Captive Power Plants or Captive Generating Plants have been seen as a solution to resolving power-related issues faced by industries. With power requirements rapidly skyrocketing in the country, the need to transfer this responsibility to private entities was identified. Therefore, this alternate mode was recognized, with industries coming together, pooling their resources, to meet their power requirements. While the need to offload such a burden to private entities was established, the need to balance the distribution of power generation and distribution with independent power producers was also necessary. For this purpose, the government has introduced a few requirements, such as the Rule of Proportionality with regards to the ownership of such power plants, and the consumption of power generated. In this blog, the author shall be attempting to look at the developments of this Rule from the perspective of both, caselaw, as well as legislative developments.
The announcement the private power policy of the Government of India in 1991 led to anincrease in proposals, especially from foreign entities through the Independent Power Producer (“IPP”) route for the setting up of power projects. However, with gestation periods for power projects being very long, mainly due to the large-scale infrastructural and resource requirements, the governmentforesaw the possibility of power shortages in the eventual future. With the intent of ensuring that such a situation would not arise, there was aneed to explore alternate routes for power generation, especially in the context of private entities, where interested industries could collectively pool their resources together to meet their power demand. Captive Power Plants were one such alternative that was identified and looked at as a solution that could meet with increasing energy demands of industries, while also providing them theoption of selling surplus energy generated on a remunerative tariff.
In this blog, the author shall provide a brief understanding of what Captive Power Plants (“CPP”) are, and what the relevant legislations governing such plants include. Post this, the author shall attempt to elaborate on the potential benefits CPPs offer. In the next part of the blog,Rule 3(1) of the Electricity Rules, 2005 shall be explored, especially in the context of the “Rule of Proportionality” present under the said provision. To understand the legal position of this principle, emphasis will be provided on the Kadodara Judgement, followed by the Appellate Tribunal for Electricity (“TNERC”) Judgement in 2021, in a case between Tamil Nadu Power Producers Association and Tamil Nadu Electricity Regulatory Commission (“TNERC Judgement”). The change in stance between these two cases will be highlighted, and the impact of the same will be elaborated on. Finally, the blog shall look at breaking down the proposed Electricity (Amendment) Rules, 2018, and extract the intent of the legislature, the reasoning, and the potential effects that the amendment would have introduced. In conclusion, the author shall summarise the developments that have been noted over time. For this blog, it is essential to note that the terms “Captive Power Plants”, and “Captive Generating Plant” shall be used interchangeably.
What are Captive Power Plants?
CPPs, also referred to as Captive Generating Plant (“CGP”), is defined by theElectricity Act, 2003 under Sec. 2(8) as follows:
“Captive generating plant” means a power plant set up by any person to generate electricity primarily for his 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.
The definition, being self-explanatory, refers to the units that are set up by industries for their self-consumption. With India’s industrial sector being one of the largest consumers of electricity in the country, experts opine that the captive power capacity of the country could be close to 20,000 MW.[i] Apart from self-consumption, these facilities also operate in grid parallel mode, implying that they can export surplus power to the local electricity distribution network.
In the contemporary context, the growth of CPPs can be attributed to the poor quality, and reliability issues of grid supply, as well as the high tariffs that are charged.[ii] Apart from these, moving over to CPPs also provides a multiplicity ofbenefits such as security of power supply since power is self-generated, reduced costs, as well as improved environmental performance due to fuel efficiency that is achieved by these units. Focussing on the optimization of costs as a criterion, it is estimated that thecost of electricity generation for a typical large captive power plant is below INR 5/kWh, as compared to electrical tariffs for industrial units, which often reach as high as INR 8/kWh.
With the benefits of CPPs being quite evident, there has been a steadyincrease of units moving towards these. Captive consumption in India has reached nearly 14% of total electricity consumption.
Now that we have understood what CPPs are, and the benefits that they provide in brief, it is essential to understand the relevant legislations that govern these.
The primary legislation governing the usage of CPPs include theElectricity Act, 2003, and theElectricity Rules, 2005.
