By Megha Arora, Partner, CMS INDUSLAW; Abhishek Rohatgi, Associate, CMS INDUSLAW; and Praneet Singh, Associate, CMS INDUSLAW
On March 13, 2026, the Ministry of Power notified amendments to Rule 3 (Amendment) of the Electricity Rules, 2005 (Electricity Rules). Rule 3 prescribes the conditions under which a power plant qualifies as a captive generating plant (CGP), enabling captive users to avail of cross-subsidy surcharge (CSS) and additional surcharge exemptions. The amendment is effective from its date of notification, except for sub-rule 3 (2)(d)(ii), sub-rule 3(2)(d)(iii) and sub-rule 3(4), effective from April 1, 2026.
Expanded recognition of group entities for captive user and ownership determination
Recognising the operational realities of group structures, the amendment expands the definition of a “captive user” to include the investing company, its subsidiaries, the holding company and fellow subsidiaries, all treated as a single entity. The definition of “ownership” in relation to power plants is correspondingly expanded to mean equity share capital with voting rights, held directly or indirectly through such entities.
In contrast, the pre-existing Rule 3 allowed group-level consumption to be treated as part of total consumption of that captive user, but did not recognise indirect or group-level ownership. The amendment also recognises special purpose vehicles as an “Association of Persons”, in line with judicial precedents.
From individual proportionality principle to collective satisfaction of captive structures
The erstwhile Rule 3 prescribed twin qualifying criteria for CGPs: minimum 26 per cent of ownership of the power plant must be held by captive users; and minimum 51 per cent annual consumption of electricity generated.
While cooperative societies could satisfy the twin qualifying criteria collectively, the association of persons was required to satisfy the same on a proportional basis, with consumption aligned to ownership, subject to a 10 per cent variation (proportionality principle).
The amendment removes the proportionality principle applicable to associations of persons and permits collective satisfaction of twin qualifying criteria, similar to registered co-operative societies. Accordingly, a plant qualifies as a CGP, if captive user(s), in aggregate, fulfil the twin qualifying criteria.
Capping captive consumption to proportionate ownership
In Dakshin Gujarat Vij Company Limited vs Gayatri Shakti Paper and Board Limited and Another (Dakshin Gujarat), the apex court clarified that the 26 per cent ownership requirement applies only to captive generation (51 per cent of total output), implying that each 1 per cent shareholding corresponds to a captive consumption of 1.764-2.156 per cent of the electricity generated, inclusive of a permissible 10 per cent variation, to meet the twin qualifying criteria.
Earlier, surplus electricity beyond 51 per cent could be sold to any entity, even captive users, without attracting CSS or AS. The amendment removes this flexibility for group captive plants by capping captive consumption for each captive user at 100 per cent of its proportionate entitlement, based on its share in the total captive ownership of the CGP (proportionate entitlement), with affiliated entities being treated as a single user for this purpose. Any excess consumption shall be treated as electricity supply by a generating company and CSS and AS will be levied on such consumption.
This cap does not apply to captive users with minimum 26 per cent ownership (single captive user), permitting captive benefits on 100 per cent of the power generated by the CGP, without any restriction. This differential treatment may lead to preference for single captive structures over group captive structures.
Statutory recognition of the weighted average principle for mid-year ownership changes
At Dakshin Gujarat, it was held that mid-year ownership changes should be assessed using the principle of weighted average to ensure compliance with the proportionality principle.
Under the weighted average principle, where ownership changes mid year, the acquiring captive user is required to consume electricity proportionate to its effective shareholding during the period it holds ownership (weighted average principle). The weighted average principle allows calculation of the average shareholding over the year and the corresponding proportionate electricity consumption. The amendment statutorily recognises and incorporates this approach.
Revised verification authorities and introduction of an appellate mechanism
Under the pre-amendment regime, captive status for interstate CGPs was verified by the Central Electricity Authority (CEA). The amendment replaces the CEA with the National Load Despatch Centre (NLDC) for such verification, while for intra-state CGPs, captive verification is to be conducted by the nodal agency designated by the state government.
An appellate mechanism against the determination of captive status before a grievance redressal committee has also been introduced. During the verification period, CSS and AS will not be levied, provided a declaration is submitted in accordance with the procedure issued by the nodal agency/NLDC, as the case may be. However, if a power plant fails to qualify as a CGP upon verification, the applicable CSS and AS will be payable, along with the carrying cost calculated at the base rate of late Payment specified in the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022.
Conclusion
The amendment marks a significant recalibration of India’s captive power framework under Rule 3 of the Electricity Rules. While the core eligibility thresholds for qualifying as a captive generating plant remain unchanged, the amendment introduces several clarifications.
In particular, the recognition of affiliates and group entities for determining both captive consumption and ownership reflects the commercial realities of modern corporate structures and is likely to facilitate the growth of the C&I market. Similarly, the statutory incorporation of the weighted average principle provides much-needed clarity in cases involving mid-year ownership changes.
At the same time, the introduction of a cap on proportionate captive consumption represents a substantive shift in the regulatory framework. While the eligibility criteria for CGP status remain intact, the limitation on captive benefits available to group captive users may lead to a preference for single captive user structures over group captive structures.
The efficacy of the revised framework will also depend significantly on the manner in which verification authorities and other regulatory bodies interpret and implement these changes.