Refurbishment - the story so far

16 January 2006

I M Sahai discovers how far India’s uprating and refurbishment programme has progressed over the past few years, and investigates what financing is available for these schemes

The active involvement of India’s federal government and its agencies has led to a boost in the country’s uprating and refurbishment (U&R) programme. The work on India’s hydro plants is being done in a methodical manner, based on a nationwide survey; a comprehensive programme of action involving uprating, renovation, modernisation, and sometimes life-extension; formulation of appropriate schemes by the owner-utilities, often with professional consultants’ help; funding by the federally-owned Power Finance Corporation (PFC) and other sources; and oversight by Central Electricity Authority (CEA), the technical wing of India’s Ministry of Power.

For a hydro-rich country like India, which set up its first small hydro project in 1897, the problem of plant ageing is not a unique phenomenon. In fact, a past survey had revealed that out of the 585 hydro generating units then existing, 46 were over 50 years’ old, and another 128 were in the 30-50 year age group.

However, until the 1980s, uprating and refurbishment was an activity left largely to the will and resources of the owner-utility. Most of the latter were the State Electricity Boards (SEBs) or other state-owned agencies. As Mr. Shyam Wadehra, Director (Projects) in PFC put it succinctly: ‘Most of the SEBs gave a very low priority to renovation and uprating of their hydro plants.’

Apart from ageing, a major problem faced by hydro plants, particularly in the Himalayan region, is erosion of equipment while operating during the monsoon season with water laden with silt containing quartz. This causes extensive damage to runner blades, guide vanes, and under-water parts, which thus need replacement much sooner than their normal life-span.

Recognising the need to push through a timely U&R action on a nationwide scale, in 1987 the federal government initiated a comprehensive survey of the hydro plants in the country which needed work. Based on the data gathered, the original phase of the U&R programme identified 55 hydro stations, comprising 193 (out of a total 211) generating units having an installed capacity of 9653MW.

The works required to be undertaken involved one or more of the following: replacement of obsolete/derated equipment; installation of more efficient runners; change of stator and rotor winding insulation; modernisation of excitation and governing system; and computerisation of control systems.

It was expected that after the work on the 193 hydro units was completed, an extra 2531MW of capacity and around 7.1BkWh of extra energy would have become available. Unfortunately, implementation of this programme remained slow. Up to March 2000, two years before the extended deadline for its completion, U&R work had only been completed on 25 stations (5791MW), with benefit of 1313MW.

The slow progress of the programme was attributed to a variety of causes on the part of the owner-utilities. These included procedural delays, non-implementation in a phased manner, non-availability of timely shut-down, financial constraints, and even force majeure.

In the subsequent years, the federal government undertook a series of initiatives to push through the U&R programme:

• The original programme of action following the 1987 survey (and its reviews) was termed as Phase-I, with its completion slated by March 2002 (marking the end of India’s IX Five-year Plan).

• PFC was designated as one of the nodal agencies to assist the owner-utilities in drawing up their U&R schemes and to fund those.

• To attract private investment and participation in U&R, detailed guidelines were issued in October 1995 by the federal government.

• A Standing Committee of officials from CEA, PFC, certain select owner-utilities, and equipment-major BHEL was set up to identify new hydro plants needing U&R in what was termed as Phase-II of the programme. Fifty-nine such stations (214 generating units; 10318MW) were identified.

• Based on this, CEA drew up a National Perspective Plan in 2000. To be implemented over a twelve-year period to 2012, it comprised Phase-II and spill-over schemes of Phase-I. Priority among the identified schemes was laid down in consultation with the owner-utilities.

• As an additional funding measure, the federal government initiated an Accelerated Generation and Supply Programme (AG & SP) under which U&R schemes were made eligible for concessional finance until March 2007.

• A U&R scheme costing up to Rs. 5B (US$113M) in capital expenditure would not need CEA’s prior approval.

• Concession in custom duty was given for equipment imported for a U&R scheme.

• For refurbishment of small projects, the federal government announced a special set of financial subsidies, their rate depending on the location of the project (maximum for hilly regions) and its size in items of installed capacity.

• The 1998 Hydro Power Policy had already emphasised the necessity for timely U&R action. The National Electricity Policy announced in February 2005 renewed this by pinpointing U&R as an area of concern and laying down policy guidelines. These were subsequently expanded into action points.

National perspective plan

As discussed earlier, following the formulation of the federal government’s policy on Hydro Power Development in 1998, CEA prepared a ‘National Perspective Plan’ in 2000, to be executed to 2012.

