India: Regulation Of Group Captive Power Plants In India

Last Updated: 14 September 2017
Article by Sourav Jena

Captive Generating plant means a power plant set up by any person, association or any company to generate electricity primarily for his or her own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such co-operative society or association1. A dedicated transmission line can also be build, operated or maintained by the same person for the transmission of electricity produced out of such captive plant. Every such person has a right to open access for the purposes of carrying electricity from his captive generating plant to the destination of his use subject to availability of transmission facility by CTU or STU, as the case may be.

A group captive scheme is where someone develops a power plant for collective usage of many commercial consumers. At present, a power project is considered 'captive' if consuming entity or entities consume at least 51% of the power generated and owns at least 26% of the equity. Various capital structures have evolved to qualify as captive under the rules. For example, a major portion of the capital could be preference shares, with only a small portion being equity capital. Thus, owning 26% of the 'equity capital' actually translates to a very small amount relative to the overall investment in the project2.

These plants are regulated under section 9 of the Electricity Act, 2003 and Electricity Rules, 2005.

Group Captive Generation can be attributed to –

  • Cheaper price – This is the most important factor and the reason as to why the modern day industrialists should shift to captive generation. Industrial tariffs tend to be higher than residential and it effects the profit maximization condition. In this way, industries will get cheaper rate. A general survey estimates the market rate to be around Rs. 3 per unit while production cost to be around Rs. 3.50 per unit.
  • Cross subsidy – The consumers of captive power scheme are exempted from paying cross subsidy surcharges (CSS)3.
  • Power deficiency – In case of power cuts, industrial consumers face heavy productivity losses leading to financial losses. Group captive generation, circumvents this frustrating problem entirely.
  • State utility – The consumers in the group captive scheme no longer need to worry about bureaucratic utilities.

Significance of Captive Generation as per NEP

The liberal provision in the Electricity Act, 2003 with respect to setting up of captive power plant has been made with a view to not only securing reliable, quality and cost effective power but also to facilitate creation of employment opportunities through speedy and efficient growth of industry.

The provision relating to captive power plants to be set up by group of consumers is primarily aimed at enabling small and medium industries or other consumers that may not individually be in a position to set up plant of optimal size in a cost effective manner. It needs to be noted that efficient expansion of small and medium industries across the country would lead to creation of enormous employment opportunities.

A large number of captive and standby generating stations in India have surplus capacity that could be supplied to the grid continuously or during certain time periods. These plants offer a sizeable and potentially competitive capacity that could be harnessed for meeting demand for power. Under the Act, captive generators have access to licensees and would get access to consumers who are allowed open access. Grid inter-connections for captive generators shall be facilitated as per section 30 of the Act. This should be done on priority basis to enable captive generation to become available as distributed generation along the grid. Towards this end, non-conventional energy sources including co-generation could also play a role. Appropriate commercial arrangements would need to be instituted between licensees and the captive generators for harnessing of spare capacity energy from captive power plants. The appropriate Regulatory Commission shall exercise regulatory oversight on such commercial arrangements between captive generators and licensees and determine tariffs when a licensee is the off-taker of power from captive plant.4

Imposition of RE Obligation on Captive Generation

In Hindustan Zinc Ltd. v. RERC5, the Supreme Court held that, RERC (Rajasthan Electricity Regulatory Commission) has jurisdiction to formulate and impose, renewable energy purchase obligations and rules incidental thereto, under section 86(1)(e) read with section 181 of the 2003 Act in respect of industries running their own captive power plants. The question under consideration was whether RERC can frame regulations with respect to renewable energy and if so, can it impose such RE obligation on captive gencos and open access consumers and that, whether they have to pay a surcharge in case of shortfall in meeting such RE obligation.

The Apex Court held that, RERC has the power and authority under the Electricity Act, 2003 to formulate such regulations. The Court also stated about Article 51-A(g) of the Constitution, National Policies on Electricity and the involvement larger public interest while considering the validity of the RERC Regulations. In reply to the contentions of the appellants on the ground that such regulation violates article 19(1)(g), the Court replied that such regulation squarely falls under article 19(6) and qualifies to be a reasonable restriction.

In case the legislature intended such power of the regulatory commission to be confined to the distribution licensee, the said words and phrases of Section 86(1)(e) would have read "total electricity purchased and supplied by distribution licensee". The mere fact that no license is required for establishment, operation and maintenance of a captive power plant does not imply that the industries engaged in various commercial activities putting up such captive power plants cannot be subjected to regulatory jurisdiction of the commission and required to purchase certain quantum of energy from renewable sources. The RE obligation has been imposed upon the consumption of electricity whether purchased from distribution licensee or consumed from its own captive power plant or through open access. The RE obligation has not been imposed on the appellants in their capacity as owners of the captive power plants.

The term "in the area of the distribution licensee" under the provision has to read along with definition of "area of supply" as provided under section 2(3) of the 2003 Act which defines it as the area within which the distribution licensee is authorized by his license to supply electricity. Further "total consumption in the area of distribution licensee" would include the consumption by captive power plant consumers also and open access consumers who fall in the "area" of distribution licensee. The other phrase "total consumption" has been used by the legislature in Section 86(1)(e) and the total consumption in an area of a distribution licensee can be by three ways either supply through distribution licensee or supply from captive power plants  by using lines and transmissions lines of distribution licensee or from any other source. The area would always be of distribution licensee as the transmission lines and the system is of distribution licensee, the total consumption is very significant.

Therefore this decision held that RE obligation formulated under the regulations framed by State Electricity Regulatory Commissions is squarely valid and applicable on Captive Generators.

Encouraging Renewable Technology

The fuel mix of captive plants shows a strong bias for coal, lignite, and diesel, with coal-based captive plants envisaged for the future. Presently, the share of hydro or renewables in installed captive capacity is almost negligible. Although low carbon gas-based captive plants are in operation, issues around the availability of gas and volatility in gas prices have been assuming greater importance. Besides encouraging renewable energy for distributed power back-up or stand-alone facilities to replace or complement smaller sized fossil fuel-based captive power units, there should be ample thrust on technological innovations in diesel generators6.

Large group captive capacities that are more efficient and thus less carbon-intensive should be encouraged so that plant capacities are better utilized and surplus power from these captive plants supplied to the grid. Further, taking policy measures to promote rapid development of renewable energy and hybrid low-carbon technologies as back-up and standalone power sources would assist in reducing the carbon footprint of captive power generation.

Footnotes

1. Section 2(8) of Electricity Act, 2003

2. Rule 3(1)(a) and (b) of Electricity Rules, 2005 provides for the requisites of a captive generation plant

3. Section 38, 39, 40, 42 of the Electricity Act, 2003

4. National Electricity Policy, Ministry of Power

5. (2015) 12 SCC 611

6. Nag Tirthankar, "Captive Generation in India: The Dilemma of Dualism", IDFC Report, accessed on 06.09.2017, available at http://www.idfc.com/pdf/report/Chapter-12.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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