Captive Power Trends

MoP proposes policy changes for the segment

Captive power plants (CPPs), whether standalone or grid connected, play a significant role in meeting power generation requirements. As per India Infrastructure Research, the aggregate capacity of such plants (of 1 MW and above) stood at a significant 80 GW in 2016-17, accounting for around 24 per cent of the total generating capacity in India. Over the years, CPPs have emerged as a viable option for industrial and commercial consumers to meet their energy demand and hedge against the risks of high grid power tariffs. However, in recent times, captive power producers are facing challenges relating to fuel supply, which have resulted in plants operating below their potential. Also, the recently issued draft amendments to the CPP guidelines propose significant changes in the industry structure.

A look at the key trends and developments in the CPP segment…

Fuel mix

Of the country’s total installed captive capacity of around 80,160 MW as of 2016-17, nearly 55 per cent is based on coal, followed by natural gas (12 per cent), bagasse (11 per cent) and diesel/ liquid fuels (4 per cent). While the share of these fuels has remained more or less the same in the past two to three years, that of solar-based CPPs increased from negligible to about 1 per cent in the tracked captive capacity. Overall, renewables (bagasse, solar, wind and biomass) had a share of over 20 per cent in the total tracked capacity.

Industry-wise, the metals and minerals industry accounted for a major share of 41 per cent. The industry has set up large baseload capacities to meet the requirements of its energy-intensive production processes. Other major industries deploying CPPs are petrochemicals (12 per cent), sugar (11 per cent), cement (9 per cent) and chemicals (7 per cent).

Recent policy developments

In May 2018, the Ministry of Power (MoP) introduced draft amendments to the Electricity Rules, 2005, related to CPPs. As per the current guidelines, for a power plant to qualify as a CPP, captive users are required to have a stake of at least 26 per cent in such a unit, and consume at least 51 per cent of the aggregate total electricity generated by it, which is determined on an annual basis.

Currently, the ownership of a CPP to meet the 26 per cent ownership requirement is linked to the equity share capital and therefore, in many cases, the ownership of a CPP is linked only to the number of shares issued by the CPP. The draft amendments have now proposed to link the ownership of the CPP 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).

In addition, the proportion of electricity consumption by each captive user vis-à-vis their shareholding in the CPP will not just be linked to 51 per cent of the power consumption (as under the existing rules) but will instead be based on the entire power consumed by captive users.

As per the draft amendments, independent power producers would be accorded CPP status only in exceptional circumstances and with permission from the appropriate commission. Further, the draft amendments state that the appropriate state commission will certify a power plant as a CPP, based on its annual statement of generation, consumption and other details.

The draft amendments, if finalised, will have significant implications for CPPs, particularly group captives in the renewables segment. As per ICRA, the upfront capital requirements for captive consumers will increase with the proposed shareholding requirements. This, in turn, will compel companies to offer a higher tariff discount. As per India Ratings, the recommended compulsory equity contribution clause will add to the cash flow pressure on captive users. The Indian Wind Power Association has also flagged the issue to the MoP, stating that industrial consumers will be forced to buy power from discoms rather than CPPs, thereby affecting their competitiveness in the domestic and international markets.

Issues and the way forward

One of the issue being faced by CPP owners is the open access restrictions that make the sale of surplus power unfeasible. There have been many instances where state governments have imposed restrictions on open access. Also, congestion in the transmission system prevents CPPs from selling in the short-term power market.

The limited availability of fuels such as coal, natural gas and biomass is also an issue. As per the Indian Captive Power Producers Association, CPPs are facing acute coal shortage and are receiving only about half of their requirement from Coal India Limited (CIL). A major portion of CIL’s supplies is directed to IPPs and state gencos. The CPPs are, therefore, mulling to resort to import, which will increase the cost of generation.

Given the significance of CPPs in industrial operations, the government needs to take steps to resolve the issues facing the segment at the earliest. Producers need to be provided greater visibility in terms of coal supply from CIL and the policy changes should ensure that the segment’s competitiveness is not impacted.


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