Growing pains for Indian small hydro

WITH two monsoons delivering some three metres of rainfall annually, 44 rivers in its catchment area and justifiable fame as one of the most fertile and green states in India, it can be a surprise to no-one that both the Keralan power sector and the environment reflect the region’s rich hydrological profile. However, it is perhaps surprising that Kerala faces drought every summer.

With the electrical generation profile for Kerala almost exclusively hydroelectric, this resource depletion is creating power shortages. In a bid to conserve water reserves, the entire state has been suffering under a programme of rolling blackouts for a number of months now. This load shedding is increasing pressure on the state government to improve the level of generation capacity, but significant environmental considerations and a burgeoning tourism industry make any major new hydroelectric facilities at the very least controversial and more likely impossible to develop, despite the fact that, according to the state electricity board, only some 40% of the total hydro potential has been exploited. However, with a distinct lack of indigenous thermal resources, such as gas and coal, and being pressed to implement reforms by the central government, the cash-strapped state may well struggle to improve the situation by conventional means without some politically unpopular moves. This is particularly true while pinioned with an historical legacy of low power tariffs. As an alternative, the state has unveiled a policy for the promotion and development of mini-hydro schemes in the hope of both fulfilling its commitments on rural electrification and boosting capacity without resorting to large-scale, unpopular or financially unfeasible schemes. Decentralised and microlevel generation through renewables are seen as a convenient way to reduce expenditure on transmission lines and T&D losses while hydrological flows, like wind and waves, are designated as resources that belong to the whole community and not to the owner of the land.

Indian power sector

India’s electricity supply began in the 1880s with the commissioning of a 130kW hydroelectric plant at Darjeeling, West Bengal. A coal-fired plant followed in Calcutta, now Kolkata, in 1897 and over the next half century, until independence, the supply of electricity was confined mainly in and around urban centres, chiefly for lighting purposes. Most of these early ventures were private sector initiatives.

Nowadays, the energy sector is dominated by the state and, barring five private sector licensees providing power to large urban areas, electrical generation and distribution throughout the country is controlled by state-owned bodies.

Legal provisions to support and regulate the sector were put in place through the Indian Electricity Act, 1910. Shortly after independence, a second Act - The Electricity (Supply) Act, 1948 - was passed, paving the way for establishing State Electricity Boards (SEBs) in the Union. The SEBs have played a vital role in the rapid expansion of the country's electricity network and in most cases, the SEB is a classic vertically integrated utility concerned with all aspects of the generation, transmission and distribution of power. The production of power was made exclusively a public sector domain in the Industrial Policy Resolution of 1956 when most of the then existing private entities were taken over by SEBs. Kerala State Electricity Board (KSEB) commenced functioning on 31 March, 1957, all the staff belonging to the previous Electricity Department transferring to the new entity. Since then, almost all new investment in the sector has been made by the public sector.

A national capacity shortfall

In 1963 hydro power accounted for more than half of all capacity in India and while there has been a continuous increase in the installed hydroelectric capacity since then, which now stands at more than 22GW, the share of hydro has steadily been reduced to 25%. According to the latest Central Electricity Authority (CEA) estimates, India needs an additional 100GW at an anticipated cost of nearly US$100B to meet its power requirements over the next 15 years. Electricity consumption over the past five years has grown at an average annual rate of 7.2%, but India is also notorious for high power losses from the grid, which run at more than 20% of all power transmitted. These losses are both physical T&D and so-called ‘non-technical’ losses, easily explained by widespread theft from the grid. Furthermore, poor investment in operations and maintenance result in low plant utilisation, which currently delivers an average plant load in India of something less than 60%.

The net result is that across India overall, average energy shortages run at almost 6%, peaking at closer to 14%. Nonetheless, while the energy deficit has reduced over the last few years, peak shortfalls continue to rise and it is expected that with a pick up in industrial activity, the energy shortages are likely to become even more of an issue for both national and state governments. Even assuming that a national grid would smooth out some pockets of deficit and surplus, T&D losses could be minimised, and renovation and maintenance of existing generation plants would be carried out to improve performance, significant problems remain. Collectively, these measures might be expected to deliver some 25GW of capacity over the period outlined, but this still implies an annual addition of some 5GW of capacity. However, at the present rate of capacity addition, even a notional annual national target of 5GW looks highly unlikely.

