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Cover Story | August 2011

Hydropower initiatives

In the 12th Plan period, the private sector is expected to play a major role in capacity building - demoting for the first time the dominance of Central government agencies, says PK Chaubey.

The government is worried about the falling share of hydropower in the energy basket. India's efforts to build large hydroelectric plants have run into trouble. Many projects have been delayed due to crucial factors such as the dearth of adequately investigated projects, environmental concerns, resettlement and rehabilitation (R&R) issues, land acquisition problems, regulatory issues, long clearance and approval procedures, power evacuation problems, dearth of good contractors, and in some cases, inter-state issues and law and order problems, which have contributed to the slow pace of hydropower development. However, the government is keen to accelerate hydropower development considering its potential and its intrinsic characteristics in promoting energy security and flexibility in system operation.

Ranking study by CEA

In 2001, the Central Electricity Authority (CEA) introduced a ranking study which prioritised and ranked the future executable projects. As per the study, 399 hydro schemes with an aggregate installed capacity of 106,910 MW were ranked in A, B and C categories depending upon their attractiveness. This was followed by a 50,000 MW hydro initiative in which preparation of pre-feasibility reports of 162 projects was taken up by CEA through various agencies. The project feasibility reports (PFRs) for all these projects have been prepared and projects with first year tariff less than Rs 2.50/kWh have been identified for preparation of detailed project reports (DPR).

Gearing up for the 12th Plan

Building large hydropower projects takes up to 10 years to build - from concept to commissioning. The construction period alone is five years on an average. Apart from surprises and shocks during the construction phase, hydropower projects are also known to face delays in the drawing board and clearance stage. In the 12th Plan period, hydropower capacity of around 30,000 MW is slated for addition, which is almost twice the target in the ongoing 11th Plan period. Keeping this in mind, the Central Electricity Authority (CEA) in 2006-07 embarked on an advance action plan, identifying a shelf of projects. This would form the basis of the 12th Plan capacity addition, and to some extent, compensate for delayed commissioning of originally-conceived projects.

As per the "Hydro Development Plan for the 12th Five Year Plan," a shelf of 109 hydroelectric schemes aggregating to 30,920 MW has been identified, which includes 46 schemes under the private sector with an installed capacity of 12,007 MW. The CEA expects 25,316 MW of hydro capacity additions to be feasible for commissioning during the above mentioned plan. To achieve the feasible 25,316 MW, an investment of Rs 151,896 crore has been envisaged, with a broad equal division between Central, state and private enterprises.

Tariff-based bidding

The Power Ministry proposed a key change in the national tariff policy that would make it mandatory for private players to participate in bidding for the allocation of hydro power projects. At present, hydro projects are offered to companies under a memorandum of understanding (MoU) route. Under this, companies are expected to offer host states some free power and sign power purchase agreements with other beneficiary states. The move is aimed at creating a level-playing field between private and public sector companies and keeping in check electricity tariff by restraining private players from offering upfront premium to state governments to bag projects. Hydro PSUs are not allowed to pay upfront premium for the allocation of projects. As a result, they have lost many projects to private players. States have been allocating projects on the basis of upfront premium as they want to optimise their revenues from water resources.

The policy change would introduce a transparent system of bidding for projects. A host of private sector companies such as Reliance Power, Lanco, LNG Bhilwara, GMR, GVK, Jindal Power, Jaiprakash Hydro are likely to get impacted as some of these players have bagged projects from state governments like Arunachal Pradesh, Himachal Pradesh and Uttarakhand by offering better financial terms and free power. However support of the states is essential to start the process of tariff-based bidding in the hydro sector. In the past, state governments have been found to be the biggest hurdle to disturb the level-playing field between public and private sector companies in the hydro sector. Some states also offered projects where DPRs were prepared by public sector companies to a private sector entity offering better financial terms.

