Far-reaching Effects

Draft amendments to captive generation plant rules

Abhimanyu Ghosh, Associate Partner, Khaitan & Co. 
Akhil Bhatnagar, Partner, Khaitan & Co.

The Ministry of Power (MoP) has recently introduced draft amendments to the Electricity Rules 2005 ,(existing rules) related to captive generating plants (CGPs) and has sought comments from stakeholders. Earlier, the draft amendments that were issued by the MoP in October 2016 did not come into effect. While the essence of the changes contemplated in 2016 remains the same, the recent draft amendments seek to impose stricter criteria and compliance rules and will thus make a significant impact on the way CGPs are structured and operate. Crucially, once the draft amendments are notified, they will be applicable to all existing CGPs, as well as those power plants seeking CGP status in future.

The CGP model is widely used in India with the key benefits being the availability of long-term supply of electricity to industries at efficient rates, and the exemption of cross-subsidy charges that are levied on inter-sale of electricity. Reports show that CGP generation in the country currently stands at 47 GW, which includes CGPs based on conventional power, as well as renewable energy-based power plants.

The principal changes in the draft amendments are in relation to the CGP qualifying conditions provided in the existing rules, which prescribe that at least 26 per cent of the ownership in such power plants is held by the captive user(s); and at least 51 per cent of the aggregate total electricity generated by such power plants, determined on an annual basis, that is, at the end of the relevant financial year, is consumed by such captive users.

The draft amendments do address a few lacunae in the existing rules, though some changes are likely to have far-reaching effects, especially on the existing group CGPs (CGPs with two or more captive users) and the current functioning of the CGP model/industry.

Key changes proposed

Ownership: In the existing rules, the ownership of a CGP to meet the 26 per cent ownership requirement is linked to “equity share capital” and thus, in many cases, the ownership of a CGP is linked only to the number of shares issued by the CGP. The draft amendments have now proposed to link the ownership of the CGP with the issued and paid-up share capital in the form of equity share capital, with voting rights (excluding equity share capital with differential voting rights). Once these draft amendments are notified, the ownership of a CGP will be determined on the basis of the value of equity capital, along with voting rights, and not merely on share numbers. A normative debt-equity ratio of 70:30 for each CGP has also been proposed to determine the actual investment of captive users. By way of an illustration, the draft amendments clarify that for every Rs 1 billion of project costs, a single captive user will need to contribute at least Rs 78 million, representing 26 per cent of the 30 per cent equity component.

These changes in the draft amendments in relation to the ownership of CGPs will be effective from April 1, 2019 and will apply to the existing CGPs as well. Thus, a major ramification of the draft amendments will be in relation to existing CGPs and will especially impact CGPs that have been commissioned and where project capital and equity have been deployed. Such CGPs would be required to rework their equity and shareholding structure by April 1, 2019.

Proportionality of usage: Another significant change that has been proposed is that the proportion of consumption of electricity by each captive user vis-à-vis their shareholding in the CGP will not just be linked to 51 per cent of the power consumption (as under the existing rules) but will instead be tested on the entire power consumed by captive users. As per the existing rules, it is unclear whether captive users are only required to consume power generated by the CGPs in proportion to their shareholding up to 51 per cent of the power generated, and for any balance power consumed by captive users, whether such usage is not required to be in proportion to the captive users’ shareholding. The draft amendments, however, seek to make it abundantly clear that the proportionality will be tested on the entire consumption by captive users, including when consumption by the captive users is over 51 per cent.

Shareholding change: Currently, there is no restriction on changes relating to the inter se shareholding and/or consumption changes of captive users, so long as the overall 51 per cent consumption and 26 per cent ownership test is met in each financial year. As per the existing rules, shareholding and consumption patterns among captive users are often altered to address temporary consumption changes (either due to commercial reasons or maintenance). Further, some captive users are often added or removed during the financial year, while continuing to maintain the overall CGP character of the plant. However, the draft amendments have recommended that the inter se shareholding pattern of the captive users in a group CGP cannot be changed more than two times in each financial year, and that, from the date of the third change in shareholding of the CGP in a financial year, the CGP will cease to avail of any CGP-related benefits. This imposes another layer of restriction on the way CGPs are structured currently.

Conversion of IPP to CGP: Under the existing rules, independent power producers (IPPs) often commercially decide to recast themselves as CGPs to receive CGP-related benefits. This change may be due to a variety of commercial reasons. The draft amendments contemplate that IPPs will be able to avail of CGP status only in exceptional circumstances, and only if permitted by the appropriate commission. The draft amendments are also unclear on whether power plants that are currently utilising CGP benefits but had originally been set up as IPPs will have to seek specific permission from the appropriate commission to continue availing of CGP benefits. This would have a significant impact and, therefore, further clarity in this regard is required. Additionally, while IPPs currently have the liberty to convert to CGPs as per commercial requirements, this will be severely restricted by the proposed changes.

Certification: It has been unclear in the existing rules whether all CGPs are required to be certified by an appropriate authority to avail of CGP benefits. This has now been amply clarified in the draft amendments, which state that the appropriate state commission will certify a power plant as a CGP, based on the annual statement of generation and consumption and other details. However, the draft amendments also stake that the Central Electricity Authority (CEA) would be required to provide details of consumption and generation of each CGP on its website on a monthly basis, and if such data is not provided, the plant will lose its CGP status. Thus, the monthly reports by the CEA under the draft of the proposed amendments appear to bind CGPs under a more onerous compliance requirement, over and above the annual compliance.

Conclusion

The changes proposed in the draft amendments if brought into force, will herald significant changes in the way CGPs (and especially group CGPs) are currently structured and operate. Some of the changes and clarifications, such as in relation to ownership by value and voting rights as opposed to numerical value of shares, and a clearer reporting structure for CGPs, are much needed. However, a few of the changes also appear to hinder captive users and would restrict loss-making IPPs from converting into CGPs to keep their plants still running. In our view, while changes in the existing rules should indeed clear the existing lacunae in the CGP framework, it is imperative that the ease of business for CGPs should not be hindered due to excessive compliances and restrictions.

 

 

GET FREE ACCESS TO OUR ARTICLES

Enter your email address