India is endowed with rich hydropower potential to the tune of 148 GW (which would be able to meet a demand of 84 GW at 60 per cent load factor) which makes it one of the most important potential sources to meet the energy security needs of the country.
Propelled by sustained economic growth and rise in income levels, India is poised to face significant increase in energy demand in the next few decades which also translates into higher demand for electricity. The gap in the electricity demand-supply situation is highlighted by the fact that the country experienced a peak deficit of 5.2 per cent and energy deficit of 4.2 per cent in FY 13-14, with the surplus western and eastern regions unable to compensate for the severely deficit northern, southern and north-eastern regions.
Considering an energy elasticity of 0.82, India is projected to require around seven per cent annual growth in electricity supply to sustain a GDP growth of around 8.5 per cent p.a. over the next few years. This requires tapping all potential sources to address the deficit and meet the demand growth for accelerating economic development while taking into account considerations of long-term sustainability, environmental and social aspects.
Climate change and other negative effects of using fossil fuels for power generation along with growing concerns over energy security are driving the expansion of hydropower around the world. Though reservoir based hydropower projects have come under criticism due to CO2 and methane emissions beyond acceptable limits, most hydro-rich countries have followed an integrated full life-cycle approach for the assessment of the benefits and impacts to ensure sustainability. (refer to Installed hydropower generation capacity and share in total generation)
A PwC report on Hydropower in India suggests that the country is endowed with significant hydroelectric potential and ranks fifth in the world in terms of usable potential. As per the latest available data, India has around 36 GW of installed hydropower capacity whereas an additional 13 GW is under construction. This puts the total capacity which is yet to be tapped at around 67 per cent of the potential. Countries such as Canada and Brazil had harnessed around 69 and 48 per cent of the economically feasible potential back in 2009. From a regional perspective, over 93 per cent of the total potential in the north eastern region is yet to be tapped, primarily in parts of the Brahmaputra river basin. The scenario is in sharp contrast to the southern and the western regions where more than 65 per cent of the potential has already been harnessed.
The government of India has, over the years, taken a number of initiatives to prioritise hydropower development and to attract investments in the sector. Key measures include the preparation of a shelf of well investigated projects, which could substantially reduce risk perceptions, streamlining clearance procedures, the provisions of open access and trading as per the Electricity Act 2003, etc.
In a recent appearance at FICCI Summit, Piyush Goyal, Minister for Power, Coal and New & Renewable Energy said, ´The government will soon initiate a dialogue with the States of Assam and Arunachal Pradesh to resolve the issues related with Subansiri hydro project. The government will enumerate benefits that the project will provide to the two States and take local people on board.´
He told awaiting reporters that there were many misconceptions about hydropower. There was a need to create a positive public perception for hydropower as it had the potential to resolve India's power crisis. India has low reserves of fossil fuels and in such a scenario renewable energy was the way forward. (refer to Status of hydropower potential development in India) Goyal highlighted that it was imperative for the States and Centre to work in tandem and facilitate the private sector in procuring hydro projects. It was essential to realize that working in silos will not be beneficial for the larger interest of the country. He added that the government was also contemplating to create a body which would look at long term hydro projects.
The government of India has increased financial allocation, along with other non-financial support, to prioritise hydropower development and increase capacity addition. Accordingly, in the 11th Five Year Plan, the target for hydropower capacity addition was placed at 16.5 GW, which was almost half of the total installed capacity then. However, the achievement, at around 5,400 MW, was well short of the target. The same trend of achievement falling short of target by far can be observed in the previous plan periods too.
Yogesh Daruka, Director - Energy, Energy Utilities & Mining, PwC India, Stated that "India has only developed 33 per cent of the rich hydropower potential of 148 GW. We need responsible hydropower development to enhance this capacity and meet our energy security needs.´ According to Daruka, hydropower development will help provide grid stability, clean and sustainable energy, accelerate economic development and promote integration of remote locations where this potential resides. Concerted action is necessary from policy makers and sector institutions to provide policy clarity, robust institutional mechanisms and enabling infrastructure.
Various factors such as environmental concerns, R&R issues, land acquisition problems, long clearance and approval procedures, capability of developers, etc., have contributed to the slow pace of hydropower development in the past. These issues have been compounded as hydropower development has largely remained under the ambit of State governments (water being a State-specific subject) with varying policies (e.g., upfront premium, royalty power, land acquisition policy, etc.) adopted by the States.
