Enabling Hydro

Government initiatives to revive the segment

The hydropower segment is back on the central government’s list of focus areas. Having given a push to the solar segment, the government now appears to be working on a policy overhaul for the hydro segment. Besides amendments to the Tariff Policy, 2006, directed at promoting hydropower, the government has formed dedicated committees for suggestions to revive the sector.

Earlier, in December 2015, a parliamentary panel listed a series of recommendations for the government to reinvigorate the hydro segment. It pulled up the Ministry of Power (MoP) for failing to address the delays associated with hydro projects and meet successive five-year plan targets. The panel also recommended replacing routine monitoring mechanisms with suitable methods and ensuring a level playing field for all stakeholders.

Current status

Of the huge 148 GW hydropower potential, just about 29 per cent has been exploited so far. The share of hydropower in the total installed capacity has declined drastically over the past two decades, from 40 per cent in 1980 to 15 per cent in 2015. In terms of electricity generation, hydro accounted for just about 12 per cent of the total 1.05 billion units generated in 2014-15.

While the minimum recommended hydro-thermal mix is 40:60, it currently stands at a meagre 18:82 (excluding nuclear) for India. An unfavourable hydro-thermal mix leads to issues such as peaking shortages and frequency fluctuations, especially as the plant load factor of the existing thermal power plants (TPPs) is declining and the share of infirm renewable energy is increasing.

Also, undue dependence on fossil fuels such as coal for power generation impacts the country’s low-carbon energy strategy. Besides, as the operating life of hydroelectric plants (HEPs) (over 40 years) is more than that of TPPs (25 years) and the cost of generation is lower, the former offers a better long-term least-cost approach to energy security.

However, despite being one of the cleanest and most abundant sources of energy, hydropower capacity addition continues to miss the targets set by the government. So far, only about one-third of the target for the Twelfth Plan period (2012-17) has been met, with only 3,691 MW having been added as of January 2016 as against a target of 10,897 MW.

Limited private participation

The thermal power segment, particularly coal-based generation, has grown significantly over the years with the active participation of the private sector. The short gestation period and early returns offered by coal-based plants have resulted in greater private participation in the segment. Meanwhile, the government’s policies for the hydro segment have largely been ineffective in attracting private sector investments. Of the current installed hydro capacity of 42.6 GW (as of January 2016), the private sector accounts for only about 7 per cent, while a major proportion belongs to the state (59 per cent) and central (34 per cent) sectors.

Besides inadequate policy support, inherent challenges in the implementation of HEPs have kept the private sector away. These include geological surprises, remote sites, local protests, delays in environmental clearances, inadequate supporting infrastructure, natural calamities, financing issues and interstate water sharing disputes. Also, with the decline in the price of traded power, many private developers do not see the hydro segment as an attractive proposition.

A case in point is a recent proposal by private companies such as Jindal Power and Lanco Infratech to sell their upcoming HEPs in Sikkim and Arunachal Pradesh to state-owned hydro major NHPC Limited. The latter is, however, unlikely to consider the proposal before determining the economical feasibility of the projects.

Time and cost overruns

As per the Central Electricity Authority (CEA), under-construction hydropower capacity aggregating over 12 GW is facing a cumulative cost overrun of Rs 422 billion and an average time overrun of 65 months (as of January 2016). Among these projects, the 400 MW Maheshwar HEP being executed by Shree Maheshwar Hydel Power Corporation Limited in Madhya Pradesh has been delayed by as much as 16 years. The HEP, which was originally scheduled to be commissioned in 2001-02, is facing resettlement and rehabilitation issues aside from a cash crunch. During this period, the project cost has more than quadrupled from Rs 16 billion to Rs 68 billion. Lenders, including the Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and several public sector banks, are estimated to have exposure of about Rs 22 billion in the project. The lenders recently approached NHPC to take over the project, but the company refused.

Other projects facing extended delays include NEEPCO’s 60 MW Tuirial project in Mizoram (11 years overrun), NHPC’s 800 MW Parbati II in Himachal Pradesh (nine years), NHPC’s 2,000 MW HEP in Arunachal Pradesh (10 years) and Lanco’s 500 MW Teesta Stage VI HEP (nine years).

New initiatives

Taking cognisance of the deteriorating state of hydropower development in the country, the MoP is taking steps to review existing policies for reviving investor interest in the sector.

In the recent amendments to the Tariff Policy, 2006, issued in January 2016, the government has exempted hydro projects from tariff-based competitive bidding till 2022. Earlier, this exemption was valid till December 2015, but now HEPs will continue to follow the cost-plus approach for tariff determination, which offers fixed returns to developers. The respective state electricity regulatory commissions (SERCs) would determine the tariffs for power sold through long-term power purchase agreements (PPAs) on performance-based cost of service regulation if the project receives the CEA’s concurrence, achieves financial closure, awards work orders and signs long-term PPAs with discoms by August 15, 2022. Besides, the SERCs can also provide a suitable regulatory framework for incentivising hydropower developers to use long-term financial instruments in order to reduce the tariff burden in the initial years. The amendments to the policy would also apply to pumped storage hydro projects.

As the government gears up to provide “Power for All by 2019”, it is looking for ways to optimally utilise all sources of energy, including hydro. In line with this objective, the Prime Minister’s Office has recently asked NITI Aayog to prepare a report on stalled hydropower projects. Concurrently, the MoP has set up a committee headed by the former chairman of the Central Water Commission to suggest ways to expedite completion of HEPs under development. The committee comprises representatives from the CEA, the Central Electricity Regulatory Commission, NHPC, SJVN Limited, PFC, REC and the MoP. A report by the committee is expected in April 2016.

Besides, the MoP is reportedly working on easing financing for hydropower projects. The ministry is considering creating a fund through the issuance of tax-free bonds to lend long-term finance to HEPs. The current financing arrangement results in a mismatch in the debt tenor and the life of a project; while the project life extends up to 40 years, the loan tenor is typically for 12 years.

A power project monitoring panel has also been set up by the MoP to independently follow up and monitor the progress of hydro projects. Further, in order to address the concerns of developers whose projects have been delayed due to geological surprises, there are plans to revise the bidding guidelines for hydro projects in order to include enabling provisions.

Summing up

The need of the hour is to create an enabling investment climate for increasing investor participation in the hydro segment by streamlining the land acquisition process and environmental clearances, tackling law and order problems, encouraging the use of advanced technology for determining the geology, and recognising and mitigating the risks involved in HEP development. India can take cues from its international counterparts which have been able to effectively utilise their hydro resources. For instance, hydropower generation accounts for 96 per cent and 69 per cent of total electricity generation in countries like Norway and Brazil respectively (as per International Energy Agency, 2013 data).

Overall, the optimal exploitation of hydro resources would not only add to the country’s energy security, but also help in meeting India’s obligation to cut carbon emissions by 30-35 per cent by 2030, as announced at the Paris climate change summit in 2015.

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