Draft Amendment To Rule 3- Qualification To CGP

The Ministry of Power has released a draft amendment to Rule 3 of the Electricity Rules, 2005, which outlines the qualifications for captive generating plants. Public comments are invited until 22 October 2025. Below is a summary of the proposed changes and their potential impact on existing captive project structures.

A. Current Regulatory Framework

1. Section 2(8) of the Electricity Act, 2003 (Act) defines a 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 an association of persons for generating electricity primarily for the use of the members of such co-operative society or association."

2. Section 9 of the Act permits a person to construct, maintain or operate a captive generating plant and dedicated transmission lines. Electricity supplied through the grid from such plants is regulated similarly to that from generating companies.

3. Additionally, Rule 3 of the Electricity Rules, 2005 (Rules) sets out a twin-fold criteria for qualifying as a captive generating plant:

1. captive user(s) must have not less than 26% of the 'ownership'; and
2. captive user(s) must consume not less than 51% of the aggregate electricity generated by such power plant.

4. Captive Power Plant by an 'Association of Persons'

The Act and the Rules further provide that in case a captive power plant is set up by an 'association of persons', then in addition to the captive framework requirements mentioned in 3 above, the power plant must also ensure that:

1. the minimum ownership requirement (i.e. 26%) in the power plant is fulfilled by the members of such association of persons on an aggregate level; and
2. captive user(s) should consume not less than 51% of the electricity generated in proportion to their shares in ownership of the power plant within a variation not exceeding 10%.

Note that neither the Act nor the Rules expressly define 'association of persons' and therefore, its scope and ambit has been left open for judicial interpretation. In this regard, Supreme Court has held that a special purpose vehicle which is setting up a captive power plant would also qualify as an 'association of persons' and hence, must comply with the proportionate consumption condition, as mentioned above.

B. Proposed Amendments to the 'Association of Persons' structure

1. Under the draft amendment, while the two core conditions for captive qualification remain unchanged, i.e., (i) minimum 26% ownership by captive users, and (ii) not less than 51% of aggregate generation to be consumed for captive use, a critical modification has been introduced in respect of 'Association of Persons'.

2. The draft clarifies that for a captive generating plant set up by an 'Association of Persons' (which includes a plant set up through an SPV) the captive consumption benefit for each user will now be capped at 110% of their proportionate entitlement. In other words, a user's eligible captive consumption will be restricted to not more than 110% of the consumption attributable to their shareholding proportion in the power plant.

3. Regulatory consequences of the proposed amendment

1. Any over-consumption beyond this 110% threshold will not qualify as captive use, thereby exposing such excess consumption to cross-subsidy surcharge and additional surcharge.
2. Failure to adhere to this limit could jeopardise captive status for the entire plant, since Rule 3 compliance is tested annually and non-fulfilment results in the plant being treated as a conventional generating station.
3. This formulaic cap seeks to curb scenarios where larger users indirectly benefit by consuming substantially more than their ownership-linked entitlement.

4. Practical Implications

1. User power allocation frameworks, especially in group captive structures, will need to be revisited to ensure that drawal remains within the permissible band.
2. Existing captive agreements and shareholder arrangements will require amendments to address responsibility for CSS/AS exposure on excess consumption.
3. Parties will need to agree on who bears the financial risk if a member exceeds its limit and jeopardises captive qualification.

C. Other material changes proposed in the draft amendment

1. Recognition of Energy Storage Systems (ESS/BESS): Captive consumption may now be achieved not only through direct drawal but also via an energy storage system. This enables time-shifting of captive power and could benefit users with variable demand profiles.

2. Expanded Definition of Ownership: Ownership is clarified to include equity held directly or indirectly through a holding company or its subsidiaries. This broadens structuring flexibility for corporate groups setting up captive projects across multiple entities.

Please find attached a copy of the draft amendment, here.