Under Solar Power Policy 2012, the Tamil Nadu Government imposed a minimum Solar Purchase Obligation (SPO) on all High Tension and Low Tension commercial consumers — 6 per cent of their total power requirement should be met through solar power. When considering the appropriate approach to meet this obligation, the setting up of a Captive Generation Plant (CGP) is gaining acceptance.
Benefit of CGP
Apart from setting up a CGP, the solar policy provides other options to meet the obligation, including the purchase of power at solar power rates. TANGEDCO’s solar power rate could be very high compared to the solar CGP per unit cost of Rs 5-6. Further, many solar energy service providers don’t require the consumer to make the initial capital investment for setting up a CGP, and the electricity is sold at negotiated prices of Rs 6 to Rs 7.
Setting up a CGP
A captive generation plant can be set up directly, with the solar equipment purchased by the end-consumer, or through a Special Purpose Vehicle jointly with the solar energy service providers (SESP). Multiple consumers can form an association of persons or SPV to set up the plant. The tax and regulatory implications for the end-consumer/ SESP may vary depending on the model used to set up the plant.
Regulatory hurdles?
The Electricity Act 2003 has liberalised the procedure for setting up generation plants. Currently, there is no licensing requirement for setting up CGPs. Regulatory compliances/ reporting requirements are also minimal. Further, CGPs have open access for carrying electricity to destination of use.
Qualifications
Primarily, a generation plant would qualify as a CGP if the captive user holds minimum 26 per cent ownership (26 per cent equity share holding with voting rights if the plant is held through an SPV), and 51 per cent of the total power generated is consumed by the captive user.
Tax benefits
Solar power equipment is eligible for 80 per cent accelerated depreciation and additional depreciation of 20 per cent in the first year of use.
Therefore, if a consumer directly invests and sets up the CGP, the accelerated depreciation from the solar equipment can be offset against the income from primary business. Further, the captive power producer will have 100 per cent deduction of profits from the power generation business for 10 years. If the captive consumer sells the excess power to third parties, the income is eligible for 100 per cent deduction.
Should the SPV be a company?
Special purpose vehicles holding the CGP can also be set up as a Limited Liability Partnership, as there is no specific restriction. Several energy companies have set up LLPs jointly with the end-consumers to hold and operate a CGP.
Let’s take the example of an SESP making full capital investment through an SPV to set up a captive generation plant. How can it retain full economic control, despite the consumers having 26 per cent of the SPV shareholding?
The existing legal framework permits arrangements where the shareholders’ rights can be varied, such that the entire economic interest in the SPV can vest with the SESP even as 26 per cent equity shares with voting rights are issued to captive consumers.
The authors are chartered accountants