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16 October 2025

Reading The Fine Print: What The Draft Amendment To Electricity Rules, 2005 Mean For Captive Users

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The law relating to captive power has long invited interpretative debate. Over time, they have evolved in response to market trends, regulatory experience, and technological shifts.
India Energy and Natural Resources
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Background

The law relating to captive power has long invited interpretative debate. Over time, they have evolved in response to market trends, regulatory experience, and technological shifts. The recently published draft Electricity (Second Amendment) Rules, 2025 ("Draft Amendment") issued by the Ministry of Power ("MoP") aim at further relaxing the eligibility criteria for Captive Generating Plants ("CGPs"). Stakeholder comments have been invited on the Draft Amendment by October 22, 2025. This Draft Amendment has been proposed at an opportune time when many businesses are turning to captive models as part of their energy procurement strategy. It may be crucial to understand how this Draft Amendment if implemented, may impact the considerations being placed by such businesses.

This article examines key interpretative and structural impact arising from the changes suggested in the Draft Amendment, especially to Rule 3 of the Electricity Rules, 2005 ("Electricity Rules").

We hope that while crystallising the Draft Amendment, the MoP would have addressed the concerns by various stakeholders, including those highlighted in this piece. Such alignment would bring clarity and consistency to the implementation of the captive power framework.

Before turning to the changes proposed by the Draft Amendment, it is necessary to recall that the basic eligibility conditions under Rule 3 of the Electricity Rules remain unchanged. Rule 3(1)(a) prescribes a dual test for a power plant to qualify as a CGP. First, the captive user must directly or indirectly hold not less than twenty-six per cent of the ownership in the generating plant. Second, the captive user must consume not less than fifty-one per cent of the electricity generated, measured on an annual basis.

For a detailed explanation of how the 26 – 51 thresholds operate in practice and how the courts and regulators have interpreted these thresholds, reference may be made to the discussion in article titled Moving Towards ESG Compliance: Harnessing Captive Power, published on Mondaq on 9 September 20241 by the same authors. In short, captive energy users enjoy significant benefits under the Electricity Act, 2003 ("Electricity Act"). The most critical is the statutory right to open access. This allows CGPs to supply power to their captive users through the grid without incurring cross-subsidy surcharges or additional surcharges, that would otherwise apply to non-captive consumers. In a cost-sensitive energy market, this exemption provides a strong incentive for industries to invest in captive generation, particularly in sectors with high and predictable energy demand. Additionally, the recent inclination by businesses to rely on green energy, in line with their ESG obligations, further makes captive energy consumption a convenient and benefical option.

The minimum consumption requirement for 'association of persons' and its members

The existing second proviso of Rule 3(1)(a)(ii) of the Electricity Rules requires that, in case of 'association of persons', the captive user/s must hold at least twenty-six per cent ownership of the CGP and consume not less than fifty-one per cent of the electricity generated, determined annually, in proportion to their ownership share, within a variation not exceeding ten per cent.

The Supreme Court in Dakshin Gujarat Vij Co. Ltd. v. Gayatri Shakti Paper & Board Ltd.2 held that the last portion of the second proviso to Rule 3(1)(a) of the Electricity Rules, that is, the proportionality principle, specifies a unitary qualifying ratio. The unitary qualifying ratio is the consumption requirement divided by the shareholding requirement, that is, 51% divided by 26%. This means that the owner of every 1% shareholding of the CGP should have minimum consumption of 1.96% of the electricity generated by the CGP, with a variation of +/- 10% being permissible.

Under the proposed amendment to Rule 3(1)(a)(ii) of the Electricity Rules, the emphasis has shifted from consumption to entitlement. Consequently, while the 'association of persons' still needs to collectively fulfil the 26% ownership and 51% consumption thresholds, there is no individual proportionate consumption threshold that now needs to be met. As a shift from this earlier regime, the Draft Amendment creates a cap on the captive consumption benefit for each user as a part of the 'association of persons'. This cap has been identified as 110% of user's entitlement proportionate to its shareholding. While the change in language is minimal, the impact of this change may be greatly beneficial to 'association of persons' and its members at large.

The impact of the change may be that the members who are individually unable to meet the minimal consumption requirement under the Electricity Rules can also be part of and get the benefit of captive procurement as long as collectively the 'association of persons' meets the 26 – 51 rule. Removal of the lower limit consumption restriction leaves only one constraint on an individual member, an upper cap of 110% of its entitlement for claiming captive status. Here also, the restriction is limited to the captive entitlement and not from consumption. By removing the per-user floor and replacing it with a 110% ceiling linked to ownership, the amendment strikes a balanced approach.