Sec. 9 of the Electricity Act, 2003 elaborates on captive generation. Sub-section (1) mentions that a person may construct, maintain or operate a captive generating plant as well as dedicated transmission lines and that this supply of electricity through the grid shall be regulated in the same manner as the generating station of a generating company. In addition, to facilitate the transmission of electricity supply, and to ensure efficient usage of already existing resources, sub-section (2) provides a right to open access to such persons who maintain and operate CPPs.Sec. 2 (47) of the Electricity Act of 2003 defines “open access” as the “non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation by the regulations specified by the Appropriate Commission”. These provisions present, especiallySec. 9(2) highlights the impetus that the government seeks to provide to such independently operated CPPs.
Sec. 3 of the Electricity Rules, 2005 is the other legislation that lays down the requirements for CGPs. Rule 3 (1) lays down the qualifiers, mentioning that the following conditions have to be fulfilled for a power plant to gain the status of a CGP:
a. In the case of a power plant [3 (1)(a)(i) and (ii)]:
i. Not less than 26% of the ownership of the plant is held by the captive user(s), and;
ii. Not less than 51% of the aggregate electricity generated in such a plant, which shall be determined on an annual basis, is consumed for captive use.
The two provisos present provide certain exceptions under specific situations. They are as follows:
A. In cases where the power plant is set up by a registered co-operative society, then the conditions mentioned underRule 3(1)(a)(i) and (ii) can be satisfied collectively by the members of the said society.
B. In cases of an Association of Persons (“AoP”), the captive user(s) should hold at least 26% or more of the ownership of the plant in aggregate. In addition, such captive user(s) should consume a minimum of 51% of the electricity generated, which shall be determined on an annual basis, in the proportion of the shares held in the ownership of such a plant, within a variation that shall not exceed 10%.
b. In the case of a generating station owned by a company formed as a Special Purpose Vehicle (“SPV”), for such a generating station, only the unit(s) identified for captive use would have to fulfill the conditions laid down above underRule 3 (1)(a)(i) and (ii).
Finally,Rule 3 (2) provides for instances where the aforementioned requirements are not complied with. In such instances, the entire electricity generated would be treated as if the same was supplied by a generating company.
A bare reading of these statutes shows a clear presence of multiple percentage requirements that are to be met by captive users. Understanding what these are, and what their implications are shall be done in the next section of this blog.
Rule of Proportionality
The focus of this blog shall be onRule 3(1)(a) and (b) of the Electricity Rules, 2005. As highlighted above, there is a certain proportion of ownership, as well as consumption requirements that are imposed on captive users. These proportionality requirements largelycome from a perspective of balancing the opportunities of CPPs, as well as IPPs; ensuring that both co-exist without harming, or causing losses for the other.
The Kadodara Power Pvt. Ltd. & Ors. v. Gujarat Electricity Regulatory Commission & Ors. (Appeal No. 171 of 2008) (hereinafter “The Kadodara Judgement”), in 2009, and the TNERC Judgement, in 2021 had common elements of the courts attempting to decipher the proportionality requirements.
The Kadodara Judgement, 2009
In this case, the issue revolved around the question of whether certain entities had fulfilled the requirement of a CGP. The entities involved were mostly SPVs whose members had not consumed the electricity generated according to the proportion dictated by the law. Based on these findings, the Gujarat Electricity Regulatory Commission (“Commission”) declared that the consumption of these companies would be considered a sale by a generating company to a consumer through open access.
A challenge against this decision of the commission was raised by these entities, claiming that SPVs were not AOPs, and therefore, it would be enough for them to solely satisfy the requirement of consumption of 51% of total generation, and not anything else. They claimed that the Rule of Proportion, with regards to consumption and ownership, which was prescribed for AoPs would not be applicable in a situation involving SPVs.
