A new policy for water power

India has one of the highest hydro power potentials in the world, assessed at about 84,000MW at 60% load factor (148,700MW installed capacity). In addition, small hydro capacity of about 6782MW has been assessed. Another 56 potential sites (total installed capacity of 94,000MW) of pumped storage schemes have been identified. However, of the total hydro potential in India, only 15% has so far been utilised, with another 7% under various stages of development.

There are many constraints to quicker hydro power development: they are technical, financial, and managerial, and because many of the potential sites are in hilly areas, they also have to deal with inaccessibility, geological risks, difficulties in acquiring sites and resettling a displaced population. Thus, after the flurry of big projects in the 1950-70s, hydro power development slackened, as a greater reliance was placed on setting up new thermal projects.

Opening up India’s power sector to private participation did not significantly benefit hydro power: only four private hydro projects, totalling 1186MW, are currently under construction, and another seven, totalling 3030MW, are under development.

Perturbed by the slow pace of development, the Indian Government set up a five-member expert committee in August 1996 under M K Sambamurti, a former chairman of the Central Electricity Authority (CEA). Based on its March 1997 report, discussed with state governments and utilities, IPPs and other players, the Indian government announced a new policy on hydro power development on 26 August 1998. It seeks to alleviate, if not resolve, many of the existing problems, and actively to attract much greater private participation.

It is an important first step, but some issues still remain unsettled.

Investor-friendly measures

The policy statement avers that ‘greater private investment through IPPs and joint ventures would be encouraged in the coming years and the required atmosphere, incentives and reliefs would be provided to stimulate and maintain a trend in this direction’.

To meet this aim a number of measures have been taken:

•A simpler procedure for project-approval has been laid down, with power delegated from federal to state governments. A private developer can now be selected through the ‘MoU route’ — one-to-one negotiations instead of competitive bidding — for a project up to 100MW. Previously this method had a project-cost limit of Rs1B (US$24M). Clearance from the CEA will not be required, if the capital cost of the project is below Rs2.5B (US$55M) for a project selected through the MoU route, and below Rs10B (US$240M) for a project whose developer has been chosen by competitive bidding. All projects with inter-state ramifications would still require CEA clearance.

•If a project proposed by a government-owned utility is transferred to a private developer, statutory approvals already obtained will be validated in favour of the latter through a simplified procedure still to be evolved by the federal government.

•Site surveys ‘on an advanced scientific basis’ will be undertaken by federal and state agencies with government and multilateral agency funds, to produce (and if necessary update) detailed project reports, to obtain statutory approvals and to initiate pre-construction activities. The projects at that stage could then be offered to private developers.

•Hydro tariffs will be rationalised, and operational incentives improved. This includes: a premium on the tariff for hydro generation during peak hours (to be determined by the respective electricity regulatory commission); availability factors in the tariff to be reduced from 90% to 85%, to account for silting; and the development of formulae by which geological and other technical risks could be compensated through increases in the project cost.

•Joint ventures for hydro power development should be encouraged between government utilities and private companies, both domestic and foreign. Power from such projects would be purchased by a new federal entity, known as the Power Trading Corporation, and transmitted on lines set up by the federal-owned Powergrid. An appropriate security package would be provided to private investors in such projects, through the opening of letters of credit and recourse to federal fund devolution in the states.

The foregoing are good steps towards the objective of obtaining greater private participation in hydro power. However, these steps must now be developed and implemented with vigour.

Finance

Experience shows that finance is a constraint to hydro development, even more than to other types of resource.

The new policy seeks to alleviate this constraint through a number of steps:

•Grants given to federal hydro utilities will be increased to enable them to complete major projects. These include: Nathpa Jhakri (1500MW); Tehri Stage I (1000MW); Dulhasti (390MW) and Dhauliganga (280MW) of the National Hydro Power Corporation; Ranganadi Stage I (405MW), Doyang (75MW) and Rangit (60MW) of Northeastern Electric Power Corporation. Grants totalling Rs16.16B (US$370M) were made during the last fiscal year: these have been increased to Rs20.70B (US$480M) this year. Moreover, Rs20B (US$485M) will be given to federal utilities over the next three years to enable them to take up 12 new projects totalling 5555MW.

•For new and on-going state power utility projects, appropriate federal fund devolutions will be made under annual state development plans. Supplemental funding through other agencies will also be organised by the federal government.

•Federal-owned Power Finance Corporation (PFC) will continue to be the main financier of uprating and refurbishment schemes for old hydro plants, while another federal financial institution, IREDA (along with other agencies) will fund small hydro projects.

