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On 23 September, the Ministry of Power issued the . These draft rules significantly reform the regulation of captive generating plants. They codify the principle of proportionality between ownership and electricity consumption, following the Supreme Court’s reasoning in . The amendments to rule 3 of the Electricity Rules, 2005, establish a statutory ceiling on captive consumption and expand the framework for ownership qualifying for captive status.

Under the Electricity Act, 2003, consumers may establish captive generating plants. These are power plants set up by one or more users to generate electricity for their own or “captive” use. This is to meet their electricity needs, reduce dependence on distribution licensees and benefit from exemptions such as waivers of cross-subsidy surcharges and additional surcharges. Rule 3 sets out two conditions for a plant to qualify as a captive generating plant. The users must collectively hold at least 26% of the plant’s ownership and consume at least 51% of the electricity generated annually.

Many captive generating plants operate as group captive plants, where a number of consumers pool ownership, often organised as an “association of persons”, share the generated power. To ensure equality, the existing rule requires each user’s consumption to align with their respective ownership share, with a ±10% variation to accommodate operational differences. The Supreme Court in Dakshin Gujarat held that each member’s consumption should be proportionate to their ownership. It established a unitary qualifying ratio of 51% consumption to 26% ownership, or about 1.96. This meant that each 1% of ownership should correspond to some 1.96% of total consumption, ±10%.

Although proportionality was recognised in principle, there was no set threshold on the maximum consumption any member could claim. This was ambiguous and could lead to disputes. The draft rules fill that gap.

The draft rules introduce a defined ceiling. Each captive user’s consumption to claim captive benefit is limited to 110% of their proportionate entitlement, calculated by their ownership share in the power plant. Any additional electricity consumed will not qualify as captive use and will not be eligible for captive benefits. This limit legislates the upper boundary of the Supreme Court’s proportionality principle, ensuring that no single member in a group captive arrangement can claim excessive consumption.

Although the existing rules recognise electricity consumed by a captive user’s holding company and subsidiaries for determining proportionate consumption, they do not account for ownership in a similar manner. Companies holding equity indirectly through holding companies, subsidiaries or subsidiaries of holding companies, as well as those structuring investments through such arrangements, cannot fully leverage their ownership to meet the 26% threshold.

This has prevented group companies from fully benefiting from captive generation. The draft rules define ownership to include all direct and indirect equity holdings. This ensures that the ownership and consumption components are fully aligned. This amendment resolves a significant practical and legal issue, enabling the 26% ownership criterion to be met equally across corporate group structures.

The draft rules are a significant step in clarifying the regulatory framework for captive generating plants. They remove longstanding ambiguities concerning overconsumption in group captive arrangements. They also align ownership and consumption, resolving the imprecision that previously constrained group companies. These reforms will help a wider adoption of captive generation as a means of self-reliance and cost optimisation.

However, the draft rules do not address certain problems, such as intra-year ownership changes and the obligation to maintain at least 26% ownership continuously throughout the year, as mandated by the Supreme Court. Guidance on such matters will bring clarity and reduce administrative burdens. The amendments confirm proportionality as the cornerstone of captive power regulation.

Utkarsh Mishra is a senior associate and Jahnavi Tolani is an associate at Sarthak Advocates & Solicitors.