CEA reported that at the end of September 2005, 53 hydro schemes having an installed capacity of about 8584MW had been refurbished. An aggregate capacity of about 2071MW had been restored in these schemes, at a total cost of US$315B. Of these 53 schemes, 40 were state-owned with the balance belonging to federal utilities.

As per the plan, another 27 schemes (5040MW) were scheduled for completion, yielding a benefit of 463MW. During the XI Five-year Plan (2007-12), a further 59 schemes (8534MW) would be taken up to yield 5461MW. Of these aggregate 86 (27+59) schemes, 10 are federal-owned and 76 state-owned. The total cost of this work is estimated to be around US$1.05B.

Financing the plan

A variety of funding has been made available for undertaking U&R in India. The large federal utilities have generally utilised their own internal resources for this, while the others (especially the SEBs) have looked to external sources, both domestic and overseas.

Role of the PFC

In this regard, the New Delhi-based Power Finance Corporation has played a key role in more ways than one. Set up in 1986 by the federal government to supplement funding of the domestic power sector, PFC became involved in U&R following the 1987 survey.

PFC had, apart from lending funds to the owner-utilities, also taken certain pro-active steps for U&R, such as: coordinating action with the owner-utilities on the drawing-up of U&R schemes by the latter and submission to PFC; registration of consultants in that sector; pre-qualification of quality vendors; preparation of model bid-documents; and in-house monitoring of the progress of U&R schemes funded by it.

Up to the end of September 2005, PFC had given an aggregate 95 loans for the U&R of 50-60 hydro schemes. The total amount sanctioned through these was about US$340M, of which about 45% had been disbursed to the borrower-utilities.

Apart from utilising its own resources, PFC also had access to the federal funds earmarked under the Accelerated Generation and Supply Programme (AG & SP). The latter was initiated by the federal government to obtain an enhancement in electric power through schemes (such as U&R) that are quicker-yielding than a new, greenfield power project set up from traditional sources. PFC was designated as the nodal agency for disbursing finds under this programme.

The AG & SP programme, to continue till end-March 2007, envisages the following:

• Funds under it would be given only to the State-owned projects (and not to the federal or private projects).

• The eligible schemes would be U&R, other quick-yielding generation projects such as on-going hydro projects due to be commissioned by 2007, or those based on renewable sources.

• Funds were to be given up to Rs. 10M (US$226,144) per year to a utility as a grant, to undertake studies ‘which help to achieve policy objectives of the Government relating to power sector’. These include U&R studies.

A federal subsidy of 3% (4% for projects located in the North-eastern region) on the interest paid for PFC’s loans, was available under the AG & SP. A provision of about US$300M had been made by the federal government under this programme, which would be sufficient to finance U&R schemes costing up to US$1.8B.

Other sources of finance

Apart from PFC, two other federal financial institutions – Rural Electrification Corp. (REC) and Indian Renewable Energy Development Agency (IREDA) – are also finding U&R.

Even though PFC and these federal institutions have remained the major source of finance for U&R schemes, many other agencies and modes for funds offer finance. These are particularly useful for owner-utilities who are either not eligible for PFC funding or prefer to look at other sources. The latter includes:

• Suppliers’ Credit: Such credit is available from both the original equipment manufacturer (OEM) and the vendor of U&R equipment and machinery. In some cases, the EPC contractor has also been extending such credits.

• Banks and Financial Institutions: Over the past few years, the domestic commercial banks and financial institutions (FIs) had gradually got over their disinclination to lend to the cash-poor SEBs in general and the long-gestating hydro schemes in particular. As for the overseas Banks and FIs, lines of credit from them had been available for a while for bankable schemes. Thus, Germany’s KfW lent DM 46.5M in June 1995 through PFC for the U&R of Koyna (Stages I and II, 560MW) in Maharashtra, and Hirakud (stage I–units 3 and 4,48MW) in Orissa.

• Export Credit Agencies: ECAs of certain countries could prove to be a good supplemental source for funds. The US’s Exim Bank and Japan’s JBIC are two such agencies which have lent to other power projects in India recently.

• Country Credits: Under bilateral agreements at Government-level between India and many developed countries, concessional credits had long been available from the latter and utilised in power projects in India. Some of these countries such as the UK, Germany, France, Japan (and the erstwhile USSR) had also been the original sources of hydro power equipment installed in lndia. Their credits could even be utilised for U&R In fact, UK’s DFID, under a UK£25M (US$43.9M) energy grant, had funded the U&R of Hirakud hydro project in Orissa state (stage I- units 1 and 2, 75MW).

