevents manipulation of the rule by owners, leading to misuse and abuse of the rule.

When changes in ownership, shareholding or consumption occur, the court held that the principle of weighted average should be adopted to ensure compliance with the proportional electricity consumption requirement in the second proviso to the rule. For example, if a captive consumer leaves or transfers their shareholding to a new captive user midway through the year, the new shareholder is expected to consume electricity proportionate to the generated amount.

Lastly, the Supreme Court clarified that even a company formed as an SPV will be treated as an association of persons under the second proviso to the rule.

The Supreme Court has provided welcome clarification, which will help develop captive electricity generation in the spirit encapsulated in the act and rules. However, it remains to be seen if the distribution companies and state electricity regulators have any further ways to try to stop captive generation.

Mani Gupta is a senior partner and Rahul Bangia is an associate at Sarthak Advocates & Solicitors.

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