Merchant power

Earlier, state-owned hydropower companies were only allowed to sell electricity to pre-identified customers through long-term PPAs, barring them from getting the highest rates in an open auction. Lately, such companies have been allowed to sell as much as 40 per cent of the power generated from their projects to the highest bidder (merchant power) to help them compete with private sector rivals. This will significantly help government-owned companies such as NHPC, North Eastern Electric Power Corporation, Satluj Jal Vidyut Nigam and Tehri Hydro Development Corporation. However, a word of caution. While merchant power capacities were viewed as a high potential segment until last year, the wild fluctuations in merchant tariffs over the last year have infused caution and shown how power company financials may be adversely affected by swings in these tariffs.

The merchant power tariffs, through the bilateral trade route, have fallen from an average of Rs 7 and Rs 6.4 a unit during 2008 and 2009 to Rs 4.93 a unit in 2010. In 2011, the rates may rise again in the short term, but the additional power capacities of around 20,000 MW that are planned to be commissioned during the next 13 months, will eventually exercise a moderating influence on tariffs. More power sold through the short-term route over the last one year also shows the moderation in tariffs. On an average, 10 per cent of the total power generated was sold through the short-term route over the last one year as against four per cent and 3.3 per cent in previous years.

However, the fact that power major NTPC today operates just 150 MW of merchant power capacity out of its installed capacities of 33,690 MW of power today reflects the government's reservations about the sustainability of high merchant power tariffs over the medium term. According to estimates of stock broking firm Edelweiss, merchant power prices could be at around Rs 4 a unit by 2013-14. As more power capacity is being added across the country, states are expecting to source more power through long-term power purchase agreements, reducing their dependence of merchant power.

Competitive Bidding

The government exempted hydropower companies from competitive bidding to develop a project and instead reinstated a cost-plus tariff regime until December 2015. This means utilities can charge a price that factor in their cost and a certain return. The government discontinued the cost-plus tariff regime in favour of competitive bidding.

The Way forward

Role of private sector: In the 12th Plan period, the private sector is expected to play a major role in the capacity-building exercise - demoting for the first time the dominance of Central government agencies. Out of the total shelf of 30,920 MW, the sector is expected to contribute 12,007 MW ahead of the Central government's 11,622 MW. State government enterprises are expected to contribute 7,291 MW-the lowest in the three broad ownership groups. It is also encouraging that the private sector is taking a very proactive role in shoring up India's hydropower capacity addition drive. This is commendable because setting up large hydropower projects is risky-and certainly not the fastest means of generating returns on capital. That the private sector believes in the long-term benefits of India's hydropower growth story is very reassuring.

Mitigation of R&R, environmental concerns: Most hydro electric projects are getting bogged down by opposition by environmentalists and locals. Resistance from the local population needs to be handled deftly. Project developers need to have a very inclusive approach of dealing with rehabilitation and resettlement (R&R). Even NTPC's pioneering idea of offering insurance cover to all project-affected people and their property is a very welcome move in this direction.

Greater synergy between Centre and states: The past few years have seen a great deal of success coming from joint ventures (JVs) between Central and state governments. For instance, the country's biggest hydropower scheme-the 1,500 MW Nathpa Jhakri project-materialised only when a JV between the Centre and Himachal Pradesh was formed to implement the project. Over 10 years in the making, the project was earlier to be developed by Central public sector unit NHPC. The same Centre-state model proved successful in the Tehri, Sardar Sarovar and Narmada Sagar projects. While PSUs have experience in project management and implementation, the involvement of state governments help address local issues and is particularly helpful to quell project-related social unrest.

The biggest advantage of large projects is that they help in elevating the socio-economic conditions of the local population. It is also pertinent that much of India's hydropower potential exists in economically backward areas-mainly the north-east. The synergy between clean energy and social uplift is striking. It looks like the country's vast untapped hydropower potential is finally becoming a tool of socio-economic development.

The author works for Accenture India and can be contacted at pkchaubey_iitk@yahoo.com
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