Draft Amendments to Rule 3 of the Electricity Rules, 2005 Issued

Captive generating plants have long been a cornerstone of India’s electricity framework, enabling industrial and commercial consumers to secure supply certainty while mitigating exposure to cross-subsidy surcharges. However, the legal and operational contours of ‘captive status’ under Rule 3 of the Electricity Rules, 2005, have increasingly been a source of dispute, particularly in group captive structures, multi-unit plants, and evolving ownership arrangements. Divergent interpretations by utilities, regulators, and courts have led to persistent compliance uncertainty, retrospective surcharge demands, and uneven enforcement across states.

Against this backdrop, the Ministry of Power, by its letter bearing reference no. 23/26/2022-R&R (Part-1) dated January 2, 2026, has placed in the public domain draft amendments proposing a complete substitution of Rule 3 of the Electricity Rules, 2005 (the “draft Rules”), along with an explanatory framework, and has invited stakeholder comments within a defined consultation window.

A central feature of the draft rules is the sharper articulation of foundational definitions that determine captive eligibility. Most notably, the rules expressly recognize Special Purpose Vehicles (SPVs) as a permissible structure for captive generating plants. An SPV is treated as an association of persons, established specifically for the purpose of owning, operating, and maintaining a captive generating plant. This explicit recognition addresses a long-standing area of ambiguity, particularly for project-based captive arrangements where ownership and consumption are channeled through a dedicated SPV rather than directly by end users.

In addition, the draft rules refine other core definitions to align captive eligibility with contemporary power sector practices. The concept of a captive user is broadened to include consumption through energy storage systems, reflecting the increasing role of storage in managing supply and demand. Where the captive user is a company, its holding company, subsidiaries, and fellow subsidiaries are collectively treated as a single captive user, acknowledging group-level power optimization models. Definitions such as “assessment period” and “ownership” are similarly tightened to ensure that compliance is evaluated on the basis of economic interest and effective control, rather than merely nominal shareholding.

At the heart of Rule 3 remains the familiar dual test for captive status:

1. at least 26% ownership by the captive user(s) in the generating stations; and
2. at least 51% of aggregate electricity generation to be consumed for captive use during the assessment period.

However, the draft rules recalibrate how these thresholds are applied. Consumption and ownership are now assessed with reference to identified generating units, rather than the generating station as a whole. This unit-based approach significantly enhances flexibility, allowing plants with multiple units to ring-fence specific units for captive use while permitting others to operate on a merchant or third-party basis.

The equity shares to be held by the captive user or users in the generating station shall not be less than the required permissible threshold. Illustrative examples embedded in the draft rules reinforce this approach and provide practical guidance for structuring compliance, thereby reducing interpretational disputes at the verification stage.

Captive consumption by any individual user shall be admissible only up to 100% of its proportionate entitlement, calculated with reference to its share in the total captive ownership in the power plant. However, this condition relating to proportionate entitlement shall not be applicable to a captive user holding not less than 26% of the ownership in the power plant.

The draft rules also address fluctuating ownership patterns by prescribing a weighted average shareholding methodology during the assessment period, an important safeguard against technical non-compliance triggered by mid-year restructuring.

The draft rules adopt a clear compliance consequence regime. Where the minimum captive consumption requirement is not met during the assessment period, the entire electricity generated by the plant is deemed to be supplied by a generating company, exposing the power to cross-subsidy surcharge and additional surcharge liabilities.

To balance enforcement with fairness, the draft rules provide that pending verification, cross-subsidy surcharge, and additional surcharges shall not be levied, subject to a declaration by captive users. However, if captive status ultimately fails verification, the deferred surcharges, along with carrying costs calculated at the base rate of the late payment surcharge specified in the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, become payable, thereby discouraging speculative claims of captive status.

The draft amendments to Rule 3 of the Electricity Rules, 2005, signal a clear move towards rule-based certainty in India’s captive power regime, aligning ownership, consumption, and verification within a coherent and enforceable framework. If notified in their present form, they are likely to reduce disputes, enable more structured group captive models, and strengthen investor confidence, making the ongoing consultation process pivotal in shaping a balanced and durable regulatory outcome.