There have been certain developments in the regulatory landscape and jurisprudence around group captive power projects in India. This article co-authored by Karam Daulet-Singh, Managing Partner, Anuj Bhatia, Partner and Simran Patel, Associate, provides a brief snapshot of these regulatory developments and analyses the potential impact that recent jurisprudence around group captive power projects could have on India’s renewable energy sector.
Green Energy in India – the Green Open Access Regime and Group Captive Structures
July 3, 2023
“Green Energy” is the current buzzword in India, which has stated an intent to have 500 GW of non-fossil-fuel-based energy capacity in place by 2030 and reach net-zero carbon emissions by 2070. In this regard, there have been certain welcome regulatory developments over the past twelve months.
There have also been developments in the jurisprudence around the consumption requirements applicable to captive consumers which have set up a group captive power project through a special purpose vehicle (SPV).
This note provides a brief snapshot of the green energy open access regime. It also looks at the reasons behind the increasing popularity of group captive power projects in the commercial and industrial segment (the C&I Segment), and the potential impact that recent jurisprudence around consumption requirements for captive consumers could have on the structuring of such group captive projects.
B. The Electricity (Promoting Renewable Energy Through Green Energy Open Access) Rules, 2022 (the GOA Rules)
The GOA Rules were introduced in June 2022 with a view to promote green energy open access. Some of the key aspects of the GOA Rules are as follows:
- Green energy open access is given priority over fossil-fuels-based open access.
- In order to make open access available to smaller consumers, the minimum sanctioned load or contracted capacity requirement for an entity to apply for open access is now 100kW (reduced from 1 MW which is what is provided under the Electricity Act, 2003 (Electricity Act). This 100kW minimum requirement can be met through multiple connections used by the same entity. There is no minimum limit prescribed for captive consumers to obtain open access.
- A central nodal agency (the Grid Controller of India Limited, commonly referred to as Grid-India) is in place to provide a single window platform for green energy open access. Applications for access will be deemed approved if not processed within fifteen days. ·
- “Obligated entities” (which include distribution licensees, open access consumers and captive consumers) are required to meet specified renewable purchase obligations (RPOs). RPOs can be met through:
- self-generation of renewable energy;
- procuring renewable energy through open access (directly from developers or through trading or power markets);
- purchasing renewable energy certificates;
- purchasing green hydrogen or green ammonia; and
- requisitions from distribution companies (provided such requisitions are for a minimum period of one year).
- The charges that can be levied on green energy open access consumers are transmission charges, wheeling charges, cross subsidy surcharges and (where applicable) standby charges. Cross subsidy surcharges will not apply to captive projects, waste to energy projects or where green ammonia or green hydrogen is produced using green energy.
- Additional surcharge (the amount payable to meet the relevant distribution company’s fixed costs) is not payable by waste to energy projects or where green ammonia or green hydrogen is produced using green energy. (Note that per a 2021 judgement of the Supreme Court of India, such a surcharge is also not payable by captive consumers).
- Monthly banking of excess energy by consumers is permitted but must be: (a) at least 30% of the total monthly consumption from the relevant distribution company and (b) must be adjusted within the same month.
- Model regulations have been prepared on the methodology for the calculation of open access and banking charges across all states to bring uniformity. These are in the process of being adopted by some states, such as Madhya Pradesh and Haryana.
The GOA Rules have been well received in the context of the green energy landscape. In the short term, there is still the possibility of bottlenecks arising at the state level, where – despite the GOA Rules – historic issues, such as additional charges and restrictions on banking energy in some states, could create bottlenecks. However, the expectation is that in the long term, policies (including at the state level), will only assist India’s complete migration to renewable energy as targeted.
C. Growth of Green Energy Captive Projects in the C&I Segment
There has been a significant increase in captive renewable energy projects in the C&I segment. The reasons for this include the following:
- Perhaps most importantly, cross subsidy surcharges and additional surcharges do not apply to captive projects
- Renewable energy projects are becoming more affordable (with lower capital and component costs), and commercially viable (surplus electricity can be sold through trading exchanges, for instance).
- The regulatory framework (which includes the GOA Rules discussed above) is getting increasingly user-friendly.
- Captive green energy projects help such commercial and industrial consumers meet their RPOs as well as achieve their net-zero and decarbonisation ESG targets.
- Tariffs under other forms of open access are generally higher (the tariffs applied by distribution companies are set at rates that do not “encourage” open access to large commercial consumers) and commercial power purchase agreements in non-captive transactions in many states have higher open access charges (there is no exemption from cross subsidy charges, for instance).
Accordingly, there have been several commercial and industrial players that have set up or are setting up captive green energy plants and increasingly these are being done as hybrid (wind-solar) power projects with round the clock capacity. Some recent examples include:
- Grasim Industries has partnered with ReNew on a wind-solar captive project.
- Welspun has acquired a stake in CleanMax (an Indian rooftop solar developer) to procure renewable energy as a captive consumer.
- United Phosphorus Limited has also partnered with CleanMax to set-up and operate a hybrid captive power plant.
- Hindalco has partnered with Greenko to set-up a hybrid captive project for its aluminium smelter.
It is not just commercial and industrial consumers that are adopting the captive approach – we are aware of a residential project in Mumbai that is in the process of setting up a captive project with the Tata Group.
