Taking the initiative

India is a hydro-rich country and needs to develop its power potential fast. There are three main reasons for this. Firstly, even with a low per capita consumption of electricity – a mere 606kWH per annum as in the last fiscal – the country is suffering acute power shortages. There is also a peaking-power deficit, as the share of hydro power in the total installed capacity has steadily fallen from the mid-1960s – and has dipped below an ideal 40% from the ‘80s. Most of the rich hydro potential in India remained undeveloped, especially in the states along the north and northeastern Himalayan belt, where the bulk of this potential is located.

The last comprehensive hydro survey, completed in the 1980s, showed an economically exploitable hydro potential of around 84,000MW, at 60% load-factor. This worked out to an installed hydro capacity of around 150,000MW. Yet until now, just over 32,000MW had been installed. The bulk of this potential lay in five States – Arunachal, Uttaranchal, Uttar Pradesh, Himachal Pradesh and Jammu & Kashmir. However, against a possible 102,000MW there, the aggregate installed capacity in these states was a mere 6838MW, with another 6253MW under construction.

The capacity addition in hydro in recent decades has not grown proportionate to the overall capacity increase. From a high of 50:50 in the year 1963, the hydro:non-hydro ratio has been steadily falling, dipping to a low of 25:75 by 2003. The resultant lack in peaking power had further aggravated the energy deficit in the country, which was already over 7%. The peak-time shortage was officially assessed to be around 9% in the first half of fiscal 2005; experts however estimate this to be closer to the 12 – 15% range, with many areas of the country suffering power-cuts, especially during the summers. It was in this context that the federal government initiated a medium- term programme to add 50,000MW of hydro capacity in the country in the coming two decades. This ‘Initiative’, announced in May 2003 by the Indian Prime Minister, had the following main features:

•The additional capacity of 50,000MW would be set up through 162 new hydro power projects, to be located in 16 States.

•Pre-feasibility reports (PFRs) for such projects were to be formulated within a specified time-period. This task was assigned to seven federal and state entities.

•Where a PFR pointed positively to the feasibility of a project, a detailed project report (DPR) was to be prepared by the federal or state government, to enable the project to be executed.

•Priority was to be given to setting up projects where the per-unit tariff was expected to be low.

Ranking study

The Initiative was based on a ‘Ranking Study’ undertaken by the Central Electricity Authority (CEA), the technical wing of India’s Ministry of Power. The various prospective projects in the major river-basins of the country were categorised in three parts, using a ten-fold criteria. Of a total of 399 such projects (106,910MW) identified, 98 projects (15,641MW) were put in the ‘most attractive’ A-category. Half of these incidentally were in the northeastern region along the Brahmaputra Valley. Another 247 projects (69,853MW) were put in B-category, with the remaining 54 (21,416MW) in C-category. Based on this priority, the initiative picked up 162 projects (50,560MW) for development. These were all new schemes where even survey and investigation had still not been undertaken or completed. All these schemes were to be of a capacity of above 50MW each.

Seven entities, all government-owned and termed ‘consultants’, were given the task of preparing pre-feasibility reports (PFRs) of these 162 projects. The bulk of this work was assigned to WAPCOS, the federal consultancy agency in the Water and Power sectors, followed by National Hydroelectric Power Corporation (NHPC). Two other federal generating companies, NEEPCO and SJVNL, were also to prepare PFRs for certain projects located in their regions of operation. State power utilities of Uttaranchal, Himachal Pradesh, and Karnataka states – UJVNL, HPSEB and KPCL – were similarly assigned the work to prepare PFRs for some projects in their respective states.

As per the schedule, all reports in draft form were to be submitted by the consultants to CEA by July 2004. After obtaining CEA’s comments on the draft, the final reports were to be in by September 2004. The completion of PFRs was completed ahead of this schedule. The estimated installed capacity, as per these reports, was to aggregate to 47,930MW. Of these 162 projects, 109 (11,411MW) were to be of less than 250MW each, 30 (10,502MW) between 250-500MW each, and 15 (9297MW) of 500-1000MW each. The remaining eight projects, all in Arunachal Pradesh, with a total capacity of 16,720MW, would have a capacity of above 1000MW each.

Based on this exercise, the federal government, on the recommendation of CEA, decided that priority in execution would be given to 78 projects (about 33,000MW) which were estimated in their PFRs to have a per-unit tariff of up to Rs. 2.50 (about US 5.5 Cents). DPRs have already been commissioned for them, based on which the developers would later be selected by the respective State Government. These 78 projects, along with others for which DPRs would subsequently be ordered, are to be implemented during the country’s XI and XII five-year plan periods (years 2007-17).

