Captive Power Rules Rewritten

Executive Summary

The Ministry of Power notified the Electricity (Amendment) Rules, 2026 vide G.S.R. 186(E) published in the Gazette of India (Extraordinary), Part II - Section 3(i) on 13 March 2026. The notification substitutes Rule 3 of the Electricity Rules, 2005 in its entirety and introduces the most substantive overhaul of the Captive Generating Plant (CGP) framework since the Electricity Rules, 2005 were first enacted. The amendment is made in exercise of the power conferred by Section 176(1) read with Section 176(2)(z) of the Electricity Act, 2003 (36 of 2003).

The amendment targets Rule 3, which prescribes the twin eligibility criteria - ownership and consumption - that a power plant must satisfy to qualify as a CGP and thereby avail exemptions from Cross-Subsidy Surcharge (CSS) and Additional Surcharge (AS). The reform is a direct response to regulatory and judicial disputes that had created structural uncertainty for industrial captive consumers and renewable energy developers, and is expressly designed to align the captive generation regime with modern corporate group structures, evolving industrial energy needs, and India's clean energy transition objectives.

KEY CHANGE - Ownership

The 2026 Amendment expands the definition of 'ownership' to include indirect holdings through a captive user's subsidiaries, holding company, and other subsidiaries of that holding company. Corporate groups can now aggregate these holdings to satisfy the 26% ownership threshold without requiring a single entity to hold 26% directly.

KEY CHANGE - ESS Integration

Electricity consumed through an Energy Storage System (ESS) interposed between the CGP and the captive user now expressly qualifies as captive consumption. This provides regulatory certainty for solar-plus-storage and other hybrid renewable captive configurations.

100% of a member's proportionate share, but excess individual consumption does not disqualify the plant's CGP status.

KEY DATE - Split Commencement

Provisions relating to individual proportionate consumption in AoP structures (Rules 3(2)(d)(ii) and (iii)) and the verification framework (Rule 3(4)) come into force on 1 April 2026. All other amendments - including the expanded ownership definition, ESS recognition, and SPV/AoP classification - take effect immediately from 13 March 2026.

Rule 3 is made under Section 176 of the Electricity Act, 2003 and operationalises Section 9 (which confers the right to establish CGPs) and Section 42 (which governs open access and surcharge exemptions). The principal rules were originally published as G.S.R. 379(E) on 8 June 2005 and were last amended vide G.S.R. 688(E) dated 19 September 2025. The twin criteria under Rule 3 are:

• Ownership criterion: Captive users must collectively hold not less than 26% of the ownership in the
• Consumption criterion: Captive users must consume not less than 51% of the aggregate electricity generated by the CGP during the financial year.
• CGP status entitles the captive user to draw power without paying CSS or AS to the local distribution licensee - charges that can represent ₹1-3 per unit for large industrial consumers operating through open The captive framework has been the subject of extensive regulatory and judicial activity before the CERC, SERCs, APTEL, and the Supreme Court, with recurring disputes on the scope of the ownership condition and the proportionality of consumption in AoP structures.

Key Amendments at a Glance

Detailed Analysis of Key Provisions

A. Expanded Definition of 'Captive User' and ESS Recognition [Rule 3(1)(a)]

The amended definition of 'captive user' expressly includes persons who consume electricity from a CGP through an Energy Storage System used to store energy generated from that CGP. The phrase 'captive use shall be construed accordingly' extends this recognition to all downstream computations, including the 51% consumption threshold. This resolves a genuine interpretational gap in the pre-amendment framework and provides a clear foundation for solar-plus-storage and wind-plus- storage captive configurations.

Where a captive user is a company, the Explanation to Rule 3(1)(a) deems the captive user to include its subsidiaries, holding company, and other subsidiaries of that holding company - collectively treated as a single captive user for all Rule 3 purposes.

B. Codified Definition of 'Ownership' [Rule 3(1)(d)]

'Ownership' is defined as proprietary interest and control, or equity share capital carrying voting rights, held either directly or through a person's subsidiaries, holding company, and other subsidiaries of that holding company. Subsidiary and holding company have the meanings assigned in Sections 2(87) and 2(46) of the Companies Act, 2013 respectively.

This codification resolves the structural problem that had prevented corporate groups - where ownership of a CGP is spread across holding and subsidiary entities - from aggregating their interests to satisfy the 26% threshold without one entity directly holding 26%.

C. Special Purpose Vehicles Classified as AoPs [Rule 3(1)(e)]

An SPV is defined as a legal entity established for the sole purpose of owning, operating and maintaining a generating station. The Explanation to Rule 3(1)(e) expressly treats all SPVs as Associations of Persons for the purposes of Rule 3. This eliminates the inconsistency across SERCs on whether SPV-held plants were subject to company-level or AoP-level captive rules and ensures that all AoP provisions - including proportionate consumption requirements effective from 1 April 2026 - apply uniformly to SPV structures.

