A measure of success4 November 2002
To incentivise disinterested private developers in the Indian hydro sector, the government issued a new hydro policy in 1998. But as IM Sahai reports, the different measures have not been as enticing as first hoped
HISTORICALLY, India has relied on hydro power to meet its energy needs. Immediately following independence from colonial rule in 1947, big multi-purpose hydro projects were set up which exploited the power potential of some of the country's major rivers. These projects were constructed either by the state governments and their agencies (assisted by central funding) or by new generation utilities wholly or partly owned by the federal government.
Smaller projects were undertaken by state electricity boards (SEBs), created under a 1948 statute for power development in the major states. As a result, there was significant hydro development in the country, both in absolute terms and in its share of total installed power capacity, which reached over 50% in 1962.
The situation, however, changed during the 1970s. A steady deterioration in the operational and financial condition of many SEBs meant they had difficulty in even maintaining their existing assets, let alone invest in new power plants of substantial capacity. The idea of setting up new hydro plants with a long gestation period was particularly dissuasive to most SEBs, since it meant locking up their funds for a considerable period without returns. Funds were hard to come by as internal resources were drying up and institutional financiers balked at lending to utilities with uncertain financial positions. As with the development of the rest of the power sector, federal government was expected to step in to breach the gap, but it had its own limitations.
It was in this context that India's power sector (including hydro generation) was opened up progressively from 1991 to private participation and investment. A set of incentives and concessions were offered over the subsequent years to prospective promoters. These included 100% ownership of the project, a debt-equity ratio up to 4:1, availability of funds from domestic public financial institutions, a five-year holiday from federal taxes, and a concessional rate of custom duty on imported plant and machinery.
Despite all this, uptake of private development in the country's hydro sector remained poor. Part of it reflected general apathy about entering the hydro sector, and the reasons behind this are common to other countries: high costs, ecological issues, opposition from the green groups, funding issues, and political interference. Furthermore, India had additional constraints in the form of bureaucratic delays, outdated procedures, division of authority between federal and state governments, and a general disinclination by the domestic financiers to fund new hydro projects.
The federal government itself recognised and admitted that such constraints were hampering hydro power development in the country. It identified them as technical and financial deficiencies; tariff-related issues and managerial weaknesses.
Other constraints were geological surprises (especially in the Himalayan region where underground tunnelling is required), inaccessibility of sites, delay in land-acquisition, resettlement of project-affected families, and law and other problems specially in areas affected by insurgency.
In that light, the federal government formulated a new Policy on Hydro Power Development and announced it in August 1998. Looking at the slow pace of hydro development to date, the Policy had the following objectives:
• The addition of 9815MW of hydro capacity had to be achieved during the 9th Five-Year Plan (ending March 2002). Of this, the federal utilities were expected to contribute 3455MW, state-owned utilities 5810MW, and private promoters 550MW.
• Faster exploitation of hydro potential by taking up new projects. This needed survey and investigations of new sites, approval to pending project proposals, activation of schemes lying dormant for various reasons, and pre-project work in identified schemes.
• Promoting small and mini hydro projects.
• Strengthening the role of the public sector in hydro, particularly in certain specific categories of hydro projects.
• A greater private investment through IPPs, and joint ventures with them. The Policy stated that the required atmosphere, incentives and relief would be provided to stimulate and maintain a trend in this direction.
The 1998 Policy envisaged three steps: (a) basin-wide, detailed studies by the Central Electricity Authority (CEA), the technical wing of federal Power Ministry; (b) survey and investigations of the various sites by the federal/state hydro utilities; and (c) undertaking inter-state projects.
The pace of basin-wide studies by the CEA has been slow and if any provisional results have been reached, they have not been publicised. In the mean time, CEA has also initiated studies to prioritise the various undeveloped hydro sites so that the potential of the feasible hydro projects could be optimally developed in the coming years.
In order that the federal utilities could methodically take up the development of projects, the Government has also evolved a 3-stage process:
• Stage I: survey and investigation and preparation of feasibility report.
• Stage II: Detailed investigation, preparation of detailed project report (DPR) and pre-construction activity (including land-acquisition).
• Stage III: Execution of the project after investment decision by the federal government.
Financial powers have been suitably delegated to approve expenditure at each of the above stages. NHPC has estimated that this process may drastically cut down the period of pre-construction activity in a federal project from the current 87 months to 36 months.
With regards to survey and investigation, a major action is being taken by NHPC. It has initiated surveys in the river basins of Subansiri and Siang in the north-east, with their total potential estimated at about 20,000MW. In addition, it is also undertaking surveys for Parbati-stages I and III (total about 1700MW) in Himachal Pradesh.