To accelerate growth in the hydropower sector and to bridge the gap between the actual and planned capacity addition, the private sector is being seen as an important stakeholder. The hydropower sector was opened up for private sector participation in 1991. Subsequently over the years, to facilitate projects through PPP/ JV mode, some States have nominated a State nodal agency with an option of equity investment by the State government. However, from 1991 to 2012, the private sector has contributed to about 11.5 per cent of the hydropower capacity addition. So far only about 2,700 MW has been commissioned through the private route, which constitutes less than 7 per cent of the total installed hydropower capacity.
Though private participation in the hydropower sector has gained momentum in the recent past, it still faces impediments in the execution of projects across various stages of the project implementation cycle. The Central and State governments need to create an enabling investment climate for increasing private participation by addressing issues related to safeguards, land acquisition, evacuation, law and order problems, technical challenges and non-appreciation of the risks involved in project development.
Hydropower planning: Planning for hydropower development in India has generally been oriented toward individual projects. However, this approach has several limitations for sustainable development of an entire river basin. Inter-State disputes are another aspect which hinders integrated river basin development for hydropower projects. A large number of hydropower projects with common river systems between adjoining States are held up due to a lack of inter-State agreements and disputes on water-sharing. The Sutlej-Beas dispute between Punjab and Haryana and the Mullaperiyar dam conflict between Kerala and Tamil Nadu are well-reported examples of water-sharing disputes between States. The conflicts in Assam and Arunachal Pradesh on division and utilisation patterns of the Brahmaputra are also emerging.
Financing: Hydropower projects are capital-intensive and financing them, by finding an optimum balance between bankability and affordability, is often a challenge. Although the operating cost of hydro projects are minimal and the project life longer than thermal, there are multiple other factors that make hydropower difficult to finance. Additionally, hydropower development needs long tenure debt (20 years or more) availability of which is limited in Indian capital markets. The constrained financial situation of the distribution sector which is the end user of the power generated also often poses counterparty risks for developers and lenders.
Furthermore, the technical challenges in hydropower development often results in time and cost overrun, posing additional risks for financiers. (Refer to box High capital costs and Long construction period)
Market development: The power market development in India is still at a nascent stage. Though section 63 of the Electricity Act makes competitive bidding mandatory for all power procurement, hydropower projects are exempted under a sunset clause which expires by end 2015 (as per the June 2011 amendment to the Tariff Policy 2006). The deferment for hydropower is based on the recommendation of a Power Ministry taskforce, which cited high risks and uncertainties inherent to these projects as among the reasons why it is difficult for hydro projects to compete with thermal generation on long-term basis.
According to Sidharth Birla, President, FICCI, the current mechanism of bidding for hydro projects involves various premiums which stack risks disproportionately towards the developer vis-a-vis the State and consequently can make projects unviable. Besides, the long gestation period, call for financial mechanisms which factor in such risks to protect developer returns. He added: ´A beginning can be made in treating hydropower projects at par with long term infrastructural projects.´ Furthermore, the current market structure does not allow hydropower developers to realise the potential benefit of meeting peak demand as the tariffs for both peak load and off-peak load are undifferentiated. Though the Enquiry Committee constituted after the two major grid failures in the country on 30 and 31 July 2012 opined that ´a review of UI mechanism should be carried out in view of its impact on recent grid disturbances. Frequency control through UI may be phased out in a timebound manner and generation reserves and ancillary services may be used for frequency control´, an appropriate regulatory mechanism for implementation is yet to be set in place.
Safeguard issues: Construction and operation of hydropower dams can significantly affect natural river systems as well as fish and wildlife populations. Furthermore, hydropower projects involve submergence causing the displacement of project area people. The rehabilitation of project affected people is also a major issue which is more pronounced in the case of storage-based hydropower projects, as was evident during the development of the Tehri dam. The project met with mass protests and public outcry on the issue of safety, environment and rehabilitation, resulting in unusual delays (the Tehri dam was commissioned more than 25 years after R&R was started).
Hydropower projects often require forest areas for their implementation and compensatory afforestation on non-forest lands. Progress of many projects has been affected on account of delay and non-clearance on environment and forest aspects. These factors have resulted in negative public perception about hydropower projects resulting in sustained opposition to project construction in many cases often resulting in time and cost over-runs.