TNERC, while providing a decision, held this understanding to be wrong. The reasoning put forth was as follows:
Sec. 2(8) of the Electricity Act, 2003 says that a CGP may be set up by any person, and this person includes an AoP or a cooperative society. Since every legal entity is a person, and an SPV is a legal entity, therefore, an SPV would be a person in itself. When looking at the definition of a person, the same includes “association of persons” as well. In the situation at hand, involving SPVs, an SPV could be both, a person, as well as an AoP. Following this, the Tribunal used two other lines of reasoning to assert why the Rule of Proportionality had to apply to SPVs as well.
1. In the context of CGPs, it is hard to comprehend what other entity, apart from an SPV could be considered as, or fit in the description of an AoP. The Tribunal observed that even the examples provided by lawyers from both sides for AoPs only included SPVs, and nothing else.
2. If the Government did not want the Rule of Proportionality to apply to SPVs, then a specific exemption would have been carved out in the provision, as it has been done for cooperative societies. The absence of such a specific exemption implies that there was no intent to exempt SPVs from observing the Rule of Proportionality.
The TNERC Judgement, 2021
In 2021 however, APTEL, in the case of Tamil Nadu Power Producers Association vs. Tamil Nadu Electricity Regulatory Commission[iii], APTEL went against the lines of the Kadodara Judgement while looking at the applicability of the Rule of Proportionality on AoPs and SPVs.
In the instant case, the Tamil Nadu Generation and Distribution Corporation Limited (“TANGEDCO”), which is a unit that is responsible for power generation and distribution in the state of Tamil Nadu issued circulars, requiring captive generators and captive users to furnish documents and data for verification of CGPs, as underRule 3 of the Electricity Rules, 2005. This circular was challenged before the High court of Tamil Nadu, which passed directions that led to the Tamil Nadu Electricity Regulatory Commission (“TNERC”) Webhosting a draft procedure, where the views and objectives of the stakeholders were invited. Post this, an order was passed, which was the basis of the current appeal.
Amongst the plethora of issues that were contested, one of the main issues was the wrongful treatment of AoPs and SPVs in the impugned order. The argument put forth by the appellants was similar to the one put forth by the appellants in the Kadodara Judgement. It was claimed that AoPs and SPVs cannot be equated with each other, especially since the Rule of Proportionality was a proviso added only in the context of AoPs by the legislature, and therefore, this separation between entities while applying the proportionate consumption test had to be maintained. The presence of SPVs and AoPs in separate sub-rules and the proviso introducing the Rule of Proportionality existing only under the sub-rule mentioning AoPs implies that the legislature has created an intelligible differentia between the two, and this distinction cannot be diminished.
In addition, the rationale provided in the Kadodara Judgement was also criticized, with the appellant requesting APTEL to declare the observations in the Kadodara Judgement to be held per-incuriam. The basis for this prayer was as follows:
1. The equation of SPVs and AoPs was wrong. While SPVs are a company, AoPs are unincorporated entities. The nature of an SoP changes the moment is incorporated, taking the character of a “Company” under relevant provisions of the Companies Act, 1956.
2. It is settled law that provisos are exceptions to the general rule and are only applicable in instances where the conditions mentioned arise. In the case of Rule. 3, there is no specific proviso imposing the Rule of Proportionality on SPVs. The Rule must therefore be given plain meaning, and should not be interpreted in a manner that makes additions that are not envisaged by it.
3. The restrictive interpretation also leads to situations that could cause unnecessary and grave harm to SPVs. For example, if an SPV is formed by 4 shareholders, and due to some unfortunate reason such as an outage, or flood, one shareholder is not able to draw electricity according to their proportion in the shareholding. This would imply that the CGP by itself would have to operate at a reduced capacity to ensure that the other shareholders draw power in proportion to their shareholdings and within the deviation of 10% mentioned. Such situations would not just cause harm to the shareholders from an economic perspective, but would also affect the health of the machinery of the CGP.
4. Differentiation between AoPs and SPVs was not appropriate. The fact AoPs are recognized tax entities that are not incorporated, and are akin to partnerships, while an SPV is a company that has been instituted for a specific purpose or objective.
