Parveen Arora and Suruchi Kotoky
As climate change intensifies alongside the meteoric rise of India’s industrial landscape, the need for reliable, cost-effective power that also supports environmental sustainability goals has assumed more importance than ever. Captive power projects offer a solution to this need by empowering businesses with cost-effective energy independence, whilst advancing the transition from fossil fuels to green power.
A. What are Captive Projects?
The Electricity Act, 2003 defines a Captive Generating Plant (“CGP”) as follows:
“Captive generating plant means a power plant set up by any person to generate electricity primarily for his own 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.”
In other words, a CGP is a power plant set up by an individual or entity to generate electricity primarily for its own use. A CGP must primarily fulfill the following criteria [1]:
Ownership Criteria: At least 26% of the ownership in the CGP must be held by one or more captive user(s).
Consumption Criteria: At least 51% of the aggregate power generated from such plant in a year must be consumed by one or more captive user(s).
Captive users must ensure that they comply with the minimum prescribed consumption limit annually, failing which the entire electricity generated will be considered as if it were supplied by a generating company without having captive status.
B. Going Solo or Going Group? Choose the Captive Power Model that Fits Your Business Needs
A CGP can be an individual, company body corporate, association or body of individuals — whether incorporated or not — primarily to generate electricity for its own use or for its members. Thus, CGPs can be categorized into two types:
1. a single user CGP, where an individual/entity sets up the CGP mainly for their own electricity needs.
2. a group user CGP, where a cooperative society or an association of persons establishes a CGP to generate electricity primarily for the use of its members.
In the case of a registered cooperative society, the members of the co-operative society must collectively fulfill the Ownership and Consumption Criteria whereas, in the case of an association of persons, other than meeting the Ownership and Consumption Criteria, the captive users are additionally required to consume electricity in proportion to their ownership share, within a variation not exceeding 10% (“Proportionate Criteria”).
Companies or body corporates can also establish a special purpose (SPV) vehicle with the objective of collectively becoming captive users, thereby taking advantage of the benefits of CGP. In the case of a generating station owned by a company created as a SPV, only the unit(s) designated for captive use must meet all the criteria, rather than the entire generating station. When there are multiple captive users (group captive in other words), each must collectively hold at least 26% of the equity shares in the Captive Generating Plant (CGP) and consume at least 51% of the power generated annually. It is pertinent to point out that various recent judgments [2] have held that SPVs that own, operate, and maintain CGPs are considered an "association of persons" in terms of the second proviso to Rule 3(1)(a) and thus, captive users of a SPV must additionally comply with the Proportionate Criteria.
C. Benefits
CGPs offer a unique opportunity for businesses to gain greater control/management over their energy costs and operations. By generating their own clean power, businesses can not only significantly slash their carbon footprint but also demonstrate a clear commitment to sustainability to their growing base of environmentally conscious investors, stakeholders, customers and society at large. This will not only strengthen their brand image, but also translate to real cost savings. Presently, India's booming industrial sector demands a dependable and budget-friendly power source, giving businesses greater control over their bottom line, and CGPs deliver exactly that.
CGPs offer a range of benefits, such as decreased grid dependency, energy cost savings, tax advantages, clean energy, compliance with RPO requirements, reduced regulatory burden, and expansion of job opportunities, among other advantages.
D. Parting Notes
As with any major investment, it's essential to carefully weigh the pros and cons. It’s essential to ensure that it aligns with your operational needs, financial capacity, long-term goals and environmental considerations to move forward effectively. The negotiation and terms of the transaction documents, primarily the power purchase agreement and the share subscription and share purchase agreements, play an integral role in this process and, therefore, need to be tailored in a manner that ensures they are balanced and protect the interests of your business.
To conclude, there is vast potential for the captive power market, which is projected to surge by 31 GW by 2026[3], with a growing focus on renewable solutions. It is time for businesses to start thinking “the sustainable way” and draw up a long-term clean energy plan.
[1] Rule 3 of the Electricity Rules, 2005
[2] Dakshin Gujarat Vij Co. Ltd. v. Gayatri Shakti Paper & Board Ltd. (2023 SCC OnLine SC 1276)