Enabling infrastructure: A number of hydropower projects are located in remote sites in States which do not have adequate demand for electricity. This creates the requirement for developing enabling infrastructure for power evacuation. The ´chicken neck´ presents geographical constraints in developing requisite transmission infrastructure for hydropower evacuation from the north east. There are certain other challenges for the coordinated development of the transmission network, e.g. identifying beneficiaries well in advance, developing excess evacuation capacity keeping in mind the future development of projects (especially where there are Right of Way (RoW) issues).
Furthermore, the Plant Load Factor (PLF) for hydropower projects is typically less than 50 per cent, as a result of which significant transmission capacity is under-utilised. All these result in higher transmission costs. Hydropower projects also require the development of associated infrastructure such as roads and bridges in the area. Inclusion of the cost of development of such associated infrastructure increases the cost of power generated affecting project viability and sustainability. Lack of infrastructure such as schools, hospitals and difficult access to sites often become blocks to moving skilled manpower to difficult project sites.
A roadmap to rescue
Ministries, departments and State governments need to work together collaboratively and efficiently, in a coordinated manner, to achieve policy goals and capacity addition targets. Alignment of processes, structures and institutional framework is necessary to achieve this. For example, the National Solar Mission with a clearly articulated goal of 20 GW by 2020 helped get commitment from all stakeholders and ensured efficient inter departmental coordination for achievement of the well laid down goal.
A basin-wide hydrological simulation model needs to be developed under the guidance of Central Electricity Authority (CEA)/Central Water Commission (CWC) to understand the effects of one project on another in a cascade. This will reduce project risks, encourage planning and operation on a broader scale, and allow planners and developers to understand how changes to one project might affect others in the system.
Allocation of hydro sites to developers needs to be done in a fair and transparent manner, keeping in mind the optimal development of the river basin. Specifically, the State government needs to ensure project allocation on inter-State rivers in line with the CEA´s/CWC´s optimal development plan of the river basin.
A comprehensive cost-benefit analysis between different project allocation models (e.g. MoU vs competitive bidding) needs to be carried out on a case-to-case basis based on project specific issues. Further, the project allocation model needs to give due weightage to the financial capacity, technical capacity as well as credibility of developers.
State governments are required to set up an ´investment boards´ to facilitate private investments across multiple infrastructure sectors including hydropower. These boards will be expected to address issues related to interdepartmental coordination and avoidable delays in according approvals and clearances.
Dedicated transmission infrastructure may be created for evacuation of power from the north east. For example, Green Energy corridor for the evacuation of renewable energy projects from States such as Rajasthan and Tamil Nadu is being constructed.
Building pooling sub-stations in locations having large concentration of hydro resources is an efficient option which help developers reduce the project cost on account of last mile connectivity.
Capital markets need to be deepened to help provide long-term debt financing for the capital-intensive nature and high gestation periods of hydropower projects. Initiatives such as India Infrastructure Finance Company Ltd. (IIFCL) for infrastructure lending have been taken. The government of India needs to also encourage suitable innovative products. E.g. tax-exempt bonds focussed on the hydropower sector
Given the large-scale requirements of infrastructure and hydropower development, many more initiatives are required to channelise long tenure funding (from pension funds, banks, etc.) to these sectors. The government of India may create a special hydropower financing scheme (e.g. the Accelerated Generation and Supply Programme to State utilities) providing loans to power utilities at a subsidised rate of interest.
Multilateral institutions and green funds have, in recent times, shown some appetite to fund both public and private sector hydropower investments and can be a good source for investors if a sound business case and risk mitigation mechanism can be demonstrated.
The government needs to consider making it mandatory for power distribution utilities to purchase a fixed amount of hydropower. In such hydropower purchase obligations or HPOs provide assurance to developers by guaranteeing the purchase of electricity and make projects much more bankable.
In all, hydropower developers need to take a longer term outlook, undertake inclusive development through higher benefit sharing with affected communities and enhance capacity for project execution & financing. The industry may not be looking for subsidies but commercially viability of the hydropower projects.
´The project allocation policy was faulty where without appropriate studies and clearances, projects were awarded and later they were either closed or faced litigation resulting in delays and loss to industry,´ concluded Jayant Kawale, former Managing Director - Hydro & Renewables, Jindal Power Limited.
Long construction period
The associated transmission system for evacuation of Kameng (600 MW) power is estimated at Rs 11,000 million, about 50 per cent of the cost of the generation project.
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