Case for Hydro

Proposed policy could lead to a revival

The absence of a hydropower policy that comprehensively addresses the woes of this segment has been one of the biggest areas of contention for the industry.

As a result, growth in the segment has been sluggish in recent years. Private sector interest has been stagnating, and only 7 per cent of the total hydro capacity installed has been commissioned by private players since the segment was opened to private participation in 1991.

Explains Yogesh Daruka, partner, PricewaterhouseCoopers, “The stagnation in interest is on account of the various challenges that hydro projects face. These include rehabilitation and resettlement (R&R) issues, water-sharing issues among states, delays in procuring clearances, geological surprises and limited availability of long-term financing. These have significantly affected hydropower investments and project development.”

The government recognises that policy lacuna is one of the biggest challenges for the sector. “The government should formulate a new hydro policy that addresses existing as well as anticipated problems,” noted the Parliamentary Standing Committee on Energy, in a report tabled in March this year.

The Ministry of Power is now close to finalising a hydropower policy, which, reports indicate, could be released before the next elections in 2019. The policy is currently at the inter-ministerial consultation stage.

While the details of the policy are yet to be revealed, it is understood that it contains several proposals that would address the issue of time and cost overruns. The policy thus gives hope that the logjam in the sector will be cleared.

“Most of the hydropower projects are stranded and power companies are becoming non-performing assets (NPAs), leading to insolvency. No effort is being made by the power ministry to get power purchase agreements signed, forest and environmental clearances approved, repayment period increased, depreciation lowered, or buyers assured as was done in the case of solar power development. The new hydropower policy should take care of all these issues and free power to the states should be waived,” says M.M. Madan, chairman, hydro, ASSOCHAM.

What can the sector expect in the new policy? What does it mean for the sector? And will it really change investor perception?

Proposed policy – A closer look

One of the key positive changes proposed in the policy would be the classification of hydro as renewable power. So far, hydel projects of up to 25 MW come under the renewable category and those that are over 25 MW are considered conventional units.

With the proposed change in classification, all hydropower projects irrespective of their size would be categorised as renewable energy, making them eligible for the benefits currently extended to renewable energy projects (such as “must-run” status, exemption from interstate transmission charges and lower cost of funds on account of priority sector lending). Several countries including the UK and Brazil consider hydro as renewable energy.

Another key proposal is mandating a separate hydropower purchase obligation (HPO). According to experts, mandating HPOs under the currently mandated non-solar renewable purchase obligation (RPO) would promote the offtake of hydropower. More importantly, this would provide a safety net for hydropower developers as it would guarantee the purchase of electricity, making these projects much more bankable.

Another key proposal is the modification of the lending terms for hydro projects. The policy is likely to propose mechanisms to modify the lending terms and conditions to make debt more suitable to hydropower characteristics (such as long construction period, greater risk during the development period and significantly less risk at the operational stage). According to news reports, the policy recommends soft loans for longer periods of 20-25 years.

Further, the policy is likely to include mechanisms to reimburse the cost of enabling infrastructure from appropriate funds of the central and/or state government and exclude the cost of enabling infrastructure for the purpose of tariff determination. This is expected to make hydropower tariffs more competitive and projects more viable.

Other policy proposals in the works

The new hydropower policy is not the only policy measure being considered for reviving the segment. A bailout plan has also been in the works since 2017; however, it has been stuck since last year owing to a paucity of funds. Reportedly, under the plan, the central government has proposed a Rs 160 billion package to revive projects worth nearly 11,000 MW of capacity. This includes 4 per cent interest subvention to projects totalling 11,639 MW as well as creating a Hydro Power Development Fund (HPDF). The HPDF would source funds from the coal cess, the National Clean Energy Fund or the fund pool for the development of the Northeast region. However, since all the cess is now subsumed under the new Goods and Services Tax regime, the finance ministry had asked the power ministry to rework the scheme and reduce the dependence on budgetary support.

