The Ministry of Power has proposed amendments to the Electricity Rules 2005 to simplify the regulatory framework for captive power generation.

Under the existing rules, a power project qualifies as a captive generating project only if two core conditions are met. Captive users must hold at least 26% ownership in the project and consume at least 51% of the electricity generated.

While these thresholds are clear in principle, practical application has proven difficult. Group captive projects involving multiple users, subsidiaries, or special purpose vehicles (SPVs) have often faced challenges in demonstrating strict proportionality between ownership and consumption. Even minor deviations have led to the denial of captive status, triggering the levy of a cross-subsidy surcharge and an additional surcharge.

According to the Ministry of Power, industrial electricity tariffs in India remain higher than those in comparable emerging economies. Regulatory uncertainty in captive and open-access power markets has added to cost pressures and discouraged investment.

The amendments aim to promote generation closer to consumption, improve energy security. They also seek to address interpretational inconsistencies that emerged following the 2023 amendments, particularly regarding group companies and flexible ownership structures.

The Ministry has invited stakeholders to submit comments and suggestions by January 17, 2026.

Group Companies

One of the most significant changes is the treatment of group entities. Under the proposed rules, a holding company, its subsidiaries, and step-down subsidiaries will be treated collectively as a single captive user.

Earlier, these entities were often assessed separately, leading to disputes over ownership thresholds and eligibility for consumption. The new approach ensures that genuine group captive investments are not denied benefits solely because of corporate structuring.

Collective Consumption Compliance

The earlier regime was frequently interpreted as requiring strict one-to-one proportionality between ownership share and power consumption for each captive user. This resulted in the disqualification of captive status when individual users consumed slightly more or less than their proportional entitlement.

The proposed rules shift the focus to collective compliance. As long as captive users together consume at least 51% of total generation, the project continues to qualify as captive. Individual deviations no longer disqualify the entire project.

However, consumption beyond an individual user’s proportionate entitlement will not qualify as individual captive consumption. Such excess energy will still be counted toward collective captive consumption, preserving overall compliance.

Large Captive Owners

The draft introduces a significant relaxation for captive users holding 26% or more ownership in a captive generating plant. For such users, the proportionality requirement will not apply, and their entire electricity consumption will be treated as captive consumption.

This provision recognises the substantive control and financial risk assumed by anchor investors and removes compliance uncertainty for large single consumers. For other captive users with lower ownership stakes, proportional consumption requirements will continue to apply.

Recognition of SPVs

The amendments explicitly clarify that SPVs used for captive generation will be treated as Associations of Persons. This removes interpretational ambiguity and ensures consistent regulatory treatment of SPVs, which are widely used for renewable and non-fossil-based captive projects.

The draft also clarifies compliance requirements for registered cooperative societies and Associations of Persons, confirming that ownership and consumption conditions will be assessed collectively for such arrangements.

Assessment Period

Under the existing framework, captive compliance was generally assessed on a rigid financial year basis. This approach proved unsuitable for industries with seasonal demand or variable operations.

The proposed amendments introduce an assessment based on actual operational periods. Where shareholding changes during the year, the proportional entitlement will be calculated using the weighted-average shareholding.

Verification Mechanism

The amendments clearly allocate responsibility for verifying captive status. Nodal agencies designated by state governments will verify intra-state captive projects. The National Load Dispatch Centre will verify interstate captive projects.

Where a captive power project and its users are located in more than one state, the captive status will be verified by the Central Electricity Authority in accordance with procedures approved by the central government.

An appeal mechanism through a grievance redressal committee has also been provided, improving procedural certainty.

Relief from Surcharges

A major concern for captive users has been the immediate imposition of cross-subsidy surcharges and additional surcharges pending verification. Under the proposed rules, these surcharges will not be levied during the verification period, provided the captive users submit the prescribed declaration.

If the project later fails to meet captive criteria, the applicable surcharges will be payable, along with the carrying cost calculated at the late-payment surcharge rate. This balances cash flow relief for industry with protection of distribution licensee interests.

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