The Electricity Act, 2003 ("Act") defines 'captive generating plant' as a power plant set up by any person to generate electricity primarily for his 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 its members.1
Further, Rule 3 of the Electricity Rules, 2005 ("Rules") provides the requirements that a power plant must meet to qualify as a captive generating plant. Mainly a power plant to qualify as a captive power plant (and, take the advantage of exemption of cross subsidy surcharge) must meet the 'ownership test' and the 'consumption test'. The ownership test is that captive users are required to own at least 26% in the captive generating plant; and the consumption test being that the captive users are required to consume at least 51% of the aggregate electricity generated from the power plant (to be determined on an annual basis).
The Government of India, Ministry of Power ("MoP") has been proposing amendments to the Rules for a while; though these amendments for some reason were never notified to become the law. Then, recently2, the MoP notified an amendment to the Rules inter alia amending certain provisions with respect to requirements of captive power plants ("Amendment").
Unfortunately, as against being a welcome step, the Amendment created a furore in the power industry. The commotion created was mainly on two accounts; both pertaining to the amendment proposed to Rule 3 (1)(a)(i) under the Amendment. This Rule provides the equity requirement (ownership test) to be met by 'captive users' in the captive power plant.
The First cause of concern was the phrase 'captive user(s)' in this Rule was modified with "captive user". This change led to some interpretations in the market that the Amendment would mean that going forward each captive user must hold 26% equity in the power plant individually. However, this doesn't seem to be a cogent interpretation; as if the intent of MoP was that then all the provisos of this Rule 3(1) along with Rule 3 (2) should have been modified as well to provide this understanding. In fact, these provisions of Rule 3 continue to provide that the ownership test in case of power plant being set up by a registered cooperative society or association of persons or a special purpose company needs to be met by all the captive users. No change has been made to these provisions. In the absence of these changes, it would be difficult to argue that the concept of 'ownership test' for a captive power plant has been changed so drastically.
Perhaps this was just an inadvertent change done to introduce the proviso (the second cause of concern) to this Rule 3(1)(a)(i) and a lot more is being read into it.
Now coming to the second cause of concern – in Rule 3(1)(a)(i) a proviso has been added which states that, if a captive power plant is being set up by an 'affiliate company' of the captive user then the captive user must hold at least 51% of the ownership in such 'affiliate company'. What would be an affiliate company has not been defined in the Act, Rules or the Amendment; even the Companies Act, 2013 does not define an affiliate company. In the absence of the definition of affiliate company and going with 'control' standard in the various MoP's bidding documents, if a company owns 26% equity or more in another company, then such another company would be an affiliate of the first company. Accordingly, a captive user which owns 26% equity in the company setting up the power plant (which it needs to so as to meet the ownership test and become a captive power plant) would become an affiliate of such company. With this interpretation, the exception (in the new proviso) would become the rule in case of single captive user power plants. As, for all such cases the captive user instead of 26% equity must hold 51% equity in the company owning the power plant. Such an interpretation would defeat the purpose of the main rule in Rules 3(1)(a)(i).
One possible interpretation of addition of this proviso is that, it were to apply to cases where the promoter of the company which would develop the captive power plant is the affiliate of the 'captive user' and in such case the captive user must own 51% of such promoter (to meet the ownership test at one level above).
This interpretation seems to be in line with the change proposed to the 'captive user' definition under the Amendment. The definition of 'captive user' under the explanation to Rule 3(2) has been modified pursuant to the Amendment. This has been a clear positive change which basically provides that now consumption by a subsidiary3 of a 'captive user' would also qualify to be captive consumption by the captive user. Additionally, captive user is allowed to also consumer electricity through energy storage system.
It appears that MoP intended for the indirect subsidiary standard to apply to both the ownership test and consumption test. The drafting of the change to the consumption test under the definition of captive user seems to be adequate; however, the Amendment with respect to the ownership test by the addition of proviso to Rule 3(1)(a)(i) unfortunately is not clear (which has been causing a lot of unrest in the captive power world).
We understand that the various stakeholders have approached the MoP to clarify the position and it seems that a clarification from MoP on the Amendment is expected in the near future (which hopefully would address these concerns).
1. Section 2(8) of the Act.
2. On June 30, 2023.
3. As defined under the Companies Act, 2013
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