By Megha Arora, Partner; Abhishek Rohatgi, Associate; 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, governing captive generating plants (CGPs). 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), which will apply from April 1, 2026.
Expanded recognition of group entities
The amendment expands the definition of “captive user” to include its subsidiaries, holding companies and fellow subsidiaries, all treated as a single captive user. 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. The amendment also recognises special purpose vehicles as an “association of persons”.
From individual proportionality principle to collective satisfaction of captive structures
The erstwhile Rule 3 prescribed “twin qualifying criteria” for a CGP: (i) a minimum 26 per cent ownership of the power plant must be held by the captive user(s); and (ii) a minimum 51 per cent of the electricity generated must be consumed for captive use.
While cooperative societies could satisfy the twin qualifying criteria collectively, an association of persons was required to satisfy the same on a proportional basis. The amendment removes the proportionality principle applicable to associations of persons and permits collective satisfaction of the twin qualifying criteria.
Capping captive consumption to proportionate ownership
In the Dakshin Gujarat ruling, the Supreme Court clarified that the 26 per cent ownership requirement applies only to captive generation (51 per cent of total output), with captive consumption required to remain proportionate to ownership, subject to a permissible 10 per cent variation.
Earlier, surplus electricity beyond 51 per cent could be sold to any person, even captive users, without attracting CSS and 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 with affiliated entities being treated as a single user for this purpose. Any excess consumption shall be treated as supply of electricity by a generating company, and CSS and AS will be leviable on such consumption. This cap does not apply where a captive user holds a minimum 26 per cent ownership (single captive user), permitting the availing of captive benefits on 100 per cent of the power generated by the CGP, without any restriction.
Statutory recognition of the weighted average principle for mid-year ownership changes
In the Dakshin Gujarat ruling 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, acquiring a captive user is required to consume electricity proportionate to its effective shareholding during the period it holds ownership. 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 a nodal agency designated by the state government. Pending verification, CSS and AS will not be levied, subject to furnishing a declaration in accordance with the procedure issued by the nodal agency/NLDC, as the case may be. However, where a power plant fails to qualify as a CGP upon verification, applicable CSS and AS will become payable, along with carrying cost.
Conclusion
The amendment marks a significant recalibration of India’s captive power framework under Rule 3 of the Electricity Rules. 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 commercial and industrial 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 substantial shift in the regulatory framework. The limitation on the captive benefits that may be availed of by group captive users may lead to the preference of single captive user structures over group captive structures.
