Captive Generating Plants in the States of Telangana and Andhra Pradesh

1. Introduction

A captive generating plant is 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 members of such co-operative society or association (“CGP”).[1] CGPs are primarily regulated under the Electricity Act, 2003 (“Act”) and the Electricity Rules, 2005 (“Rules”) and are developed for the purpose of collective usage of electricity by a group of commercial consumers.

1. Setting up CGPs

 Generating stations, set up in terms of the Act, have the right to have open access for the purposes of carrying electricity from a CGP to an electricity consumer based on the availability of transmission facility. Such generating stations are not required to procure any license for the purpose of supplying electricity generated from a CGP to any licensee in accordance with the provisions of the Act.

1. Eligibility criteria for CGPs

 Under Rule 3 of the Rules, a solar power plant qualifies to be a CGP only in cases where the following criteria are met (collectively, “Eligibility Criteria”):

• not less than twenty six percent (26%) of the ownership is held by the captive user(s); and
• not less than fifty one percent (51%) of the aggregate electricity generated in such plant, determined on an annual basis, is consumed for captive use.

Ownership in relation to a generating station or a power plant set up by a company or any other body corporate means the equity share capital with voting rights. In other cases, ownership refers to proprietary interest and control over such generating station or power plant.

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• Special Purpose Vehicles

If a power generating station is owned by a company formed as a special purpose vehicle for such generating station, then:

• only the unit(s) of such generating station which are identified for captive use, must satisfy the Eligibility Criteria; and
• the ownership requirement in (i) of the Eligibility Criteria above is required to be met only in proportion of the equity of the company related to such unit(s) identified for captive use.
• Registered Co-operative Societies

If a power generating station is owned by a registered co-operative society, the Eligibility Criteria must be satisfied collectively by the members of such co-operative society.

• Associations of Persons

In the case of associations of persons, a captive user must hold not less than twenty six percent (26%) of the ownership of the plant in aggregate and such captive user must consume not less than fifty one percent (51%) of the electricity generated, determined on an annual basis, in proportion to their shares in ownership of the power plant with a variation not exceeding ten percent (10%).

4. Consumption of electricity

It is the obligation of captive users to ensure that the consumption of electricity at the specified percentage is maintained. Where for any year, the minimum percentage of captive use is not complied with, the entire electricity generated is treated as supply of electricity by the generating station and not as electricity used for captive user(s). Consequently, cross-subsidy charges as per the prevailing rules and regulations will be applicable.

5. Proposed amendment to the Rules

On May 22, 2018, the Ministry of Power, Government of India proposed amendments to the Rules in relation to CGPs which could make the CGP structures in India more regulated (“Proposed Amendment”). The key changes set out in the Proposed Amendment are briefly discussed below:

• Unlike the present provisions, CGPs would be required to interlink equity shareholding with voting rights in the entity. As such, the shareholders/members of an entity holding small percentages of the equity but exercising greater voting rights would come within the ambit of the consumption criteria laid down under the Rules.
• Change in shareholding patterns of CGPs is proposed to be regulated by a fixed number of instances in a financial year (i.e., only two (2) changes in a financial year). This would make it difficult to acquire certain plants at the time of acquisition and sale of business undertakings. As such, parties to a transaction may acquire rights in the CGP only in the next financial year, thereby, impacting acquisition values and timelines for such transactions.
• Certification of CGPs by relevant authorities is also proposed to be effectuated to regulate CGPs in India. So far, the process of obtaining certificates has not been provided in the Proposed Amendment. However, in the event a generating station and its consumer are both located in different states, three (3) authorities would be involved in the process of issuing the certificate, i.e., the distribution companies in respective states where the generating stations are located and the regulatory commission. If the process of obtaining certificates is made cumbersome, it may demotivate business houses setting up CGPs since CGPs have flourished in India without any licensing requirements.
• Maintenance of records and filing of returns have been introduced in the Proposed Amendment.
• Certain relaxations have also been provided in the Proposed Amendment such as: (a) variation of fifteen to thirty percent (15% to 30%) in consumption in relation to the solar and wind power projects, subject to the approval of the state government, (b) variation of up to fifteen percent 15% in consumption by captive users. This is a welcome change for the industry as it would provide more flexibility to businesses in relation to their consumption of electricity.

It is clear that the Government of India is planning to implement strict measures to regulate CGPs in the country. However, such stringent regulation may reduce the number of CGPs being set up by industries. As such, initiatives taken by various state governments such as the solar power policies, etc. may become futile over a period of time.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal, Hyderabad.

[1] Section 2(8) of the Act