On June 30, 2023, the Ministry of Power notified the Electricity (Amendment) Rules, 2023 (Amendment) which amend the Electricity Rules, 2005 (Rules). The Amendment has inter alia introduced critical changes as regards captive generating plants.
Rule 3 of the Rules prescribes the criteria that a power plant needed to meet to qualify as a ‘captive generating plant’ for the purposes of Section 9 of the Electricity Act, 2003 (Act). As per the Rules, prior to the Amendment, a power plant would not qualify as a captive generating plant, unless (i) not less than 26% of the ownership is held by ‘captive user(s)’; and (ii) not less than 51% of the aggregate electricity generated in such plant, determined on an annual use, is consumed for captive use.
Rule 3(1)(a)(i) of the Rules specifically states as follows:
“not less than twenty-six percent of the ownership is held by the captive user(s), and”
The Amendment replaces Rule 3(1)(a)(i) with the following:
“not less than twenty-six per cent of the ownership is held by the captive user:
Provided that if the Captive Generating Plant is set up by an affiliate company, not less than fifty one per cent of the ownership, is held by the captive user, in that affiliate company; and”
As a result of the above, the following changes have been made:
The second change is clarificatory and a welcome one.
As regards the first change, several interpretations have been taken to suggest that each individual captive user would now be required to hold a minimum of 26% of ownership in a power plant, for it to qualify as a captive power plant. If such interpretation was to be taken, prior captive transactions where captive users cumulatively held 26% of ownership in the power plant may need to be re-visited. This is due to the fact that Rules do not have a grand-fathering provision and have come into effect from June 30, 2023.
However, another school of interpretation is that the deletion of the ‘s’ in Rule 3(1)(a)(i) of the Rules was unintentional, and the amendment was solely to insert the clarification regarding captive generating plants held by an affiliate company. The reasoning underlying this argument is that the Ministry of Power has not deleted reference to collective ownership of 26% by ‘captive users’ in the illustration to Rule 3(1)(b) of the Rules which states as follows:
“Illustration: In a generating station with two units of 50 MW each namely Units A and B, one unit of 50 MW namely Unit A may be identified as the Captive Generating Plant. The captive users shall hold not less than thirteen percent of the equity shares in the company (being the twenty six percent proportionate to Unit A of 50 MW) and not less than fifty one percent of the electricity generated in Unit A determined on an annual basis is to be consumed by the captive users.”
Further, no amendments have been proposed to any of the regulations on verification of captive generating plants and captive consumers that are issued by the respective State Electricity Regulatory Commissions (“SERCs”). If the intent of the Ministry of Power is to restrict captive users to entities that individually own 26% equity shares of the captive plant, the extant SERC regulations would need to be amended to avoid a conflict between the Rules and such regulations.
Under the Act, cross subsidy surcharge is not leviable if open access is provided to a person who has established a captive generating plant for carrying the electricity to the destination of his own use. Captive generating plans that fail to meet with the amendment requirements pursuant to the Amendment, may face the risk of losing their captive status, which would consequently lead to the imposition of cross subsidy surcharge and additional surcharge from the Central Electricity Regulatory Commission or the SERC, as the case may be. In light of the above, it would be imperative for the Ministry of Power to issue a clarification regarding the rationale of the amendment to Rule 3(1)(a)(i) of the Rules.
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