To address the growing energy shortage, the national government has sought to encourage private and foreign participation in the power sector. Policies now permit 100% foreign-owned companies to set up power projects of any capacity and type, including hydroelectric. It also allows them to repatriate profits and provide for liberal capital restructuring with an attractive rate of return. Furthermore, a recent amendment to the Electricity Act dispenses with the requirement for a licence to generate power and an independent power producer, after getting government approvals for its specified plant size and type, can generate and sell its output to the respective SEB under a power purchase agreement. Despite this, investment still significantly lags demand. Of the total capacity added in the last year for which figures are available, some 49% was added by state authorities, even in their typically weakened financial situation, while central plants contributed 44%, and the private sector only a relatively minor contribution of 4%.
One of the key stumbling blocks is the fact that, ultimately, the power purchaser is the local SEB, most of which are all but financially bankrupt, fundamentally as a result of the tariff structure in the country. Tariffs in India are characterised by nominal agricultural tariffs, low domestic tariffs, relatively high industrial tariffs, high commercial tariffs and very high railway tariffs. There is a heavy element of cross-subsidy in the tariff structure and latest figures show power is on average priced at just over Rs 2/kWh (cents 4.5/kWh), considerably less than most of Europe and the US, with industry and commercial operations bearing the brunt of any tariff hikes. As in many other nations, power tariffs have always been a politically sensitive issue and consecutive state governments have consistently failed to hike agricultural - read voting populace - tariffs.

The emergence of Keralan power

Commissioning of the Pallivasal hydro power plant in 1940 began hydroelectric generation in the state and the next few decades saw the progressive development of various schemes, Sabarigiri in 1965 and Idukki in 1976 being notables. Now, there are 18 hydroelectric facilities located within the state, 17 owned by KSEB and one privately, and the KSEB has an installed capacity of 2031MW. Other major plants in the state include the thermal Kayamkulam plant owned by the National Thermal Power Corp, with an installed capacity of 359MW and plans to increase this to a substantial 2300MW, and the BSES-owned Kochi Plant of 130MW.

Until 1997, when the 107MW diesel-fired Brahmapuram station was commissioned, Keralan capacity was 100% hydroelectric and it was thus able to generate and supply power at one of the lowest rates in the country. Now, due to environmental and resettlement issues, and interstate disputes over water resources and such like, a substantial proportion of the state’s untapped hydroelectric potential is most likely to stay that way. In addition, the vagaries of the monsoon and the potential capacity shortages this can engender have prompted the development of more costly, but more reliable, thermal stations. However, the use of comparatively expensive fuels like naphtha has put immense financial pressure on the KSEB from a scenario where power prices were among the lowest of any state, to one where having a substantial share of high cost thermal power necessitates stiff tariff hikes.

That aside, in Kerala the Tenth Plan (2002-2007) Committee has concluded that an additional capacity of 900MW will have to be put in place to meet the predicted demand by the end of the concluding year. Larger hydroelectric projects already planned, and some of which have actually begun work, include Athirappally (163MW), and extensions to Kuttiady (100MW), Neriamangalam (25MW) and Pallivasal (60MW), potentially delivering some 350MW. In addition, renovation and modernisation candidates include the hydroelectric plants at Neriamangalam and Sabarigiri at 45MW and 300MW respectively. There are also a number of diversion schemes planned that will boost the Idukki reservoir from the Vazhikkadavu and Vaadakkepuzha catchments. But despite such efforts and the laudable goals of the state government, results still fall far short of expectations and the generally slow pace of developments is likely to result in a significant deficit of power by the end of 2007. Just 33MW of new capacity has actually been added in the past two years, while a whole series of hydroelectric developments and upgrades have been left stalled, along with a raft of private developments nationwide that have been granted provisional regulatory approval, but are hampered by a lack of financial resources to push them forward.

National policy measures

Over a decade ago, the Power Ministry handed responsibility for small hydro development to the then recently created Ministry of Non-conventional Energy Sources (MNES). It has been responsible for small and mini hydro projects up to 3MW since 1989 and up to 25MW since late 1999. When small hydro was handed to the MNES, the total installed capacity of such projects was only 63MW. In the 15 years since, this has increased by more than four times.

A hydro resources study was completed which identified a national target of 15GW of capacity and state by state targets have also been set. So far, 13 states have announced policies for setting up commercial small hydro projects through private sector participation, including Kerala. In the states where such policies exist, an encouraging response has been received from the private sector and over 800 sites with a capacity of about 2000MW have already been offered or allotted.

India now has 420 small (up to 25MW) hydroelectric projects with a total capacity of more than 1423MW in operation. A further 187 similar projects with a capacity of 521MW are under construction and some 4096 potential sites with a capacity of 10,071MW have been identified.

Among the major initiatives by the MNES are the identification of potential sites and their feasibility studies, the setting up of demonstration projects and technical and financial support to set up grid-connected as well as decentralised small hydro projects.