There had been only a minimal success in initiating projects located on inter-state rivers. The state-owned 1450MW Sardar Sarovar project on Narmada river was held up for half a decade due to a litigation pending before India's Supreme Court, and work could be resumed only in late 2000 after the Court gave a favourable judgement. The 1100MW Upper Krishna Project, then being promoted by New Zealand's AsiaPower, could not receive federal clearance for years because of a prolonged dispute between the riparian states over water-sharing in the river Krishna. A scaled-down version of that project would now be developed by KPC, as AsiaPower had since quit. Four projects on another south Indian river, Kaveri, are held up because NHPC cannot make the states of Tamilnadu and Karnataka agree to terms. Such is the case with the 345MW Mahadayi project, on the river of the same name where the dispute over water-usage is between the state governments of Karnataka and Goa.
The 1998 Policy had listed six steps specifically to make it easier for hydro developers, especially the IPPs, to take up projects. These were: (i) easier process of project-approval; (ii) a simple transfer of clearance if the project-ownership were to change hands; (iii) joint-ventures between government-owned utilities and IPPs; (iv) government support for pre-project action; (v) rationalised tariff norms; and (vi) coverage of geological risks.
Looking at the hesitation by the IPPs in the preceding years to invest in India's hydro sector, the Policy envisaged that a federal or state utility would undertake pre-construction action on some new schemes on its own, such as survey and investigation, obtaining all approvals etc. At that stage, the concerned utility would offer the project to an IPP on a stand-alone or joint-venture basis. The pre-construction cost incurred until then would be recovered in due course from that IPP.
The requirement of obtaining CEA's approval to a project was also liberalised by changing the basis from its capital cost to its capacity (above 100MW).
The hydro tariff was also proposed to be rationalised to (a) allow a premium on peak-time tariff (b) have a common rate for primary and secondary energy, and (c) compensate for geological risks that are actually encountered in executing the project.
In view of the difficulties encountered during the pre-construction period, such as land-acquisition, resettlement of project-affected families and catchment area development, the Policy required state governments to each create a specialised agency to tackle these issues. The resultant costs were to be recovered from the project developer (who, in turn, would be allowed to include those in his tariff).
In these areas too, the Policy has been but partially implemented. While the process of federal approvals, whether by CEA or Ministry of Environment & Forests (from an ecological angle) has been made simpler, the clearances required from State government and its agencies still take time. In fact a regressive step taken even by the federal government in its new Electricity Act is to continue the licensing of hydro power projects, while abolishing it for all other power-generation activity.
The 'shelves' of projects to be offered by states to IPPs have still to materialise, neither has any state as yet set up an agency to undertake land-acquisition etc. for the projects. Even the joint ventures between public and private sectors in hydro have not taken off. An attempt by NHPC a few years back in this regard by calling for global bids to jointly execute its future projects came to nothing.
As a result, the entry of IPPs in India's hydro sector has as yet been insignificant. In the first flush of the opening of this sector to private investment in the early 1990s, a dozen or so memoranda of understanding were signed between the IPPs and some predominant hydro states of the country like Himachal Pradesh. Even the preliminary, in-principle clearance of CEA was obtained for them. However, until now, less than 2000MW of capacity of medium or big size has been or is being set up through such IPP plants.
As envisaged in the 1998 Policy, the definition of small hydro has been changed to cover plants of a capacity of 25MW and below. Previously it was kept below 3MW or under 15MW. Following the new definition, it is estimated that a small hydro potential of almost 10,000MW exists in the country. However, current installed capacity is still less than 400MW.
Reasoning behind this has been the lack of attention on the part of SEBs which were initially entrusted with the task of small hydro development. In recent years, a well-devised package of incentives, along with funding by the federal-owned Indian Renewable Energy Development Agency (IREDA) has attracted IPPs to this area. Most of the recent small hydro development has however been by domestic private companies.
Uprating and refurbishment
The Policy expects that the national programme of uprating and refurbishment (U&R) of old hydro plants in the country under implementation from the last decade, would be completed quickly. Under that programme, 55 plants (9653MW) were to be taken up for U&R. However, to March 2002, U&R work on only 36 plants could be completed. In Phase-II now in progress, 100 plants (11,022MW) are to be refurbished over the next ten years. These include the spill-over of 19 plants (652MW) from the earlier phase.
In U&R, it is seen that while the federal utilities like NHPC had taken timely action regarding their own plants, the same had not been done by SEBs. Despite a 1995 set of guidelines to invite private participation in U&R, neither the IPPs nor SEBs had shown interest in that area. The federal government has, in the recent years, taken up a few new initiatives to speed up U&R. The federal-owned Power Finance Corp (PFC) has been made the lead agency to help in the process. PFC would give loans at subsidised rates for U&R schemes and, in turn, would be recompensed out of the federal budget. PFC has also short-listed domestic and international consultants/agencies which would undertake U&R studies and do the actual work in U&R projects to be funded by PFC.