Ownership re-defined: A necessary regulatory clarification

One of the most significant changes introduced by the Draft Amendment is the expanded definition of 'ownership' under Rule 3, which directly impacts how captive users can structure their equity participation in CGPs.

Under the existing Electricity Rules, 'ownership' in relation to a generating station set up by a company or body corporate is limited to holding equity share capital with voting rights. For other forms, it refers to proprietary interest and control. This formulation is narrow and does not cater to the layered structures typically adopted in group captive arrangements.

The Draft Amendment substitutes this definition. It now states that ownership shall mean proprietary interest and control, or equity share capital with voting rights, held either directly or through the holding company, its subsidiaries, or any other subsidiary of the holding company. This phrase significantly broadens the scope of qualifying ownership under Rule 3(1)(a), which requires that not less than twenty-six per cent of the ownership be held by the captive user(s).

The implications of this language are clear. It enables captive users to meet the 26% ownership requirement even through indirect means. For instance, if Company X owns 100% of Company Y, and Company Y holds 26% equity in the CGP, Company X would now qualify as a captive user under the Draft Amendment. The shareholding need not be held directly by Company X. It may flow through its subsidiary.

Further, even more complex structures may now be permitted. The phrase "held either directly or through the holding company, its subsidiaries, or any other subsidiary of the holding company" may allow the following layers of participation:

(i) direct shareholding by the captive user,

(ii) shareholding through the captive user's holding company,

(iii) shareholding through a captive user's subsidiary, and

(iv) shareholding through another subsidiary of the same holding company.

For example, Company A and Company B may both be subsidiaries of a Holding Company. If Company B holds 26% equity in the CGP, Company A despite holding no direct stake, would now qualify as a captive user by virtue of its position in the group. This illustrates how the phrase "or any other subsidiary of the holding company" would operate. It may permit group entities, which are not direct shareholders in the CGP, to claim the benefit of captive consumption solely on account of their corporate relationship within the group.

While the move may be broadly welcomed by stakeholders, it also puts greater responsibility on verifying agencies to trace ownership links across complex group charts and ensure compliance with both the ownership and consumption thresholds. The government should analyse whether it wants to extend the captive benefit to such a large pool of connected entities.

As it stands, the expressions Subsidiary Company and Holding Company are defined terms under Sections 2(87) and 2(46) respectively of the Companies Act, 2013 ("Companies Act"). The proviso to the existing definition of 'captive user' in Rule 3 (3), Explanation (1)(b) already refers to these statutory definitions and permits consumption by a subsidiary or holding company to qualify as captive consumption. The proviso clarifying this may apply only to the definition of 'captive user'. The ownership definition in the Draft Amendment does not carry a similar cross-reference to Companies Act. This may invite confusion or lead to unnecessary litigation, particularly if authorities apply inconsistent interpretative standards to consumption and ownership. To avoid unnecessary disputes, and to provide more clarity, the Draft Amendment should clarify that the proviso in Rule 3 (2), Explanation (1)(b) will also apply to the definition of 'ownership' defined at Rule 3 (2), Explanation (1)(c). This simple insertion will harmonize the two limbs of the eligibility test and bring much-needed clarity to verifying layered captive structures.

Recent reports3 suggest that the State of Maharashtra has taken a progressive step by allowing data centres to set up energy generation and distribution plants to meet their captive consumption needs. This regulatory shift signals a broader recognition of the strategic importance and advantages of captive energy models for high energy demand sectors such as data infrastructure, which require stable, scalable, and cost-efficient power supply.The Draft Amendment supports such developments by introducing flexibility in ownership and consumption thresholds, particularly for associations of persons.

Overall, the Draft Amendment aligns with commercial interests, where group captive structures are typically routed through layered SPVs, and direct equity participation by consuming entity may not be commercially or operationally feasible. The changes may also ensure that complex structures by corporate groups to ensure its entities receive captive benefits is made redundant. The Draft Amendment signals a willingness to modernise captive eligibility rules to reflect commercial realities.

Footnotes:

1 https://www.mondaq.com/india/oil-gas-electricity/1515090/moving-towards-esg-compliance-harnessing-captive-power

2 2023 SCC OnLine SC 1276.

3 News Report: https://www.hindustantimes.com/cities/mumbai-news/maharashtra-allows-data-centres-to-set-up-power-energy-generation-and-distribution-plants-101760120845339.html

Originally Published on 16 October, 2025

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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