The Ministry of Power, Government of India has notified significant amendments to Rule 3 (Amendment) of the Electricity Rules, 2005 (Electricity Rules) on March 13, 2026. Rule 3 of the Electricity Rules prescribes the criteria for qualification of a power plant as a captive generating plant (CGP), enabling captive users to avail exemptions from cross-subsidy and additional surcharge (CSS & AS). While the other provisions of the Amendment will be effective from the date of its notification, Rule 3(2)(d)(ii), Rule 3(d)(iii) and Rule 3(4) are applicable from April 1, 2026, onwards.
The Amendment brings much awaited clarity to certain ambiguities in the erstwhile Rule 3 of the Electricity Rules, which was a subject matter of judicial interpretation for several years.
Key Changes Introduced by the Amendment
Widening the Definition of ‘Captive User’ – Recognising Group Entities
The Amendment expands the definition of ‘Captive User’ being a company, to include its subsidiaries, its holding company, and other subsidiary(y)/(ies) of such holding company, treating all as a single captive user. It correspondingly also broadens the definition of ‘ownership’ in relation to a power plant to include equity share capital with voting rights held directly or indirectly, through subsidiaries, holding company or other subsidiary(y)/(ies) of such holding company. This is in contrast with the erstwhile Rule 3, which permitted only the subsidiary of a holding company or vice versa, to be recognised as a single captive user, but did not recognise other affiliates of such an entity as a ‘captive user’.
This is a welcome change and is aimed at boosting captive consumption for large group companies in the C&I market. By treating such group entities as a single captive user, the Amendment seeks to simplify the compliance and verification requirements for multiple entities under the same flagship company. Captive benefits will be made available to corporate groups that are making legitimate captive investments, with the flexibility of organisation structuring.
Transition from Proportionality Principle to Collective Fulfilment of Captive Criteria
Under Rule 3, a power plant is required to satisfy two qualifying criteria to be a CGP: (i) a minimum of 26% ownership of the CGP must be held by the captive user(s); and (ii) consume not less than 51% of the total electricity generated for captive purposes (Twin Qualifying Criteria).
The Amendment expressly recognises special purposes vehicles (SPVs) as an Association of Person (AoP), a position that has also been affirmed judicially.
Under the erstwhile Electricity Rules, while in case of a power plant established by a registered co-operative society collective satisfaction of the Twin Qualifying Criteria was permissible, power plants set up by an AoP required satisfaction of the consumption criteria on a proportional basis. The captive user(s) were required to consume not less than 51% of the electricity generated from the CGP, in proportion to their ownership in the power plant, subject to a permissible variation not exceeding 10% (Proportionality Principle).
The Amendment does away with this requirement of each captive user consuming electricity in proportion to its ownership and instead allows collective satisfaction of the Twin Qualifying Criteria by an AoP, similar to a registered cooperative society. Hence, if captive user(s), in aggregate, hold not less than 26% of the ownership of the CGP and collectively consume not less than 51% of the electricity generated, the plant would qualify as a CGP.
The captive C&I market is likely to benefit from this key amendment, as there will not be any disqualification due to disproportionate consumption by an individual captive user. This amendment also ensures that the group captive model retains its intended flexibility.
Restricting Captive Consumption to Proportionate Ownership
The Hon’ble Supreme Court in the case of Dakshin Gujarat Vij Company Limited v. Gayatri Shakti Paper and Board Limited and Another (Dakshin Gujarat), held that the 26% ownership requirement under the Twin Qualifying Criteria is linked specifically to the captive portion of power generation (51% of the total electricity generated) thereby meaning that every 1% of equity stake translates into approximately 1.764% to 2.156% of the electricity generated.
Previously, surplus electricity beyond 51% of the threshold was permitted to be sold freely even to captive users themselves without attracting CSS & AS, however the Amendment restricts this by capping consumption for each captive user at 100% of its proportionate consumption based on its ownership share. For calculating proportionate consumption limit, a captive user together with its subsidiaries, its holding company and other subsidiaries of such holding company will be treated as one captive user. Any consumption beyond the proportionate entitlement will be treated as supply by a generating company, attracting CSS & AS. This restriction does not apply where a captive user holds 26% or more ownership, permitting them to avail captive benefits on entire generation.
From a C&I market perspective, this restriction may see a decline of group captive structures and single captive use structures may be preferred.
Statutory Recognition of Weighted Average Principle for Mid-Year Ownership Changes
The Amendment give statutory recognition to the weighted average principle set-out by the Hon’ble Supreme Court in Dakshin Gujarat, holding that if a captive user exits or transfers its shareholding in the middle of the year, the new or acquiring captive user would be required to consume electricity proportionate to its effective shareholding during the period it holds ownership (Weighted Average Principle).
Reconstitution of Verification Authorities and Introduction of an Appellate Mechanism
The verification of captive status for inter-state projects, which was earlier undertaken by the Central Electricity Authority (CEA), has now been replaced with the National Load Despatch Centre (NLDC), while intra-state projects will be verified by a state designated nodal agency.
The Amendment also introduces an appellate mechanism against the determination of captive status before a ‘Grievance Redressal Committee’ and permits exemption from CSS & AS pending verification, subject to furnishing a declaration in accordance with the procedure issued by the nodal agency/NLDC. However, if a power plant fails to qualify as a CGP, CSS & AS will become payable along with the carrying cost calculated at the base rate of Late Payment specified in the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022.
Conclusion
While the Amendment retains core eligibility thresholds for qualifying as a CGP under Rule 3, it provides clarity on several existing interpretational ambiguities to align it with judicial precedents and contemporary corporate structures. In this respect, recognition of affiliates and group entities for assessing captive consumption and ownership is likely to facilitate C&I market growth in the country, while statutory incorporation of weighted average brings clarity for mid-year ownership changes.
At the same time, the introduction of a cap on proportionate captive consumption for group captive arrangements would incentivise single captive user structures, who are not constrained by such capping. The efficacy of the Amendment will ultimately depend on its implementation by verification authorities and regulators.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
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