•A new levy on consumers, the ‘Power Development Cess’ has been proposed. The idea came from a federal committee, back in January 1994, and was repeated by the Sambamurti Committee in its report of March 1997. At a proposed rate of Rs0.10/kWh (0.24UScents) the cess might realise Rs30B (US$685M) annually. Two-thirds of the levy from any state will be returned for state power projects, while one-third will be retained by federal government for its own hydro projects and for large hydro projects benefitting more than one state. To impose the levy, and create a National Power Development Fund for the proceeds, federal legislation is required.

Uprating and refurbishment

Rehabilitating old hydro power plants has been a long-felt need.

An effort in real earnest was made in 1987 when India’s federal government constituted a committee to identify the plants which needed uprating and refurbishment and to work out implementation. The committee, comprising representatives of CEA, public-sector engineering major BHEL, and the PFC, visited the old plants, talked to the plant managers and the related utilities, and gave its report. Based on its recommendations and subsequent reviews, 55 plants with an aggregate installed capacity of 9653 MW were identified for renovation, modernisation and uprating. A national uprating and refurbishment (UR) programme was initiated that year (1987) which envisaged: improving operation to reach acceptable safety standards; improving availability and reliability; extending plant life; recovering lost capacity; uprating; and reducing outages (IWP&DC, August 1998, pp 25-27).

Implementation since 1987 has been very slow. Of the 55 plants identified, only 20 have been completely rehabilitated (adding around 971MW). In the meantime, more hydro units have reached a vintage that requires rehabilitation.

Financing has not been a problem: PFC has been funding schemes on a priority basis, and under the federal budgets of the last two years, grants have been given to PFC to enable it to reduce interest rates on its UR loans from 16% to 12%. Moreover, UR schemes no longer need CEA approval. Delays have arisen because owner utilities, mainly the State Electricity Boards, have not expedited UR project reports, approvals, or funding applications, and have been slow at executing the projects.

The new policy notes the slow progress in UR and intends to ‘set up a standing committee to identify the new schemes and for tying up technology, funding and executing agencies’. In effect, it seeks to replicate the efforts made in 1987 under current conditions. While that is commendable, what is really required is to goad federal and state-owned utilities, which operate most of the old plants, into taking up UR with speed, taking advantage of incentives already offered.

For example, the federal government, on 28 October 1995, issued guidelines on introducing private participation in UR. These suggested three options:

•Lease-rehabilitate-operate-transfer.

•Sale of plant to private company.

•Joint-venture between the utility and the private company.

Utilities were also free to work out other innovative options.

It is regrettable that although the guidelines (for both hydro and thermal plants) were issued three years ago there has not been one case of private participation in UR of hydro plants. While private investors share the blame, the owner-utilities have not marketed the idea forcefully to potential investors.

For a private promoter hoping to make an initial entry into India’s hydro power sector, and not wishing to go through the bureaucracy required for a new plant, there cannot be a better opportunity than to undertake UR, in co-ordinated action with the owner-utility.

Small hydro

The new policy is a departure from past practice in that it refers specifically to the role of small hydro (SH). In the past there was little co-ordination in the hydro power sector because conventional projects were in the purview of the federal Ministry of Power (MoP) while SH was the responsibility of the Ministry of Non-Conventional Energy Sources (MNES). Moreover, there was no definition of ‘small hydro’ and each agency interpreted it differently. The Government of India had allowed MNES to evolve policies for promoting SH up to 3MW, with bigger sizes the responsibility of MoP.

Under the new policy projects up to 25MW are promoted by MNES, and most of the funding is provided by its financial arm, the Indian Renewable Energy Development Agency (IREDA). State governments and utilities are told ‘to take up a cluster of small/mini hydro schemes on build-operate-transfer basis, and [make] other suitable packages of financial incentives’ to accelerate SH.

Despite incentives and concessions, SH in India has not been able to attract noticeable private investment. An MNES seminar in August drew attention to the main reasons: lack of a clear SH policy; difficulties in acquiring sites and obtaining government approvals; delay in getting funds from financial institutions; and lack of data on potential sites.

These problems need to be resolved jointly by federal and state governments — all the more, as there is increasingly a realisation in India that future hydro development will be mainly small and medium-sized projects. With a potential capacity estimated between 5000MW and 10,000MW, SH could play a significant role.

Intent and action

The hydro power policy framework has resulted in some steps being taken, but for much else there is only a declaration of intent. Follow-up action should be taken urgently in the latter cases, such as the passage of legislation to impose the power development levy, agreement of further incentives for small hydro, and studies for new hydro and UR potential.

More importantly, past experience has shown that it is not so much the evolution of policy that has been lacking in this sector as its monitored implementation. The problem is aggravated by the fact that, as in the rest of the Indian power sector, the responsibility for hydro development is shared between federal and state governments — and they do not always act with the same speed or direction. This, above all, must be remedied, if the sector is to attract more private participation.