D. AoP Proportionate Consumption Framework [Rule 3(2)(d)] - effective 1 April 2026

For plants set up by an AoP (including SPVs), Rule 3(2)(d) introduces a structured proportionate consumption discipline:

• Collective satisfaction [Rule 3(2)(d)(i)]: The 26% ownership and 51% consumption conditions are satisfied by aggregating the ownership and consumption of all captive users. The aggregate consumption by all users from the plant is counted for plant-level verification.
• Individual consumption cap [Rule 3(2)(d)(ii)]: Each individual captive user's captive consumption benefit is capped at 100% of its proportionate consumption entitlement, calculated by reference to its share in total captive ownership in the plant. Consumption in excess of this cap does not disqualify the plant's CGP status but the excess does not attract the captive benefit (i.e., CSS and AS will apply on the excess).
• 26%-ownership carve-out [Rule 3(2)(d)(iii)]: Where an individual captive user holds ≥26% ownership in the plant, the proportionate consumption cap under Rule 3(2)(d)(ii) does not apply. That user's entire actual consumption qualifies as captive consumption.
• Weighted average shareholding [Rule 3(2)(d)(iv)]: Where ownership changes during the financial year, proportionate consumption for each user is calculated on the basis of weighted average shareholding for that year.

• Group entity aggregation [Rule 3(2)(d)(v)]: For proportionate consumption computation, a captive user together with its subsidiaries, holding company, and other subsidiaries of that holding company is treated as a single captive

Schedule III to the notified rules contains four worked numerical examples - illustrating proportionate consumption within limit, collective vs. individual limits, the ≥26% ownership exemption, and group entities treated as a single person - which form part of the notified rules and provide authoritative guidance on application of the formula.

E. Obligation of Captive Users and Consequences of Non-Compliance [Rule 3(3)]

It is the obligation of captive users to ensure compliance with the Rule 3(2) conditions during the financial year. Where the minimum 51% captive consumption requirement is not met, the entire electricity generated by the CGP is treated as supply by a generating company and CSS and AS are levied on all such consumption. For AoP plants, where any individual user's consumption exceeds 100% of its proportionate entitlement, that excess consumption is treated as supply by a generating company and CSS and AS apply on the excess only and not on the entire plant output.

F. Two-Tier Verification Framework [Rule 3(4)] - effective 1 April 2026

Rule 3(4) establishes for the first time a statutory verification mechanism for CGP status:

Pending verification for any financial year, CSS and AS will not be levied provided the captive user(s) furnish the prescribed declaration. Where a plant fails verification after furnishing such declaration, the applicable CSS and AS (as determined by the respective State Commission) along with carrying costs at the base rate of the Late Payment Surcharge under the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, become payable.

Commencement Schedule

Impact Assessment by Stakeholder

Open Questions and Areas to Watch

Notwithstanding the breadth of the 2026 Amendment, several important legal and regulatory gaps remain:

OPEN QUESTION 1 - Verification Procedures

Rule 3(4) requires State Governments to designate nodal agencies and for those agencies (and NLDC for inter-State cases) to issue verification procedures. As of 13 March 2026, such procedures have not been published. This must be completed before 1 April 2026, when Rule 3(4) comes into force

OPEN QUESTION 2 - Grievance Redressal Committees

The Appropriate Government must constitute Grievance Redressal Committees under Rule 3(4)(b) to hear appeals against verification decisions. The composition, jurisdiction, quorum requirements, and procedural rules of these Committees are yet to be specified.

OPEN QUESTION 3 - Weighted Average Shareholding Mechanics

The procedure for calculating weighted average shareholding under Rule 3(2)(d)(iv) - particularly for mid-year entrants and exits in an AoP - will require further procedural guidance from nodal agencies or NLDC.

OPEN QUESTION 4 - ESS Accounting Protocols

While ESS-mediated consumption is now expressly recognised, questions around banking windows, deemed generation, and grid-supplied ESS charging are not addressed by the amendment. Sector-specific guidance will be required.

OPEN QUESTION 5 - Interaction with Existing SERC Orders

The interplay between Rule 3(4)(c) (declaration-based CSS/AS deferral effective 1 April 2026) and existing SERC billing directives and tariff orders will need to be harmonised at the State level. The gap between 13 March and 1 April 2026 creates a transitional window of uncertainty

Recommended Action Points for Stakeholders

• Conduct an immediate audit of all existing CGP structures and pending captive status disputes in light of the new ownership definition and the expanded group-entity framework.
• Review intra-group energy supply agreements and AoP constitutive documents to align with the proportionate consumption cap and the 26%-ownership carve-out effective from 1 April 2026.
• For plants with outstanding SERC or APTEL proceedings on CGP status, assess the impact of the 13 March 2026 Amendment on all pending arguments relating to ownership, ESS consumption, and AoP proportionality.
• Engage proactively with DISCOMs to invoke the declaration-based 'pending verification' protection from 1 April 2026 where CSS/AS demands are outstanding.
• For renewable energy and hybrid project developers, revisit SPV structure documentation to ensure indirect ownership chains are adequately recorded, verifiable, and aligned with the new ownership definition.
• Monitor Ministry of Power and SERC notifications for designation of State nodal agencies and issue of verification procedures ahead of 1 April 2026.
• For new group captive or AoP arrangements being structured post-13 March 2026, ensure transaction documents - including AoP agreements, SPV shareholders' agreements, and power purchase agreements - incorporate compliance obligations under the amended Rule 3.

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.