New amendments to the group captive power scheme irk several states

These states fear loss of revenue earned through cross subsidy charges

The new amendments to the group captive scheme in power generation have been cold-shouldered by several states, including Rajasthan, Andhra Pradesh and Tamil Nadu. 

These states have opposed amendments made to the Group Captive Power Plants (or self-use power generating units) regulations. They feel that they would lose a huge amount of revenue which they earn through cross subsidy charges.

The industry, however, is critical of the opposition, saying this is restricting their business. Group captive generation allows several consumers to own and use a captive power generation unit. In May 2018, the Ministry of Power published ‘draft amendments in the provisions relating to Captive Generating Plant in Electricity Rules, 2005’.  The Ministry was of the view that provisions are being misused and suggested certain changes. 

The new regulations stipulate that a stakeholder should have 26% ownership rights and must use 51% of the power generated. The amendments allow anyone with 74% of investment to set up a captive power plant. Group captive can have several energy sources – coal, wind, solar. The most prevalent group captive is wind, which is mainly popular in South India.

Rajasthan has written to the Centre saying that the new amendments promote third party sales in a group captive structure instead of captive power generation. 

State officials said there would be a revenue shortfall of close to Rs 15 billion if group captives continue like this.

“The new amendment has led many investors, who are not actual users of energy, to set up power plants through SPVs by investing most of the money for other users who have a small share in the SPV. This usage is like a third party sales of power from the investor to the captive user. This usage of power by captive users from the share of investors also qualifies for benefits like non-application of cross subsidy surcharge whereas third party sales is not exempt from the cross subsidy surcharge. This defeats the objective of the Act to impose cross subsidy surcharge on open access users other than captive users,” said the letter written by Rajasthan's energy department to the ministry of power. 

The letter was reviewed by Business Standard. Captive power plants are set up usually by industrial users in order to avoid cross subsidy charges. Cross subsidy charges are levied by the state power distribution companies to recover their cost of supply. The subsidised population in states are mostly farmers, the rural people, and lower income/consumption groups.

The industries are allowed to meet their power requirements from outside the state and the spot market or through their captive units falling in the category of ‘Open Access’ and paying cross subsidy charges for them.

Several states including Gujarat, Tamil Nadu and Rajasthan have denied permission to any new group captive power unit to come up in their state. 

Affected the most are the renewable captive groups, which wanted to utilise the falling cost of renewable energy.

Industry executives said approval for all solar captive units are pending in Rajasthan and Gujarat. “Barring some large captive units (coal based) of some players such as JSW and KSK Energy, which received approval in Maharashtra and OPG in Gujarat, no other captive unit got approval in states including Karnataka, Andhra Pradesh and Rajasthan,” said an executive with a power generation company. 

Aditya K Singh, counsel, Bharucha and Partners, said discoms are not only worried with the group captive generating plant but are also feeling threatened from open access.  

Commenting on the resistance by states, he said, “Third party sales are not bad if the interest of all the affected parties is being taken care of. Loss of cross subsidy is again a flawed argument. Cross subsidy is not an incentive for discoms; it is being imposed to take care of the subsidy provided by it to the subsidised consumer.  It is compensatory in nature and is payable by every subsidising consumer when it decides not to purchase power from the discom in the area but secures it from another entity.”  
 

He further said that generation from captive plants is specifically exempted from payment of the cross subsidy surcharge. However, a few states have started imposing parallel operation charges from these entities.

“There are lot of uncertainties in the market and discoms have started taking advantage this process extensively. Cross subsidy surcharges are only compensatory in nature and cannot be charged from the entities which are never consumers of the discoms,” Singh said.

Rajasthan, in its letter, said the capital cost of setting up solar power plants has plummeted recently. “There has also been an increase in the proposals for setting up group captive solar power plants through the SPV,” the letter said.

Rajasthan officials said it has asked the Centre to change the ownership in group captives to 100%. There hasn't been any reply from the Centre yet.

THE NEW REGULATIONS

• A stakeholder should have 26% ownership rights
• Stakeholder itself should use 51% of the power generated
• The amendments allow anyone with 74% of investment can set up a captive power plant
• Group captive can have any energy source - coal, wind, solar