Such a financial rehabilitation plan has also been mentioned by NITI Aayog in the draft National Electricity Policy released last year. “It is envisaged that the central and state governments will cooperate in reorienting the current hydropower strategy for course correction. A salient part of the above will be financial rehabilitation of ongoing/stranded, large hydro projects so that the funds already invested in them can be put to good use. The government will consider a rehabilitation package for the revival of stranded hydel projects. The project life of hydro projects will be considered for a longer time frame (60 years instead of the present 35 years), which will enable them to access long-term financing,” stated NITI Aayog in the document.

Another key policy measure is a basin-wise review of the hydro potential and preparation of basin reports by the Central Electricity Authority (CEA) in association with WAPCOS Limited. The reassessment study is being carried out taking into consideration actual site constraints in terms of geology, submergence, etc. and includes the impact of these projects on the environment and forests. The study is likely to be completed over a period of 30 months, by September 2019.

Stranded asset acquisitions

While the policy logjam has led to a number of projects getting stalled, a key trend being seen in the segment is heightened interest in such assets, with the industry coming forward to buy these at attractive valuations. In February 2018, the country’s biggest power generator, NTPC Limited, announced plans to call bids for acquiring hydropower plants of up to 1,000 MW of capacity. The company was reportedly looking at plants bigger than 50 MW.

Last month, JSW Energy, announced plans to invest in the hydropower segment. The company will reportedly look at investing in stressed hydro assets. JSW Energy is the biggest private player in the hydropower segment, accounting for almost 40 per cent of the installed private sector capacity. In 2015, it had concluded one of the biggest acquisition deals in the hydropower segment, with the acquisition of the Baspa and Karcham Wangtoo projects of JPVL.

Earlier, in July this year, Tata Power reportedly expressed interest in acquiring two operational assets of about 200 MW of Equis Energy, an Asian infrastructure investor, in Sikkim. Equis has an ownership interest in DANS Energy, which has developed these two projects. Renewable energy major Greenko has also reportedly expressed interest in these assets.

“Investing in stressed hydropower assets on a case-by-case basis can represent an attractive proposition for private and foreign players, who could bring in superior construction technology, project management skills and the ability to respond to and benefit from emerging power market opportunities,” notes Daruka.

Does the policy go far enough?

While the hydropower policy has introduced a number of positive changes, experts note that these may not be enough. For instance, while the idea of HPOs has merit, strong compliance mechanisms would be needed given that discoms had resisted RPOs for several years.

Some of the additional measures that the government should look at are waiving-off free power till the debt is repaid by the developers and waiving-off cross-subsidy surcharges. Also, long-term bulk power transmission charges based on the capacity of the project should be done away with, according to experts. According to Madan, developers need to be supported in a number of other areas, especially infrastructure related. “The government should help in developing infrastructure prior to the award of hydro projects so that the burden of infrastructure development, which is used by everybody, is not loaded on one project developer (who builds it first). There is also a need to control unnecessary interference by NGOs and ensure single-window clearances. Moreover, the burden of the Catchment Area Treatment plan, wildlife conservation plan, etc. should not be loaded onto hydropower developers,” says Madan. Storage projects near border areas also need to be taken up on priority so as to avoid the risk of floods.

Aside from policy initiatives, the segment also needs regulatory measures to recognise the role that hydropower can play in balancing renewables. “The government and regulators need to explore the need to extend the ancillary services market (currently limited to frequency support only) to include spinning reserves, voltage regulation, black start, etc. The ancillary services market mechanism needs to be suitably modified to compensate pumped storage plants for both the “generation” and “pumping” modes of operation,” notes Daruka. He adds that a “peaking power policy” mandating higher peak tariffs combined with time-of-day metering will facilitate hydropower offtake and help discoms to better manage peak demand.

Conclusion

The fact that hydro is a competitive source of energy with a number of inherent benefits, both technical and environmental, make it an excellent source of power for balancing the grid with greater renewable influx. However, for this to realistically happen, a policy and regulatory framework that is conducive to hydro growth is much needed, and the new hydropower policy could be the much-needed enabler.

Reya Ramdev

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