How to recharge the hydropower sector

On June 27, NITI Aayog notified its latest draft of the National Energy Policy. The draft policy proposes to bail out stranded large hydropower projects. The bailout is expected to consider close to 11,000 MW hydro projects. The new policy also suggests increase in the life of hydro projects from current 35 years to 60 years.

Given the Government’s power sector reforms agenda, the plan to revive the stranded projects is a positive sign. However, the revival strategy must address the underlying policy issues that triggered this emergency.

As of May 2017, India’s total generation capacity stood at 330GW, of which 44GW is from hydropower. Despite having significant hydro potential of 148GW, only 44MW (30 per cent) of the total potential is harnessed. The share of hydropower in the overall energy mix has been falling since 1962-63 when it stood at 51 per cent, against 13 per cent today.

The major reasons of low capacity addition lie in clearances delays, local issues (law and order problems, agitations, etc.), land acquisition, rehabilitation and resettlement and contractual disputes between contractors and companies.

The Government plan to bring private investments into the sector has not been successful either. Only close to 7 per cent hydro capacity belongs to the private sector today. Numerous projects has been stranded for decades leading to increase in various costs in the original project.

For example, the Tuirial project in Mizoram, which was expected to be commissioned in 2006-07, is in a limbo. Tuirial’s original estimated cost was ₹367 crore; now, it is estimated to be ₹1,441 crore by the time of commissioning. This increase results in increased tariff for the electricity produced, which can be as high as ₹5-6 per unit compared to ₹3-3.5 for solar energy adding to the woes of discoms, which are already grappling with many requests to re-negotiate legally sacrosanct renewable PPAs. This poses a threat to the financial/business viability of projects.

The parliamentary committee on energy and sub-committees (2016) of the Ministry of power formed to advise the policy interventions in the energy sector has recommended multiple measures to revive hydro power.

Some of them are: (i) Declaring all hydro projects as renewable energy sources and introducing Hydro Power Obligation (HPO), ;(ii) Reinstating mega power benefit for hydro projects (discontinued after 2012); and (iii) proving better financing options (long-term loans, tax-free bonds, etc.).

Classifying hydropower as renewable appears to have arisen from the willingness to accelerate the growth of the sector, motivated further with its clean and low carbon emissions status. This status could help in attracting private investments and importantly selling power. Several countries including the UK and Brazil consider hydro as renewables.

On the other hand, though hydropower is clean energy, it comes with a cost to the environment, wildlife, and relief and rehabilitation (R&R). The major problems lie in land use, emission of greenhouse gases such as methane, sitting in geological sensitive areas. But, perhaps, the larger problem faced in India is sub-optimal impact assessments and clearances by the Ministry of Environment and Forests.

In 2013, after the catastrophic Uttarakhand floods, the Supreme Court had prohibited construction of any new hydro project in the State till further orders. In December 2014, the environment ministry admitted that hydro projects might have directly or indirectly aggravated the impacts of the floods. Bringing hydro into renewables should be supported with proper regulation, rather than allowing developers a free hand in exploiting environmental and geological resources.

Similarly, Athirappilly power project (163MW) in Kerala, proposed in 1982 is planned in one of the most ecologically sensitive zones. There have been multiple protests and a number of court cases, preventing any progress on the project. It is imperative that declaring hydro renewable does not undermine the ecological issue and R&R issues.

In terms of buying hydropower, HPO will obligate the electricity companies to buy, which can be successful in assuring the investors of PPAs. However, with HPO the issues will be on compliance. The way distribution companies resisted Renewable Purchase Obligation (RPO) compliance for numerous years is a good example. From 2010, the discoms were obligated to buy costly Renewable Energy Certificates (REC) to comply with the RPOs.

Discoms resisted buying RECs, citing financial weakness. Close to eight million non-solar and 3.5 million solar RECs remained unsold before Supreme Court in May 2017 ordered stay on all trading of RECs.

So there has to be strict enforcement, or HPO (may not be cheaper) may become new REC, resulting in disappointment for investors. The Ujwal Discom Assurance Yojana (UDAY) scheme launched in 2015 to revive the financially weak discoms is yet to prove itself and give positive results, till then they might remain sensitive towards finances.

The mega power benefits scheme (2008) which offered incentives in terms of waiver of customs duties. Taxes form a significant portion of the project costs.

Another important policy proposal is extension of project life from current 35 years to 60. Earlier the loans to the hydro project were provided only for 12-13 years, which forced the projects to have a higher cash flow. The short term loans caused increased per unit energy prices for the initial period, with significantly reduced prices after the initial 12-13 years of loan repayment. The proposed change would help project developers to get long term loans and thereby possibly reducing the energy prices making it more uniform for an extended period.

The power ministry’s recommendations to the Expenditure Finance Committee proposes resolution of most issues related to project financing and viability. However, the benefit of the proposed changes seems to apply to the projects that achieve commercial operation within five years of the notification. The problem may continue to persist for many delayed future projects.

The rules to acquire clearances need to be clearly defined to communicate, to what extent environmental, ecological and geological disturbances will be accepted.

Mohan is Associate Professor, Business policy Area, Indian Institute of Management Ahmedabad. Babariya is Research Associate, Indian Institute of Management Ahmedabad. The views are personal

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