Course Correction

Policy initiatives to give an impetus to segment

The declining share of hydropower in the country’s energy mix and insufficient hydro capacity addition over the years necessitate the government to take some strong policy actions to drive growth in the segment. The last dedicated National Hydro Policy was released way back in 2008. Today, investment in the hydropower segment is at a standstill, with several projects stranded due to environmental concerns, local resistance, contractual disputes, and other issues. The draft National Energy Policy (NEP) released by NITI Aayog in June 2017 states that the central and state governments will cooperate in reorienting the current hydropower strategy for course correction. It further adds that a salient feature of the strategy will be the financial rehabilitation of ongoing/ stranded large hydro projects, so that the funds already invested in them can be put to good use.

Against this background, the Ministry of Power (MoP) is working on a new hydropower policy that includes a rehabilitation package for the revival of stranded hydro projects. The proposed policy is reportedly at the final stages and is expected to be sent for cabinet approval soon. The policy is aimed at improving the saleability of hydropower by making tariffs competitive, restarting work on stalled projects, incentivising their completion, and encouraging fresh investment.

Key features of proposed hydro policy

The policy proposes to classify all hydroelectric projects (HEPs), irrespective of their size, as renewable energy projects, given their clean energy generation and low-carbon emission status. This will make hydropower projects eligible for the incentives available to renewable power projects, such as must-run status and purchase obligations.

In addition, the proposed policy is expected to provide an interest subvention of 4 per cent during construction for up to seven years and for three years after the commencement of commercial operations for all hydro projects with a capacity beyond 25 MW and commissioned within five years of the notification of the policy. This would entail a financial implication of about Rs 167.09 billion, which is proposed to be funded from the coal cess, the National Clean Energy Fund and the Ministry of Development of North Eastern Region (MDoNER). The revival package will cover 40 HEPs aggregating 11,631 MW, of which 21 are stalled and the rest are likely to be commissioned in the next five years. The establishment of a hydropower development fund is also envisaged.

The MoP has also proposed that the cost of enabling infrastructure be excluded from the project cost for calculation of tariff and the same reimbursed by the central/state governments. There are provisions for modifying the financing terms and conditions for HEPs so that long-term loans are available at affordable rates to developers. In this context, the draft NEP suggests considering the project life of HEPs for a longer time frame (60 years instead of the present 35 years) to enable them to access long-term financing. The MoP is also expected to engage with the Central Electricity Regulatory Commission (CERC) to work out the modalities to reduce tariffs by rationalising parameters such as depreciation, and operations and maintenance expenses.

Other policy developments

In January 2016, the amended Tariff Policy provided exemption from competitive bidding to the hydropower segment till 2022, as a cost-plus model promises assured returns over the investment made for hydropower projects. In addition, the policy stipulated extending power purchase agreements by 15 years beyond the usual 35 years for existing hydropower projects.

The MoP also released the Cross-border Electricity Trade Guidelines in December 2016 to facilitate power trade among the South Asian Association for Regional Cooperation countries. The guidelines are expected to provide a firm framework for hydropower import and export from/to neighbouring countries like Nepal, Bhutan and Bangladesh.

Further, the CERC’s Ancillary Services Operation Regulations, 2015 has opened a new market for power generation, especially hydropower, given the ability of hydro schemes to provide ancillary support. The regulations seek to restore and maintain the frequency of electricity supply at the desired levels by providing commercial incentives for both ramp-up and back-down of ancillary services.

Conclusion

The proposal for the launch of a new hydropower policy is a welcome step to arrest the waning investor interest in the hydropower segment. The inclusion of hydropower in the renewable energy sector and the issuance of a hydro purchase obligation (HPO) would help ensure PPAs for HEPs. However, discoms’ compliance with the proposed HPOs would require close monitoring. Besides, there should be provisions for incentives/disincentives to ensure timely completion of HEPs, given that delays result in considerable cost overruns.

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