• Multilateral Credits: Multilateral financial institutions such as the World Bank, IFC and Asian Development Bank have been active in the Indian power sector for the last three decades. They also funded power efficiency-improvement programmes in the early-1990s, the World Bank had part-funded the U&R of the 712.8MW Sharavathi hydro station of the former Karnataka Electricity Board in south India. These agencies, however, need to be more actively involved in this regard.

National electricity policy

Despite the various initiatives taken by the Government and its agencies, the U&R programme in India was still not proceeding at the pace the former would have liked it to achieve. This was particularly disturbing in the light of the various federal programmes to promote hydro power in the country and to achieve at least a 30:70 ratio.

Following the introduction of the Electricity Act in 2003, the federal government announced a National Electricity Policy on 12 February 2005. Among the areas pinpointed for future action was renovation and modernisation (R&M) of power plants. The Policy laid down a three-point guideline.

• 5.2.21 - Renovation and modernisation for achieving higher efficiency levels needs to be pursued vigorously and all generation capacity should be brought to minimum acceptable standards. The Government of India is providing financial support for this purpose.

• 5.2.22 - For projects performing below acceptable standards, R&M should be undertaken as per well-defined plans featuring necessary cost-benefit analysis. If economic operation does not appear feasible through R&M, then there may be no alternative to closure of such plants as the last resort.

• 5.2.23 - In cases of plants with poor O&M records and persisting operational problems, alternative strategies may need to be considered to improve the efficiency to acceptable levels of these power stations.

Detailed guidelines were subsequently issued by the federal government for undertaking U&R and life extension, both of thermal and hydro plants, suggesting separate action depending on whether a plant was operating on a plant-load factor (PLF) below 40%, between 40-60%, or above 60%.

PLF below 40%

If the station were closed for more than one year, the decision whether to revive or scrap it should be taken by the owner in talks with a professional consultant. Any scrapping would need the prior approval of CEA. For the running units showing PLF of less than 40%, the performance could be improved by adopting better O&M practices and by using essential resources like spares, trained manpower, etc. Further improvement could be brought about by adopting ‘need-based’ U&R works and also life extension wherever feasible.

PLF 40-60%

In the case of such plants, such need-based R&M works should be identified immediately and consequent action taken, as suggested for plants below 40% PLF.

PLF above 60%

For such plants, fuller efforts should be made to improve plant performance through pro-active steps such as the latest O&M practices and life extension studies.

It is expected that the entire U&R and life extension works in the identified plants would be completed by the year 2007. This was to be ensured by adhering to the time-schedule, tying up finances with PFC and close monitoring.

While the policy enunciated as above is comprehensive, the difficult part lies in its implementation. For example, how is an average SEB, itself run inefficiently and also suffering from an energy shortage, get to be convinced that an uneconomic plant ought to be closed down? What about the consequent aggravation of power deficit of that SEB? How would it convince the political leadership on one hand and its consumers on the other? And what about the Unions of its plant employees, who until then would have been getting their pay and perks irrespective of the state of the plant?

What could be done?

As the present federal government in India has discovered, there are no easy solutions to some of the country’s infrastructure issues. In the case of U&R, the progress of the current programme could be increased by certain key measures, based on past experience and practical considerations:

• Some of the U&R eligible hydro plants belong to utilities either wholly or partly owned by the federal government. The latter needs to compel all such utilities to fall in line with its National Plan and to initiate U&R measures on a priority basis so as to give the necessary push to the programme.

• Most of the identified plants are owned and operated by SEBs or other state utilities. Based on the past 15 years’ experience of dealing in U&R with these utilities, some additional (if not new) steps need to be introduced. There has to be a closer monitoring and review of their U&R plans by the Ministry of Power and federal agencies such as CEA. The state governments have to be persuaded to release counterpart funds to SEBs that are already in receipt of federal U&R funds, to allow them to formulate specific U&R schemes. The annual federal-state discussions, prior to the fixation and release of annual fund devolutions by the federal government, could also be utilised for this purpose.

• With the national U&R programme already extended until 2012, the AG&SP financing would also need to continued beyond 2007 for another five years.

• Currently PFC funding, both out of its own resources and under AG&SP, is tied to a few conditions such as the borrowing SEB undertaking power-sector reforms. For practical reasons, these conditions may need to be selectively relaxed.

• While private investment and participation in U&R has been rare, it has been quite a success in setting up new small and mini hydro projects (covering a capacity of less than 25MW each) in many hydro states such as Himachal Pradesh, Punjab and Karnataka. Fresh efforts are required, with appropriate policy incentives by the various state governments and backed by the federal government, to attract such private investment in U&R.

Author Info:

I M Sahai is an independent consultant in the power industry

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