However, significant challenges remain, says an ICRA report in the concluding part of a two-part series.The execution and evacuation challenges faced by SHP projects are much higher than other renewable energy sources for a variety of reasons. Firstly, water being a state subject, the SHP projects are governed by state policies and the potential sites are allotted by the state governments to private developers. The projects involve a time-consuming process for allotment of sites by states and statutory clearances including land acquisition, forest clearance, irrigation clearance, etc, in the absence of any provision for a single window clearance. In addition, the projects have a relatively longer gestation period in completing the projects (vis-a-vis other RE sources like wind, biomass, solar or cogen) due to difficult terrain and limited working season. Secondly, as SHP plants are very site-specific and these tend to be in hilly regions, lack of adequate access and evacuation infrastructure can become major issues. Very often, infrastructure such as roads, bridges and transmission lines from the plant site to the nearest motorable road/grid station has to be built by the developers themselves which increases both the gestation period as well as cost/MW. In fact most of the economically attractive potential for SHP in Himalayan and North Eastern states remains untapped because of lack of adequate grid interconnection facilities and approach roads, which increase the risks involved in transporting heavy equipment to the sites. Thirdly, lack of reliable hydrological data required to assess the viability also remains a major issue. Fourthly, since projects are usually located in hilly and often seismically active regions, they are often impacted by natural calamities such as flash floods, landslides and earthquakes- these calamities can result in significant cost and time overruns.Finally, sometimes SHP developers face objections from the local community. Normally, the issues relate to land, employment of local people and contribution towards local area development. To address these issues, state governments have specific provisions in their policies. For example: the state of Himachal Pradesh requires 1 per cent of the project cost to be deposited by the developer for local area development. This apart the SHP developer also engages local residents during construction of the project and as their employees. However, in spite of the measures, a number of SHP projects have faced resistance from local communities.Although capital costs are typically higher for SHP plants vis-a-vis other RE sources (barring solar), cost of generation is usually competitive; superior also with respect to scheduling.The capital investment required for setting up of power projects from renewable energy sources and consequently the economic viability of such projects is highly resource and site-specific. It depends on several factors such as the available potential at a selected project site, site-specific conditions and size of the project.Capital costs for new SHP plants typically tend to be between Rs 8-10 crore for plants in the Himalayan and North Eastern region and between Rs 6-8 crore/MW for other regions.The levelised energy cost for SHPs tend to be in the Rs 3.5-4.5/unit which is comparable with wind (and also coal-based power plants not having captive mines) but lower than biomass and solar projects. This arises out of the fact that PLFs tend to be higher for SHP- between 30-40 per cent in Southern India and between 40-60 per cent in the Himalayan and NE regions - as compared to wind or solar. While biomass plants tend to have better PLFs this is offset by the fact that such plants have relatively higher fuel and O&M costs and higher auxiliary consumption which makes biomass power much more expensive.Apart from cost-competitiveness, the other major advantage of SHPs is flexibility with respect to scheduling. Firstly, SHPs typically have an inherent ability for instantaneous starting, stopping and load variations (solar and wind have similar flexibility but not so with biomass and cogen). Secondly, SHPs usually have a limited pondage capacity thus in off seasons when they are generating less than full capacity water can be stored during off-peak hours and utilised during peak hours thus making them suitable as peaking capacities (in peak season they usually run as base loads). Further, for SHPs their maximum power production is in the summer and monsoon months, and a significant part of the generation season coincides with peak seasonal demand in India. Thus subject to adequate hydrology, SHP plants can be operated as peak load stations and are well-suited for merchant operations.CERC’s tariff regulations for SHP plants are a key positive from regulatory perspective. For small hydro projects, CERC has prescribed a set of tariff norms (See Table 3 below), depending on the