Untapped potential10 February 1998
India has great hydropower potential, but much of this remains unexploited. Last year, the Indian Hydropower Committee expressed grave concern about the steady decline of hydro development within the country. I.M. Sahai* examines the procedural, technical and financial issues which need addressing if this trend is to be reversed.
WITH an exploitable hydro potential of 84 044MW (at 60 per cent load factor), and a total energy potential assessed at 600 billion kWh per year, India has been rated among the first ten nations of the world in the hydro sector for some time. However, this potential has, for a variety of reasons, remained mostly unexploited. Hydel projects in operation in India account for only 14.76 per cent, and those under execution for 7.24 per cent, of the total potential. Thus the bulk of potential - over 78 per cent - still remains to be developed. This situation has arisen despite the efforts of state-owned electricity boards in nineteen states of the country, supplemented by six federal hydel utilities operating in north and east India.
Much of the problem has been due to a lack of financial resources, aggravated by an unrealistic tariff structure imposed on state electricity boards (SEBs) by the government for non-commercial reasons. When the federal government opened up the Indian power sector progressively from mid-1991 for private investment, it was hoped that the hydel sector would get its due share of attention and funds from IPPs. While there were enough expressions of interest, they did not materialize into actual projects. Until the end of 1997, only two projects (together 700MW) had received federal approval and were under development, and another nine projects (totalling 3000MW) had received the preliminary nod and were waiting for detailed project reports (DPRs) from their respective promoters.
The main reason for IPP disinterest was that the hydropower policy of the then federal government, evolving through a process of trial-and-error, did not adequately answer certain key concerns of the hydropower developers. This was especially seen in the hydro tariff formula, which the government took its own time to specify, completing it in January 1995.
Reflecting the anxiety of the federal government at the slow development of private hydropower, in August 1996 the former appointed a five-member committee headed by Mr M.K. Sambamurti (a known hydel expert and former chairman of the Central Electricity Authority) to study various aspects of the matter (including preparation of project cost estimates) and to give its recommendations.
The Hydropower Committee gave its report in March 1997 to the Federal Ministry of Power and in its letter forwarding the report, it observed: ‘The committee is deeply concerned over the steady decline of hydropower development in India in the last three decades...Drastic policy initiatives are required to reverse the trend and enable rapid exploitation of the vast untapped hydro potential. This is where enticing and encouraging private sector participation in hydro development become relevant.’
A new hydropower policy from the Indian government, based on the recommendations of this report, was still under finalization when the 14-party ruling coalition at the centre resigned, leading to announcement of fresh elections (planned for February-March).
The new policy would thus have to await assumption by a new federal government. What is more, the new policy, as and when finalized, would necessarily have to address itself to three sets of issues crucial to the Indian hydropower sector. These are procedural, technical and financial/commercial issues.
These broadly relate to certain procedural and adminsitrative matters, including the selection of a power project and of its developer, preparation of project reports, the project approval process and the respective roles of IPPs and the (already established and operating) public utilities in the future hydel development in India.
The appropriate selection of projects to be given to IPPs is of critical importance if the exploitation of hydro resources in India is to be accelerated by private investment. To initiate the process of private hydropower, and with a view to making the first few projects easily bankable in India and abroad, such projects should involve fewer risks to the developer. IPPs would also prefer to have a more modest investment, and a shorter gestation period - ideally offering commissioning in three to four years. In combination, these aspects would have a positive ‘demonstration effect’.
Such projects could have an installed capacity up to 300MW each. Run-of-river schemes having minimal storage, or projects at the dam toe would be specially suitable. Private investment could also qualify for the expansion of existing power stations or for installing power generation units at existing dams.
Small hydro is an area which should not be forgotten. It has been given importance in India only in recent years: of a total estimated potential of about 10 000MW, only about 200-300MW capacity has as yet been set up or is under way.
In an effort to create transparency and accountability, the method of selecting the project developer becomes important. Following the opening up of India Power to private participation from 1991 onwards, the early selection of project developers was on the basis of direct negotiations between the state government and the IPP, followed by the signing of an MOU with the selected private developer. In February 1995, however, the government of India instructed state governments that henceforth all selection must be made through international competitive bidding (ICB) and a deadline (extended from time to time) was fixed for conversion of MOUs into project approvals on the basis of DPRs.
Guided by the experience of the recent past, the Hydropower Committee has recommended that the MOU route may not altogether be given up, but could be resorted to for large projects in geologically difficult terrain, as there may not be many bidders in such cases. The competitive advantage in these cases could be secured by offering project packages, such as an EPC contract, through the ICB.
Where IPP selection itself is through ICB and not MOU, the bidding process could be further refined by prior preparation of a DPR by the state government or its hydel utility, affording access to the DPR to short-listed bidders, two-part bids, pre-bid conference and bid evaluation by professional experts.
Project preparation, especially by state hydel utilities in India, is an area which has suffered of late, despite the vast experience and technical know-how which exists in the country’s hydro industry. This has often been due to a lack of funds to conduct studies and field investigations for a project. This needs co-ordinated action by the government and the financing agencies.
