While the captive power plant model has appealed to many industries over the years, its variant, the group captive model, wherein a group of consumers come together to set up a power plant, is finding growing interest. This is mainly because it holds numerous advantages such as exempting users from cross-subsidy and additional surcharges and reducing the investment burden on a single consumer by facilitating group investments.
Under the Electricity Act, 2003 and the Electricity Rules, 2005, in a group captive power purchase mechanism, one entity or a group of entities can set up a power plant for power purchase from that plant for their own consumption. Users of this captive set-up should hold at least 26 per cent of the ownership in the generating plant and consume not less than 51 per cent of the electricity generated, on an annual basis, in proportion to their shares in ownership of the power plant within a variation not exceeding 109 per cent.
The group captive mechanism exempts users from cross-subsidy and additional surcharges, which is one of the key components of open access power (in line with Supreme Court’s directive of 2021). Uncertain/High open access charges pose a key challenge for C&I consumers, with varying state policies inhibiting the broader adoption of open access regulations. As per ICRA, the CSS varies widely between 70 paise per kWh and Rs 2.20 per kWh as observed across key states. In addition to CSS, additional surcharges have also been in place in most states and vary between 25 paise per unit and Rs 1.30 per unit.
Thus, the group captive model is one of the most cost-effective and low-risk mechanisms available to help consumers/users meet their renewable energy targets while removing regulatory uncertainty.
It also facilitates group investments, reducing the investment burden on a single consumer. The tariff that is determined for a group captive model remains constant for the term of the power purchase agreement (PPA). In the short run, regulatory changes have no impact on this arrangement. The equity investment is refundable once the transaction is over or the PPA has expired. Each captive user is able to retain its own individual identity as consumer of power. The users can also form special purpose vehicles (SPVs) to manage or facilitate power usage arrangements.
Further, group captive projects relieve discoms of the stress of providing continuous, good quality power to high electricity-intensive industries and prevents power shortages during peak season. During periods like the pandemic when there was a shortage of demand, it relieved the plants of the additional cost of running the units. Further, another advantage of a group captives plant is that it helps users to avoid the price volatility of the power exchanges.
The procedure to set up a group captive plant is simple. Users need to decide on equity, usage arrangement and draft a proposal that is acceptable to everyone including technology providers. A letter of intent is issued for the generator and a PPA is signed between the generator and the consumers. The required documents are to be submitted for clearance to regulatory authorities. The group captive plant is usually set up and operated by an SPV owned by the consumers. After deciding the share in the SPV, the consumers can start generating and using captive power as a group. Entering such an arrangement requires the consumers to have a contract demand greater than 1 MW.
Hindustan Zinc Limited, in a recent deal, invested Rs 3.5 billion in Serentica Renewables 4 and 5 Private Limited, an SPV, for a 26 per cent stake for procuring up to 200 MW of renewable power through the group captive power set-up. The project will be funded on a 70:30 debt-equity basis. The SPV will create captive power projects in different parts of India as per location suitability and serve as a source of renewable power on a long-term basis.
Group captives have emerged as a solution for many kinds of users other than industrial users. Tata Power Renewable Energy Limited (TPREL) signed an agreement with Vivarea Condominium, a residential society in Mumbai, to supply solar power by setting up the country’s first residential group captive plant. The 3.125 MW solar plant will be set up at Himayatnagar, Maharashtra, to power the residential area.
With falling renewable energy costs, many industries and C&I consumers are shifting to renewable captives and group captives. In particular, the structure has the advantage of routing renewable energy-related capital from those companies in the C&I segment that otherwise may not have invested in renewables. Given the conducive policy environment for green energy, investing in renewable energy group captives can turn out profitable for users.