capacity and location.Present tariff regulations across states are inconsistent. Further tariffs in some of the key states are inadequate.While the CERC has put in place tariff norms for SHP plants, State Electricity Regulatory Commissions (SERCs) have been deciding tariff in their respective states. Power being a concurrent subject, 23 state governments have so far announced policies for private sector participation for the development of SHP projects and setting of tariffs. The SHP tariffs set by the SERCs, being single part, vary widely across states as Table 4 (On the next page) shows. The divergence is attributable mainly to the varying normative assumptions made for the key parameters, like capital costs, capacity utilisation factor (CUF), O&M expenses, water royalty charges and grid connectivity.Barring MERC and UERC, the SERCs are yet to follow the CERC’s guidelines on tariff norms. Even in Uttaranchal, the year-on-year basis variation in capital cost during the control period is not considered, which means that projects commissioned at the beginning of the control period will have same capital cost as the projects to be commissioned at the end of control period, providing no mechanism for considering the inflation impact in the capital cost. Thus, while CERC has taken the lead in providing guidelines for harmonised tariff norms, a fine tuning on project costs assumptions, O&M costs and capacity utilisation factor could provide some comfort for convergence in norms.MNRE’s financial and technical assistance scheme boost private sector participation in small hydro. The MNRE has been providing upfront capital subsidy for SHP development over the past 20 years. In December 2009, the ministry revised its guidelines for releasing subsidy to projects set up by private developers, which would continue till March 2012. Previously, the subsidy was released after successful commissioning of the project. Now, it is released in two tranches – 50 per cent is disbursed after the order for equipment is placed and the remaining after performance testing of the project. For state sector projects, the subsidy is disbursed in four tranches depending on the progress of the projects. Facilities located in the North-Eastern states, Jammu & Kashmir, Himachal Pradesh and Uttarakhand receive a higher level of financial assistance from the ministry. Central Financial Assistance (CFA) is available for renovation and modernisation of old SHP projects as well. The MNRE also provides financial support to promote technologically advanced watermills and micro hydel projects. In addition to providing financial support, MNRE is also organising a technical support towards survey and investigation, preparation of DPRs, project monitoring and training through Alternate Hydro Energy Centre (AHEC), IIT, Roorkee.Recommended RPO norms and RECs could boost returns over the long term; however strict enforcement of RPO targets and penalty framework remain extremely crucial.The NAPCC has stipulated the minimum renewable energy procurement target at 6 per cent of the total procurement in 2010-11, with a 1 per cent year-on-year (yoy) increase for the next 10 years. Thus, if the overall RPO were to be in line with the NAPCC’s recommendations, the incremental requirement of SHP capacity would be around 5,874 MW by FY 2015 assuming the share of SHP in the overall renewable energy remains at 15 per cent. This represents a CAGR of 39 per cent until FY 2015. Another positive development for the renewable energy sector as a whole is the promulgation of CERC regulations for Renewable Energy Certificates (RECs) with the objective of promoting the development of renewable energy and thereby facilitating its inter-state flow. This will enable the obligated entities (distribution utilities and open access customers) across states to meet the RPO target as recommended by the NAPCC. Under this framework, states that are unable to meet their renewable energy off-take targets can plug the shortfall by purchasing RECs from renewable energy generators in other states. Thus, states which have already met their RPO targets will have a continued incentive to further develop renewable energy projects, given that the entities setting up units there would be able to sell their surplus RECs (that is, in excess of the RPO target) to others.Further, the commencement of trading of RECs (non-solar) in March 2011 on the Power Exchange of India as well as the Indian Energy Exchange is a key positive. Both the traded volumes/price of RECs (combined for both the power exchanges) have improved significantly to 105,000 (@ Rs 2.9/unit) in November 2011 from 150(@ Rs 1.5/unit) in March 2011, which further signify a growing demand to meet RPO requirements from the obligated entities and the quarterly compliance requirements as stated in RPO regulations by SERCs in some states. Further, long-term certainty over the pricing range (floor/cap) for RECs as per the order issued in August 2011 by CERC is a positive development. The floor price remains unchanged and the same along-with average power purchase cost (APPC) is likely to ensure the economic viability of SHP assets in key states with high hydro potential under the normative assumptions of the CERC. However, the benefits of RECs will accrue only to those renewable energy players, which are selling either on the merchant route or selling to utilities at the average pooled power purchase costs (APPC).While the aforesaid developments are a positive in the long run, there are major lacunae that prevent the realisation of the intended benefits of these measures currently. Firstly, RPO requirements are inconsistent across the states and as of now none of the states, including those where the RPO is in any case lower than the NAPCC norms, have put in place a strict enforcement mechanism (especially penalties for underperformance) for ensuring meeting of RPO norms. The variation in RPO targets as well as inability to enforce penalties on failure to meet RPO norms can be attributed mainly to the lack of an operational regulatory framework to facilitate purchase of renewable energy from outside the state, thus constraining SERCs to build in targets on the basis of the locally available estimates of renewable energy. In fact, it is observed that SERCs in a few states such as Chhattisgarh, Haryana, Kerala, Tamil Nadu, Uttar Pradesh and West Bengal have revised their target RPO levels significantly downwards (varying between 27 per cent and 85 per cent) for FY 2012 from the earlier levels set in FY 2010, given that the earlier target levels were quite aggressive in some of these states. Secondly, the REC framework is still in the initial stages of development and is yet to be uniformly adopted by the SERCs. Further, the actual price discovery of REC on power exchange would be market-linked, and would depend on the RPO requirements of the state concerned, the availability of such energy sources, and the extent of enforcement mechanism for penalty for any shortfall in RPO as put in place by the SERCs.Currently, in most of the states with high SHP potential, APPC + REC or merchant realisations + REC tend to be higher than the preferred tariffs, thus ICRA expects in the long-term more SHPs to opt for the REC route as compared to the preferred tariff route.Going forward, issuing of RPO guidelines across all states for the long-term; convergence of the same with NAPCC targets; putting in place strict penalties for underperformance on meeting RPO targets and issuing of consistent REC guidelines by SERCs will be crucial for boosting renewable energy capacities including small hydro power.Upside from CER benefits exist for small hydro plants; however uncertainty continues over Kyoto Protocol Mechanism post December 2012 With CDM in place under the Kyoto Protocol since 1997, the registration of the projects eligible for such CDM benefits from India by CDM‘s Executive Board as in September 2011 stood at 728, accounting for about 20.8 per cent of the registered projects with the national authority (for host country approval). Of these projects, biomass-based power plants accounted for 29 per cent; wind energy plants accounted for 20 per cent; waste gas/heat recovery plants accounted for 13 per cent; small hydroelectric projects accounted for 13 per cent and energy efficiency projects accounted for 11 per cent. These projects have already been issued 118.18 million Certified Emission Reduction (CER) units as in September 2011; wind energy projects account for about 10 per cent of the same. (Source: IGCS CDM Project Database). While the CER benefits are expected to be shared with the beneficiaries (being the distribution utilities) in accordance with the CERC’s framework, the incremental IRR should be higher by an average of 1.5 per cent for the projects over that for projects not enjoying CER benefits (assuming a CER price of euro 10/unit, all other things being equal).However, uncertainties still persist over the approval and registration of such projects, considering the clause of additionality’ in the CDM mechanism (the clause requires project owners to prove non-viability without the CDM benefits).Further, the first commitment period under Kyoto Protocol is about to end in December 2012 and member countries under Kyoto Protocol are yet to either ratify the existing mechanism or devise any new mechanism with a binding commitment period for emission reduction targets post 2012. As a result, there remains a regulatory uncertainty over the continuity of Kyoto Protocol and this coupled with difficult economic conditions/sovereign debt crisis in EU countries is likely to negatively impact the demand potential of CERs and thus keep its price level subdued at the current level (8~10 Euro/CER) in the medium term.
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