The Respondents on the other hand relied on the fact that since the challenge to Kadodara Judgement in the Supreme Court did not result in a stay, and because other judgments have held the Kadodara Judgement to be the law, therefore, the same has been followed when equating AoPs and SPVs while implementing the rule of Proportionality.
The Tribunal in the instant case agreed with the arguments put forth by the appellants. They emphasized that courts cannot rewrite or recast legislation, and should not act as lawmakers when there is no ambiguity in the language of legislation. When there is no ambiguity present, then there has to be a literal interpretation conducted without any deviation.
With this, the Tribunal concluded that to the extent of equating SPVs and AOPs, the Kadodara Judgement is “per incuriam”.
This case, therefore, changed the wrong interpretation of the law, which deviated from the statute while equating AoPs and SPVs. Post this judgment, AoPs and SPVs have been treated as separate entities, with the Rule of Proportionality not applicable to SPVs.
Proposed Electricity (Amendment) Rules, 2018
While it is true that the courts play a major role in the interpretation of laws, the legislature plays an equally important role, observing the operation of a variety of factors before deciding to either implement or amend laws. In the context of CGPs and the Rule of Proportionality, the following amendments weresuggested:
i. The second proviso, applicable only to AoPs was extended to SPVs, Partnership Firms, and Body of Individuals or Body Corporate.
ii. The permitted variation in consumption between captive users was raised to 15%, from the earlier existing 10%.
iii. The proportion of consumption of energy according to the shareholding of captive users extends from the earlier 51% to the entire consumption done in total.
It must be noted that the specific amendment, including other bodies within the proviso applying the Rule of Proportionality to AoPs, comes from a perspective of the legislature seeking to introduce clarity on the same, especially in the context of courts attempting to provide their twist to the words used in these statutes.[iv] The interpretation in the Kadodara Judgement, equating SPVs and AoPs, despite the existence of separate provisions and provisos can be taken as an example.
The general issue with the Rule of Proportionality arises from situations where if any user is forced to draw lesser power due to issues such as closure for maintenance, then the power generated through the year will be treated as non-captive,allowing for state discoms to charge CSS on it. In addition, the penaltyincurred would not be applicable to just one user, but to all captive users of the CPP. What makes the situation worse is the applicability of the Rule of Proportionality being extended to the entire consumption of captive users, instead of the earlier set amount of 51%. This strips away the freedom of users, and in fact, goes against discussions that the Power Ministry has had with stakeholders, where they hadagreed to repeal the Rule of Proportionality due to it forcing consumption on users, therefore making it impractical.
Theraised leeway of variation, increased to 15%, from the earlier 10% looks at providing captive companies better opportunities to manage the sale of energy between different companies. This leeway is higher for renewable plants, increasing to 30% with the consent of the State Government and the electricity regulatory commission.
This article has attempted to highlight the unfolding of these changes, and how these have affected the stakeholders over time. CPPs or CGPs have been identified as the future of power generation, especially in the context of ensuring self-sufficiency in the industrial sector. To ensure the smooth facilitation of these facilities, along with the effective and efficient integration with existing resources, the government has attempted to come up with legislation and policies that reflect this intent. However, while the legislature does play a crucial role in setting these laws, the courts play a vital role in interpreting these as well. The development of the very crucial Rule of Proportionality, which sets thresholds for the consumption of energy from these CPPs, as well as ownership over these by the captive user(s) showcases the change in stances taken by the judiciary. The attempt to concretize certain absurdities or lacunae per se by amending or adding laws can also be seen and has been highlighted in this blog. With vested interests on both sides, from the private sector, and captive users to independent power producers owned by the state, this tussle to maintain a fine balance shall continue.
About the Authors
Mr. Karthik Subramaniam is a 5th Year B.A. LL.B. (Hons) at NALSAR University of Law, Hyderabad.
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Preferred Method of Citation
Karthik Subramaniam, “Captive Power Plants in India: Breaking down the ‘Rule of Proportionality’” (IJPIEL, 30 September 2022)