The implementation of the hydro power initiative would be rendered easier by certain key steps taken in the recent years by the federal government. These included the following:

•A comprehensive Electricity Act was passed by the Indian Parliament in 2003. The Act sought to put in place ‘a liberal and progressive framework for the electricity industry in India’. All generation (except hydro) has been delicensed. Hydro projects still need federal clearance but in the context of an optimum utilisation of water resources, inter-state and public safety issues.

•To promote fair competition and to protect consumers’ interest, a regulatory framework has been put in place at the federal level and in most of the states.

•Power trading has been recognised as a distinct licensed activity in the domestic power sector.

•Modalities are being worked out for providing open access to transmission, which is permitted under the 2003 Electricity Act.

•The federal government has recently been making higher budgetary allocations for the hydro sector.

To conform with the Electricity Act, the federal government announced its National Electricity Policy on 12 February, 2005. On hydro generation, it said: ‘Maximum emphasis would be laid on the full development of the feasible hydro potential in the country.’ In this regard, the following points were stated:

•1. The states with hydro potential need to focus on its full development at the earliest.

•2. Federal government is committed to policies that ensure financing of viable hydro projects.

•3. For speedy hydro developments, states need to review procedures for land acquisition and other approval processes.

•4. Federal hydro utilities like NHPC would offer their services to the states for their expeditious hydro development.

•5. There should be proper implementation of the National Policy on Rehabilitation and Resettlement of project-affected families.

•6. Adequate safeguards would be put in place for environmental protection.

Action has since been initiated at the federal and state levels to implement this policy.

Preparation of DPRS

The federal government had given much thought to this issue, and had devised separate detailed guidelines on the preparation of project reports. The 1998 policy document on hydro power development had even talked of state governments putting together a shelf of proposed hydro projects (with ready projects reports) which could be offered from time to time to the intending developers.

To hasten this process, the federal government has now proposed two options for preparation of DPRs in advance of project bidding: (a) preparation by a state agency, or (b) by a federal agency. In either case, the report should be vetted by CEA or a reputed agency recognised by CEA, to ensure that it contains all essential data and it attends to key issues. The cost of preparation of the report could be recovered from the developer to whom the project is allocated in due course.

For the public-sector projects, which occupy a major position in the Indian hydro sector, the federal government has recently introduced a three-stage process for project development: Stage-I – S&I, and preparation of a pre-feasibility report; Stage-II – detailed investigation, preparation of DPR and pre-construction activity like land acquisition; Stage-III – execution of the project after obtaining approval of the federal government.

Funding hydro projects

In line with worldwide trends, financing of hydro power projects in India has faced many hurdles. For equity, federal generating companies like the NHPC had been relying on annual budgetary allocations by federal government. These had been erratic until 1998 when, under a new Policy announced in August that year, the federal government committed itself to funding not only the on-going projects of such companies but also to allocate money for pre-project action to be take in advance for selected hydro schemes. Since then, there has been an increase in the federal budgetary support. Between the country’s VIII Five-Year Plan (ending March 1997) and X Plan (which will end in March 2007), there had been an over three-fold increase in budget allocations for hydro projects – from about US$1B to US$3.8B. However, the few private-owned projects still have difficulty in raising equity in the domestic market and often have to rely on overseas sources. Various steps have been considered and set in motion by government and domestic financial institutions (FIs) in this regard, including the setting-up of India Power Fund of Rs.50 B (about US$1.1B) to be subscribed by power companies, financiers etc.

As for debt-financing, the Indian Ministry of Power itself recognised the reluctance of domestic FIs to finance hydro projects, ‘given the huge risks of geological and hydrological uncertainties, delays in land acquisition, rehabilitation and resettlement issues, law and order problems and natural calamities – in addition to the general problems of IPPs like payment security etc. ‘ For the latter, the FIs had been seeking additional comforts like government guarantees, escrow accounts etc. An added problem to the developers had been the tenure of loan, which was not long enough to cover the average period taken in India to commission a hydro project.

A number of steps have been taken to get over these problems. An Inter-institutional Group (IIG) was set up in the year 2004 in the Ministry of Power, comprising representatives of the main lending institutions, to jointly appraise and tie up funding for IPP projects. Meeting periodically with the Secretary, Ministry of Power in the chair, IIG has evaluated projects on the basis of tariff, ability of the developer to raise equity, and technical expertise to complete the project on time. In lieu of payment security, FIs are prepared now to accept as basis, a long-term PPA (of 25 years or more) having provision for front-loading of tariffs.

