MoP reveals proposed amendments related to captive power plants in Electricity Rules 2005

Ministry of Power recently announced proposed amendments in the electricity rules 2005 related to provisions regarding captive generating plants. The captive power producers body ICPPA expressed their woes against the proposed amendments.  According to ICPPA, these amendments are aimed at creating new ways of earning Cross Subsidy Surcharge (CSS) from captive users.

The amendments state that any captive user whose ownership of that plant is not exceeding 15% shall not qualify the power plant as a captive power plant. The proposed amendments have associated the ownership of the captive power plant with the eligibility of being a captive user.

In case the captive user fails to abide by the rules, then the electricity generated by the plant will be considered as if its a supply element by a generating company.

ICPPA secretary Rajiv Agrawal while interviewing with Economic Times said that “If any user is forced to draw lesser power share due to genuine reasons like the closure of its end-use plant for maintenance then the whole power generated in a year will be treated as non-captive and state income will charge CSS on it. It means all users of CPP will also have to pay the penalty, and thus the CPP may have to close down.”

The amendments suggest each captive user utilize 51% of the generated electricity from the captive plant and in case of group captive, each member should have a 26% equity share in the plant to be able to utilize the power from the plant.

“Captive plant set up by a company or any other body corporate, shall mean the issued and paid-up share capital in the form of equity share capital with voting rights (excluding equity share capital with differential voting rights) only as per the provisions of the Companies Act, 2013. In other cases, ownership shall mean proprietary interest and control over generating station or power plant, Provided further that for the purpose of assessing status as captive generating plant, a normative debt : equity ratio of 70:30 will be considered i.e. at least 26% of the equity base of 30% of capital employed, in the form of equity share capital with voting rights (excluding equity share capital with differential voting rights) needs to be invested by Captive user(s).”

In our opinion, the proposed amendments can bring stability in the electricity sector and increase the workability of DISCOMs across the country. By suggesting the eligibility of captive plants to be associated with the ownership in the plant the commission is asking the captive users to conduct rightful investments and be responsible towards the generation from the plant.

Read the document here.

Analysis – Draft Amendment to Electricity Rules 2005

The Ministry of Power (MoP) has proposed changes to the Electricity Rules 2005. The proposed changes focus on rules relating to “Captive Power Plants”. More specifically, the changes proposed will impact the structures commonly known as “Group Captive” projects. Group captive projects are an important way in which renewable energy (RE) capacity is set up (its important to note that the Group Captive structure is also used by conventional power plants).
What is the change proposed?
At present, a power project is considered ‘captive’ if consuming entity or entities consume at least 51% of the power generated and owns at least 26% of the equity. Various capital structures have evolved to qualify as captive under the rules. For example, a major portion of the capital could be preference shares, with only a small portion being equity capital. Thus, owning 26% of the ‘equity capital’ actually translates to a very small amount relative to the overall investment in the project. Further, equity shares of different face values are issues with the lower value shares being subscribed by the consumers while the higher value shares being owned by the investor.
The proposed change requires 26% or more ownership of the “paid up equity share capital”. Thus, equity structures with different face value of shares will no longer be tenable as ownership will have to be 26% or more of the total value of equity capital.
However, it appears that the structures where a large majority of the capital is brought in as preference shares are likely to still qualify under the draft rules. This is because the draft refers to “equity capital” alone, not preference capital or total paid up capital.
What will be the impact of the change?
Group captive structures are a very important tool used by companies investing in RE capacity. This is because once a project is classified as captive, cross subsidy cannot be made applicable to power generated from it. This important protection to captive projects stems from the Electricity Act and an order of the Supreme Court.

 

In the current environment where states vary in cross subsidy significantly every year (often with the intent to make open access unviable), such a protection is critical. Without such a protection projects that are build with a life of 20-25 years face huge uncertainties as PPA’s that are viable at present may suddenly become unviable if the state imposes high cross-subsidies.
The proposed change will make group captive structures more difficult as it will require the consumer to put up significantly more equity. This will likely result in less such structures coming up and consequently less investment in RE capacity overall.
Why is the change proposed?
As mentioned in the document of MoP, the rule “is being misused by issuing shares of small face value which actually do not represent the monetary share of the capital of the plant”  (emphasis added)
However, we believe that this needs to be looked at in the larger context of the regulatory environment that an RE plant operates in. Many states misuse their power to set cross-subsidy surcharge (CSS) rates and change them drastically every year (please refer to the CSS article below) often making open access unviable. Further, related provision to cross-subsidy like limiting such rates to 20% of the applicable tariff category or progressive reduction over time are not adhered to. The National Tariff Policy also suggested a change in the way CSS is calculated. However, states have not adopted the suggested methodology.
In this context, making it far more difficult to make group captive structures will result in increasing the risks faced by RE projects. The direct consequence of such a change will be reduction in new investment in the RE capacity.

How soon can the changes be effective?
Electricity Rules are made by notification by the Central Government (s. 176). This is unlike the Electricity Act or its amendment, which requires the approval of the parliament. As a result, the MoP can modify the rules by notification very quickly after it receives comments and has the opportunity to consider them. Comments are due on the draft rules by November 1, 2016.

 

 

 

 

KERC: No CSS, Wheeling and Banking charges for Solar power generators

Karnataka Electricity Regulatory Commission (KERC) in its order dated 18th August has exempted Solar Power generators from Cross Subsidy Surcharge (CSS), Wheeling and Banking charges.

On the basis of the comments received by the commission on the discussion paper released by the commission on 7th July 2014, the commission has given this final order. The Summary of the order is as below:

  • All solar power generators in the State achieving commercial operation between 1st April 2013 and 31st March 2018 are exempted from payment of wheeling and banking charges and cross subsidy surcharge for a period of ten years from the date of commissioning. This is also applicable for captive solar power plants for self-consumption within the State.
  •  Captive solar power plants opting for Renewable Energy Certificates shall pay the normal wheeling, banking and other charges as specified in the Commission’s Order dated 9th October 2013.

The table below illustrates the high CSS applicable for commercial consumers availing RE (Non-Solar), under Third Party Sale (For Group Captive consumers CSS = 0). All values in Rs/KWh.

This will bridge the gap between the Solar tariff and Non-Solar RE tariffs prevalent in the state, and encourage more competition between them.

The Commission said that there is need for encouraging solar generation, as only 41 MW of installed solar capacity is existent in the state, whereas the Karnataka Solar Policy aims to achieve 2000 MW of Solar capacity by 2018.

As per earlier order, solar power generators are also exempted from paying transmission charges and are also exempted from wheeling and transmission losses.

The KERC Order can be accessed here

Our previous blog post on the KERC Wheeling charges can be read here.

Contributed by Dheeraj Babariya & Nikhil Dhamankar.

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