From 1989 to 1993, the major thrust of the small hydro development programme was on setting up of demonstration projects in various states to promote the interest of state governments and SEBs. For this purpose a capital subsidy of up to 50% of the cost of project subject to a maximum of Rs crores 2.5/MW was provided. From 1994 onwards, efforts have been focused on encouraging the private sector to set up commercial small hydro projects.

In order to accelerate the development of small hydro power in the country, MNES is giving incentives for detailed survey and investigation, detailed project report preparation, loan interest subsidy for commercial projects, capital subsidy for small hydro projects in the North-Eastern region, renovation and modernisation of old stations and for development or up-grading of water mills, setting up of portable micro hydroelectric sets, and implementation of the UNDP/GEF Hilly Hydro project in 13 states of the Himalayan and sub-Himalayan region.

Government finance at low interest rates is now available and schemes can be structured with 25% equity and 75% debt. There are also tax breaks available, such as enhanced capital allowances, and, at state level, electricity boards offer attractive purchase rates, third party sale options, power banking and such like.

Under the renovation and modernisation scheme, financial assistance is provided up to 75% of the cost or a maximum Rs2 crores/MW, to utilities in the public sector and this has been extended to cover projects up to 15MW to a maximum of Rs10 crores per project. Examples of MNES approved grants include Jali (6 x 350kW) and Rongnichu II (5 x 500kW) and small hydro projects in Sikkim, Rinchington (2 x 1MW) and Little Ranjit (2 x 1MW) in West Bengal.

The emergence of the Indian Renewable Energy Development Agency (IREDA) as an institution with a large financial base for lending has also had a substantial impact. It provides soft loans for setting up commercial small hydro projects of up to 25MW. IREDA has so far sanctioned 118 projects aggregating 450 MW and a total of 180MW have been commissioned. Incorporated in 1987 under the MNES, IREDA has sanctioned disbursements of US$255M in loans to the small hydro sector and disbursed US$128M. In Kerala, IREDA has identified 198 potential small hydro sites with an estimated capacity of 466.85MW

In addition, rural electrification is viewed as an essential pre-requisite for development and new momentum has been injected by the fact that the pace of electrification declined in the previous two five year plan periods. Consequently, the national Ministry of Power is planning new schemes for financial assistance for rural electrification projects. Currently, funds for investment in rural electrification are available under the Rural Infrastructure Development Fund and loans are also available from Rural Electrification Corp.

The Electricity Act makes it obligatory for state governments to supply power to all areas, including remote villages and hamlets, and within a given time frame from the date of request for power. Under the aegis of this policy, the Power Ministry has identified off-grid generation as a major plank of the solution, especially in states which have lagged behind in rural electrification.

Renewable energy policy

In a bid to develop generation resources as an alternative to large hydroelectric projects and at minimal cost, the state power department stated: ‘The power industry being the life line for all economic development, special endeavour will be made to ensure techno-economic viability of Kerala State Electricity Board by revamping and such other management interventions. Special significance will be accorded for the utilisation of non-conventional sources of power.’ The state government adds: ‘The spread of various renewable energy technologies has been aided by a variety of policies and support measures by government. Major policy initiatives have been taken to encourage private/foreign direct investment to tap energy from renewable sources including provision of fiscal and financial incentives. This policy is directed towards a greater thrust on overall development and promotion of renewable energy technologies and applications.’

Indeed, in the Kerala power policy of 1998, it was announced that mini hydroelectric projects would be allotted to private agencies, the public sector and local self governments, great emphasis being placed by the state on the quick development of micro, mini and small hydro power, sites for which are comparatively abundant in Kerala. All power producers generating grid-grade electricity using non-conventional resources are eligible under the policy, though in the case of small hydro projects, only those with an installed capacity of 25MW or less are eligible producers.

As part of Kerala’s policy to encourage private sector finance in setting up small and mini-hydro projects, guidelines for the development of such projects to either captive producers or independent power producers include the following measures:

• Hydroelectric projects allotted will be on Build, Own, Operate and Transfer (BOOT) basis for 30 years from the scheduled date of allotment, at the end of which they shall revert to the government of Kerala/ KSEB.

• Transmission charges and T&D losses are fixed at 15% of the energy supplied to the KSEB grid.

• No government fees will be levied for water used for power generation.

• Any individual/company/partnership or joint venture is eligible to bid as an independent power producer

• All industrial consumers with a demand load of 0.5MW and above are eligible to apply for hydroelectric captive power projects.