The project approval process in India has traditionally been lengthy and time consuming, for historical reasons. The federal agencies - such as the Central Electricity Authority (CEA), and the Central Water Commission (CWC) for hydro projects - did the overall national planning to ensure optimal utilization of natural resources by public utilities, gave techno-economic approval to projects, monitored their execution, and generally acted as super regulators. With economic liberalization, the old system of federal controls is being dismantled, although slowly. The CEA’s role is being reviewed by the federal government, but in the meantime the CEA is not concerned with commercial aspects of a project such as capital cost or tariffs; powers in this regard are to be delegated by federal government to state governments.
The CEA would, however, still look at a project from an overall planning viewpoint such as the optimal development of a hydro source. The CWC’s clearance is to be necessary only for a project on an inter-state or inter-country river.
The Federal Ministry of Environment has delegated its powers to state governments to give environmental approval to thermal power projects up to 250MW. For hydel projects, however, there is as yet no such delegation.
These relate to the project location, site and environment, to the risks associated with hydro projects and rehabilitation problems.
The Hydropower Committee has noted that while the CEA, along with state power utilities, had, from time to time, carried out an assessment of the hydro potential of various parts of the country, the environmental impact of hydro sites identified during that assessment was not considered. The Committee has recommended that a reassessment of the potential needs to be done by the CEA, keeping in view the additional hydrological/geological data available and the environmental aspects.
The technological risks that could beset a hydro project anywhere in the world are features that a developer has to contend with. In India, many of the surveys of the land had traditionally been undertaken by federal agencies and the data collected was often treated as ‘classified’ information. It could be released to state-owned hydel utilities for project preparation, due to their links with the government. However, in the case of a private developer, a proper mechanism would need to be established for the release of this data. The Hydropower Committee suggests that in view of the expertise of the government survey agencies, they could provide consultancy services to private developers in critical areas of investigation and project preparation. With regards to the geo-environmental impact of a hydro project, such assessment should be the responsibility of the government, and be made available to the developer from the early stages of project formulation, to avoid undue delays.
The last two decades have been replete with examples of public sector hydro projects being held up due to land problems, particularly the rehabilitation of oustees. In the north, the Tehri irrigation-cum-power project, at one time funded by the erstwhile USSR, is now in its second decade and nowhere near completion, as the ‘green’ lobby is protesting on the grounds of dam safety, ecological damage and, above all, a faulty rehabilitation scheme.
In central India a whole ‘green’ movement called the NBA (Save the Narmada Movement) has evolved to protest against plans to harness the hydro resources of the river Narmada. The NBA first stalled the Sardar Sarovar multi-purpose project in Gujarat state and forced the World Bank to withdraw its funding. Last month, on 11 January 1998, the movement led a ‘people’s march’ to halt site activity at the 400MW IPP Maheshwar hydel project for allegedly violating established rehabilitation policies.
To preclude similar situations arising in the future, the government of India needs to lay down a clear (and realistic) policy governing land acquisition, rehabilitation of oustees, and catchment area treatment, so that neither the authorities and developers, nor the environmentalists, are in any doubt about what is required.
A welcome measure taken last year was notification making a public hearing mandatory in all cases of projects seeking environmental approval. A special federal tribunal has also been set up in Delhi to hear and decide on appeals against such approvals: this should lessen recourse to litigation on such issues.
Financial and commercial issues
As a part of its efforts to encourage private investment in the power sector, the Indian government has announced from time to time, a set of incentives and concessions to IPPs. Yet the sector, especially in hydropower, has suffered from a severe resource crunch. The early funding of hydro projects was all from the government, either directly or obtained from overseas.
Indian commercial banks hardly played any role and Indian financial institutions were scared off by the long gestation and risks involved in a hydro project. Traditional debt instruments did not take into account the long maturity and other special features of hydel development.
A step forward was the establishment of a new financial institution in December 1997. The Infra-structure Development Finance Company has been promoted by the government of India, through credit and maturity enhancement and by encouraging inflow of private funds. But much more is needed to be done.
An added problem is the security of invested funds. The government of India had, a few years back, suggested a set of options to IPPs and state governments by way of a security mechanism. These included opening an escrow bank account in favour of the developer, direct sale of power to consumers and assigning of a geographical area for power distribution to a power project. Each option has its pros and cons. At the initial stage, the government of India was ready to extend its own counter-guarantee to ensure energy payments to IPPs by the concerned state government (or its power utility). These were later limited to eight ‘pioneer’ IPP projects (none hydel) as they increased the contingent liability of the government of India. The Hydropower Committee has suggested that the government should continue to extend guarantees to hydropower projects. Even if the government does not agree to this, a viable security mechanism is a prerequisite to attracting finances into the sector.
In the hydropower tariff formula, 90 per cent availability of plant has been predicted to determine capacity charges by the developer and associated incentives to him. While this might be generally acceptable, the Hydropower Committee has pointed out that this 90 per cent factor may be high for many run-of-river projects in the Himalayan region because of excessive silt carried by the rivers. Also consideration would need to be given to the output and capacity factor. Similarly, the standard 16 per cent rate of return on equity, guaranteed under the present government policy, would result in a lower internal rate of return for long gestation projects like hydropower. An additional return would thus need to be negotiated between the concerned parties.
Lastly, a model PPA document is required which adequately takes into account the legitimate interests of both parties, so as to expedite deals. A draft was prepared in 1996 by the Power Finance Corporation through an international consultant, but the Hydropower Committee found it to be tilted in favour of IPPs. The draft is now being reworked by the Federal Power Ministry, as a part of its exercise of devising a new hydropower policy.