Draft Electricity (Amendment) Rules, 2026 on Captive Generating Plants Issued by the Ministry of Power

Introduction

On 15 September 2022, the Ministry of Power published Draft Electricity (Amendment) Rules 2026. The proposed amendments replace Rule 3 of the Electricity Rules 2005, which set forth the regulation of captive generating facilities. The primary objective of the proposed amendments is to address certain interpretive issues that have risen as a result of prior amendments to the rules. 

Explanation

Legislative context

Historically, Rule 3 of the Electricity Rules in 2005 was used to establish if a generation facility is a captive generation facility, and to determine if the generated power is a captive consumption exemption under Z-subsidy surcharges and additional surcharges. Amendments to this rule in 2023 caused confusion on the definitions of ownership, consumption, and assessment periods, leading to disputes between captive users and distribution licensees.

Captive user and group entity treatment

The newly created draft has included another significant change regarding the way corporate group structures are defined. For instance, based upon draft definition of a “captive user,” when Company X qualifies as a captive user, the corporation and all of its subsidiary companies plus any subsidiaries of the corporation will all be considered captive users for the purpose of complying with the requirements of the applicable regulations. The definition of ownership is now based on both the proprietary interest and the control and equity share of the capital stock that carries voting rights held either directly or indirectly through entities in a corporate group.

This change is a move away from the previous narrow entity-specific analysis to a broader consolidated group-based assessment of whether ownership requirements have been met. This change may have significant impacts on corporate structure since indirect ownership in a corporate group may be aggregated together for the purpose of determining whether the corporate group meets the thresholds for captive eligibility.

Ownership and minimum equity requirement

The draft retains the principle that captive users must hold not less than twenty-six per cent of the ownership in the captive generating plant. However, by recognising indirect ownership and group-level aggregation, it clarifies how this threshold is to be assessed in practice. The emphasis on proprietary interest and control aligns the rule with corporate law concepts while maintaining the statutory requirement that captive users retain a meaningful stake in the generating asset. This clarification is intended to reduce disputes arising from fragmented shareholding patterns and layered corporate structures.

Consumption norms and assessment period

The requirement that captive users collectively consume not less than fifty-one per cent of the electricity generated continues to apply. The draft introduces flexibility in determining the assessment period for evaluating compliance. Captive users may choose either the financial year or any continuous period within the financial year as the assessment period. Where ownership varies during the chosen period, the draft mandates the use of a weighted average methodology to determine entitlement.

Association of Persons and proportional entitlement

For captive generating plants established by an Association of Persons, the draft introduces detailed proportionality rules. Each captive user is entitled to captive consumption in proportion to its ownership share. While users may draw power based on operational requirements, consumption exceeding proportionate entitlement will not qualify as captive consumption for that user, though it will be considered for meeting the collective fifty-one per cent consumption threshold. An exception is carved out for any captive user holding at least twenty-six per cent ownership, for whom the proportionality restriction does not apply. This framework introduces differentiation within AoP structures and necessitates careful contractual and operational allocation of power among participants.

Verification framework

The draft establishes a structured verification regime to determine compliance with captive criteria. State governments are empowered to designate nodal agencies for verification in respect of intra-State captive generating plants, while verification for inter-State plants is to be carried out by the National Load Despatch Centre in accordance with procedures approved by the Central Government. Verification may be conducted at the unit level rather than the generating station level, allowing for granular assessment. The draft also contemplates the submission of declarations by captive users during the verification period, forming the basis for provisional regulatory treatment.

Dispute resolution mechanism

One of the provisions in the draft to resolve disputes related to verification is the establishment of a Grievance Redressal Committee by the appropriate government. As such, this mechanism establishes an administrative procedure to resolve issues surrounding captive status, potentially eliminating the need to resolve these matters in the courts for a lengthy period.

Treatment of cross-subsidy and additional surcharge

The rules adopted by the draft do not allow for the imposition of either a cross-subsidy surcharge or additional surcharges during the verification process of the captive status. Instead, it allows for the issuance of a declaration by the captive user certifying that the use of electricity during the period of verification was for a purpose authorised under the rules. When a captive electricity user provides a declaration stating that they are using the electricity for an authorised purpose, any cross-subsidy or other surcharge that would have applied if the electricity had not been validated as an assigned use will be charged retroactively, meaning that they will be treated as if they did not provide the declaration.

Conclusion

Overall, the Draft Electricity (Amendment) Regulation, 2026 presents an opportunity for establishing a clear, vibrant regulatory framework for captive generation facilities and clarifying issues such as ownership, consumption, assessment, and validation of such installations. At the same time, the Draft establishes provisions for recovering surcharges where the captive user does not meet their regulatory obligations.