• The total annual generation potential from the project will not exceed the annual requirement of the company.

• Maximum capacity for a single project is 25MW

• The successful bidder has to enter into a power purchase agreement with the KSEB.

• As with other independent power projects, the output would be sold to KSEB, for small hydro at a ceiling rate of Rs.2.50/kWh, compared to Rs.2.80/kWh for power from all other renewable sources.

• With a base year of 2000-2001 an annual 5% price increase will apply for up to five years of operation, thereafter rates are to be negotiated individually.

• KSEB will purchase excess energy generated by captive producers at the rates specified in a power purchase agreement. Separate purchase rates shall be specified for peak and off peak.

• Construction and maintenance of transmission lines to the KSEB grid is the developer’s responsibility.

• KSEB reserves right to draw extra power through this transmission line. Any modification of a KSEB substation which draws power from the project, shall be at the cost of developer.

• The developer shall be responsible for all-statutory clearances and approvals from concerned agencies.

• The project shall be made operational within 36 months from the date of financial closure.

• Public sector undertakings and power intensive industries may be given preference in allotment of the small hydro projects for captive power projects and schemes using controlled releases from existing reservoirs and tailraces are reserved for the KSEB.

Following the development of this policy some 62 small projects have been proposed for private investment and a number of smaller hydro projects have begun development in conjunction with the private sector. These include Bhoothathankettu (16MW), Ullungal (7MW), Karikkayam (15MW) and Barapole (9MW), which collectively could add a further 47MW by the end of the Tenth Plan period. Besides the above, KSEB is planning some mini hydroelectric schemes such as Poovaramthodu (2MW), Parasukadavu (2MW) and Meenvallom (2.4MW) being implemented by the Palghat District local government.

Given that the small hydro resource has been identified by the Keralan government as one which can provide energy to the remote rural villages, which are yet to be electrified, one of the main activities of the state Energy Management Centre (EMC) has been its development and promotion. As part of the plans for the total development of Kerala’s small hydro capacity within five or 10 years, EMC has launched a project to assess the entire potential of the state, a first for India. Around 360 sites have been identified so far and the Centre is currently the coordinating agency for the execution of 18 such schemes with a total capacity 107MW. These schemes are being implemented by KSEB with the technical and financial collaboration of the International Network on Small Hydro Power (IN-SHP) and the Chinese government. The Centre is also acting as a technical facilitator in the fast track approval of small hydro projects proposed by local governments, known as Panchayats.

Furthermore, the Agency for Non-conventional Energy and Rural Technology (Anert) is an autonomous institution established by the government of Kerala in 1986 with the purpose of coordinating renewable energy development within the state. Part of its responsibilities as set out by the MNES are to minimise bureaucracy by functioning as a single clearing agency for all renewable energy power projects, including small hydroelectric power plants up to and including 3MW. Anert is also to issue necessary clearances and approvals on behalf of the Keralan government, provide technology support and facilitate financing. For hydroelectric developments between 3MW and 25MW KSEB is the licensing authority while the Central Electricity Authority is responsible for regulating the entry of new bulk generating units and all major projects of SEBs, licensees and generating companies.

Looking forward

In the budget for 2004-2005, the Keralan government has announced plans for completing the ongoing hydroelectric projects and for starting new ones. Through projects proposed for the coming year, including the Pallivasal Extension Scheme, Athirapally and Mankulam and by completing ongoing projects, KSEB hopes to bring on line an additional 391.5MW of capacity. It has already started work on the Meenamkutty, Sabarigiri and Kuttiyadi augmentation and Neriyamangalam power projects, works which had been suspended during the previous administration. Meanwhile, work on 30 small hydro projects with an installed capacity of 77.5MW is due to begin this year.

However, two factors stand in the way of significant continued progress. A new national government has just assumed power after a lengthy tenure by the BJP, and it can only be hoped that the current administration is keen to pursue the energy sector reforms and policies set out by its predecessors. And, as the chairman of KSEB, Mr. K. Mohanchandran, says, the issue of meeting forward power demand is intimately linked with industrial development in the state. With prospects for industrial development currently limited, KSEB with the help of the private sector may just have time enough to deliver sufficient and reliable installed capacity through the small and mini hydro programme.

The director general of IN-SHP, Professor Tong Jiangdong, says Kerala has excellent potential with more than double the rainfall of China and a natural sloping terrain, which could be used for establishing a large number of small hydroelectric projects. How much of this potential will be exploited in the coming years remains to be seen.

David Appleyard is a freelance journalist specialising in the energy and process sectors and is currently based in Australia. For more information, email: David_J_Appleyard@hotmail.com