D. Group Captive Structures – Recent Jurisprudence and Potential Impact on Structuring
A power project is considered a “captive” project if two conditions are met:
- the consuming entities own at least 26 per cent of the equity in the project; and
- the consuming entities consume at least 51 per cent of the power generated.
There is a specific provision to the two rules above that additionally applies to an “association of persons” (and there is no clear definition of what an association of persons is – it is generally understood to be an unincorporated consortium or joint venture between persons (both natural and corporate)). The proviso – which has proved troublesome for group captive projects – states that for a captive plant set up by an association of persons, a rule of proportionality applies (in other words, each captive user forming part of such an association needs to consume not less than 51% percent of the electricity generated in proportion to their shares in ownership of the power plant, within a permissible variation not exceeding ten per cent).
By way of illustration, where a project is set up by four captive consumers as an association of persons and collectively holding 26% of the project, the consumption requirements would be as follows:
|Ownership (%)||Consumption (%)||Variation Allowed (%)||Allowed Consumption (%)|
|1||1||6||12||+/- 10% of 12%||Within 10.8 – 13.2|
|2||2||10||20||+/- 10% of 20%||Within 18 – 22|
|3||3||8||16||+/- 10% of 16%||Within 14.4 – 17.6|
|4||4||2||4||+/- 10% of 4%||Within 3.6 – 4.4|
|TOTAL||26||51||51%||Equal to or more than 51%|
There has been a series of cases on the question of whether such a requirement of proportionality would apply to each of the various consuming entities where the plant is held by an SPV. The risk of the rule of proportionality applying to each such captive owner in this case is that if any such captive consumer/owner of an SPV was not able to consume its requisite proportionate share of electricity in any given year (for instance, due to an outage or maintenance) then all the power generated by the plant in question for that year will be considered to be non-captive and will be subject to the cross-subsidy surcharge. Such a position would serve to penalise the other captive consumer/owners, even though – as a whole, 51 per cent of the power generated by the plant in question may have been utilised by captive consumers holding 26 per cent. Conversely, in the absence of any proportionality requirements, it would be open for a captive consumer to inject a relatively small amount of equity into an SPV but nevertheless consume the vast majority of power generated by the relevant project – in such a case, could the plant really be considered to be a “captive” or merely a method by which surcharges are avoided?
The question before the various tribunals has ultimately boiled down to whether an SPV (or the shareholders of an SPV) owned by various captive users should be considered as an association of persons to which the proportionality rule applies.
The latest judicial position was set out in 2021, where the Appellate Tribunal for Electricity (APTEL) held that an SPV is not an association of persons, and the requirement of proportionate consumption applies only to associations of persons and not captive consumers / owners of SPVs. Its reasons for doing so appear to be based on the view that if the legislature had intended certain provisions to apply or not apply to SPVs, this would have been specifically addressed in the relevant rules. It noted that there are specific provisos in the rules applicable to associations of persons and co-operative societies (co-operative societies are specifically exempted from the proportionality requirements, presumably to enable societies such as the Mumbai residential society referred to above to access captive power) but no such specific provisions relating to SPVs. The APTEL judgement of 2021 set aside, to this extent, its own previous judgement in 2009 (which had held that SPVs themselves were in fact within the ambit of associations of persons), which it said was made per incuriam (without due regard to the law or facts).
The 2021 judgement further held that the requirement of 26% shareholding and 51% captive consumption are the minimum requirements to be fulfilled by a set of captive users. If this is achieved, then it is not relevant if the rest of the captive users do not fulfil the above conditions.
The 2021 APTEL judgement has of course been widely welcomed by C&I consumers since it allows them the flexibility to structure SPVs in a manner that enables them to obtain superior economic returns (i.e. with lower capital investment and the benefit of access to cheaper electricity on a disproportionate basis) so long as the overall requirements of 26% equity ownership and 51% energy consumption in such projects are met.
However, any structuring on the basis of the 2021 APTEL judgement should consider the following “risk factors” going forward:
- The 2021 APTEL judgement is still pending in appeal before the Supreme Court, which may take a contrary view (it may, for instance give weightage to the fact that group captive projects are invariably set up under SPVs, and projects being set up by associations of persons are unheard of in practice).
- Draft amendments were proposed to the relevant rules in 2018 which, amongst other things:
- specifically applied the proportionality rule to all categories of captive generators (including SPVs and bodies corporate), except for co-operative societies;
- applied the rule of proportionality to the consumption of captive power even beyond 51%;
- made the definition of “ownership” more stringent – the amendments proposed to exclude equity share capital with differential voting rights and apply a normative debt to equity ratio of 70:30.
While such amendments have not yet come into force, in what is likely a reaction to the proposed amendments on ownership, we are noting that an increasing number of captive consumers are now injecting their funds into projects by way of actual – and substantive “equity” (a few years ago, structures were being used where the equity injections were small, and the bulk of the funding was done by the issue of convertible securities or equity with differential voting rights). Accordingly, when setting up captive structures, it may also be prudent to be cognizant of the possibility that the proportionality rule (or some variant thereof) could apply in the future – even if that is not the case today.
 Tamil Nadu Power Producers Association versus Tamil Nadu Electricity Regulatory Commission and others [2021 SCC OnLine APTEL 19]
 Kadodara Power Private Limited & Others vs Gujarat Electricity Regulatory Commission and others [2009 ELR 1037 (APTEL)]
This material is for general information only and is not intended to provide legal advice.
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