India’s Power Finance Corporation, which has been the main lender to state hydro power projects, has also rationalised its terms of debt financing. For hydro generation, it is now prepared to give loans of a tenure up to 25 years (including an initial five-year moratorium). Apart from these domestic sources, hydro developers have looked to offshore finance. The federal generators had tapped export-credit agencies and financiers such as the Japan Bank for International Cooperation, KfW of Germany, and DFID of UK. Much more could however be invested by multilateral agencies like the World Bank (which was quite active in Indian hydro between 1970-90), the IFC and the ADB.

Guidelines for private participation

The need for private investment and participation in hydro development in the country was reiterated in a paper produced last year by Indian Ministry of Power. It stated: ‘It is expected that the managerial capabilities and commercial orientation of the private sector would minimise time delays. More importantly, involvement of the private sector would reduce the need for funding of equity for the Government companies. It is also expected that the capital and operating efficiencies of the private sector would help in reducing tariffs’.

Through this paper, the government drew up guidelines for development of hydroelectric project sites by private developers. Separate rules were proposed for developing projects of capacity up to 100MW and for those having a higher capacity.

Projects up to 100MW

•1. In the award of sites in such cases, the State Governments were allowed the flexibility to choose the private developer through the MoU (memorandum of understanding) route i.e. by direct negotiation, as opposed to calling for international competitive bids (ICB). However, in such cases, it was to be ensured that the EPC contract, which constitutes the major portion of the project cost, was finalised by the developer on the basis of ICB.

•2. In choosing the developer, there ought to be utmost transparency, ensured inter alia through the method of selection, and the eligibility and evaluation criteria should be laid down in advance.

•3. The state government shall be entitled to draw 12% of the power generated by the project, free of cost.

•4. The rehabilitation and resettlement of families displaced by the project should be done in line with the 2003 federal policy.

•5. The developer should ensure strict compliance with the ecological clearance accorded to the project and to the other existing laws on the subject.

•6. In order to make the project ‘bankable’, the developer should enter into a PPA for a long term (at least 25 years) with front-loaded tariff. The benefit of a lower tariff in the later years should be passed on to the consumers.

•7. Similarly, arrangements for evacuation of power from the project, such as transmission, should have a validity of at least 25 years, so that the transmission entities could plan coordinated action for that entire region (where the project is located).

Projects above 100MW

•1. Selection of the developer in such as case should be done solely on the basis of ‘a competitive tariff based bidding process’, so as to ensure transparency, fair competition and lower project cost.

•2. The developer should have access to a DPR prepared in advance by the State Government.

•3. The ICB process should be in two parts. First, there should be a call for requests for qualification (RFQ). The pre-qualified prospective developers would be asked to submit a request for proposal (RFP).

•4. The bids received under RFP would be evaluated solely on the basis of the composite, levelised tariff quoted by the bidder.

•5. Conditions stated at (3) to (7) above for projects below 100MW are also relevant for those above 100MW.

The above guidelines were prepared by the Ministry of Power as a draft and sent in mid-2005 to the main stakeholders (and also put on Ministry’s website) for eliciting comments. The guidelines are expected to be finalised before the end of 2006.

Prospects

The hydro power initiative, taken at the federal level by India, was an essential step required to give a boost to a speedy and methodical development of this sector. Its provisions, along with subsequent measures adopted by Government in certain other key areas, have laid a solid ground in the regard. However, these are still early days in the implementation of the initiative, as the DPRs for the selected 78 projects are under preparation. The success of the programme, and the speed with which the projects are executed in the coming years would depend on a number of factors:

•The programme of power reforms and restructuring in India, initiated a decade back, is languishing, mainly for the lack of political will, and needs to be pushed through.

•The State power utilities currently own 78% of the total hydro capacity and would have an important role to play in the future too – as generator, buyer and distributor of power. They need to be further strengthened and made financially viable.

•The processes for project formulation, approval and transfer (where required) need to be further simplified and rationalised.

•A better coordination between the various government agencies at the state level and with those at federal level has to be ensured.

•While the federal government lays down the policy framework and monitors implementation, the policies have to be put into practice mainly by the States. The success of the initiative would depend in a big way on how well the federal government is able to get its policies implemented on the ground by the States.

•Hydro financing would continue to engage the attention of the various stakeholders. The existing policies would need to be pushed through, and fine-tuned in the light of future requirements.

I M Sahai is an independent consultant in hydro power, based in New Delhi, India