Government needs to relook at policies and streamline processes for clearance, bidding and award as well as implement robust monitoring frameworks to help accelerate project development, says Yogesh Daruka.India is experiencing a peak deficit of 10.6 per cent and energy deficit of 7.9 per cent. As on end of December 2011, India’s installed capacity stands at 187 GW with major share (around 66 per cent) from thermal and only 21 per cent from hydropower. We need to tap all potential sources to address this deficit and meet the demand growth for accelerating economic development.India ranks fifth in the world with a hydropower potential of 150 GW. Out of this only 23 per cent has been developed and 10 per cent is under construction so far. Countries like China and Brazil with a hydro potential of 380 GW and 130 GW respectively have harnessed around 52 per cent as on 2009.The hydropower potential in India is unevenly distributed. One-third of the potential is concentrated in Arunachal Pradesh. Himachal Pradesh and Uttaranchal each account for 12 per cent of the total potential. Overall, the northern and north-eastern parts of India account for 76 per cent of the potential.Benefits of hydropowerHydropower development is a key element for our energy security. The key benefit of hydropower is derived from eliminating the cost of fuel - hydropower generation cost is almost inflation-free and reduces over time. These projects have very long economic lives compared with fossil-fuel based power projects. Hydropower plants can also be used to address daily demand fluctuations due to their inherent ability to quickly ramp-up and ramp-down. These plants produce clean power and help in reduction of greenhouse gas emissions. In addition, these projects may also be conceived as multi-purpose ones.Projects such as Bhakra Nangal, Damodar Valley and Nagarajuna Sagar contribute to irrigation and flood control in addition to power generation.Development of hydropower in IndiaA big thrust was laid on development of hydropower during our initial development years (1960s). However, the capacity additions fell short of targets right from inception and the progress has slowed over the last decade. In the 11th Plan, against a hydropower capacity addition target of 15,627 MW, only 5,304 MW has been commissioned till date. The hydropower capacity as a proportion of our total installed capacity has reduced from 46 per cent in 1970s to 21 per cent in 2011. We have an ambitious plan to add around 30,000 MW of hydropower capacity in the 12th Plan. The key reasons hindering development of hydropower projects are environmental clearances and issues on aspects like R&R, technical, institutional capacity, financial etc.Issues in hydropower developmentThe issues in hydropower development involve various dimensions of policy, financing, R&R, technical and commercial issues, etc. Hydropower development in general is more complex than most other infrastructure sectors and requires concerted and well thought out actions from policy-makers, developers and investors. The key issues in hydropower development are:1. Obtaining MoEF clearance has become a major issue in the recent past for hydro power plants, particularly in the North-East. Also, developing hydropower projects often involves submergence of both forest and non-forest lands. Forest clearances also require compensatory afforestation on the non-forest lands.2. The features of hydropower projects being site-specific depend on the geology, topography and hydrology at the site. A good degree of uncertainty remains in the sub-surface geology even after preparatory studies and geological surprises during actual construction cannot be ruled out. Projects like Tapovan Vishnugad (520 MW) in Uttaranchal, Parbati St.-II (800 MW) and Rampur (412 MW) in Himachal Pradesh have been delayed due to geological issues leading to slippage in 11th Plan capacity addition. 3. Land acquisition is a major issue hampering the development of hydropower projects. Most hydropower projects are located in remote hilly areas and land ownership records are not easily available. The process of land acquisition also varies from state to state as per their respective Land Acquisition Acts. 4. A large number of hydropower projects having common river systems between adjoining states are held up due to a lack of inter-state agreements and disputes on water sharing. 5. Power projects require facilitating physical infrastructure like better physical connectivity, telecommunication systems, transmission evacuation etc. Developing such infrastructure at hydropower project sites is often challenging and costly due to adverse climatic conditions and difficult terrain. For example, the associated transmission system for evacuation of Kameng (600 MW) power is estimated at Rs 11,000 million, about 50 per cent of the cost of the generation project. Lack of infrastructure such as schools, hospitals and difficult access to sites often becomes a block to moving skilled manpower to difficult project sites.6. Hydropower is a highly capital-intensive industry with long gestation periods. Hydropower development needs long tenure debt (20 years or more) availability of which is extremely limited in Indian capital markets. The constrained financial situation of the distribution sector which is the end user of the power generated often poses counterparty risks for developers and lenders.Government policies to promote hydropowerTo prioritise hydropower development, the Government of India has put in various policies like Hydropower Policy, R&R policy, Water Policy and provision for mega power benefits.In 2003, a ‘50,000 MW initiative’ was launched for preparation of Preliminary Feasibility Report (PFR) of 162 new hydro electric schemes. However, only 78 schemes of 34,020 MW potential were identified for DPR preparation considering their low tariff (first year tariff below 2.50 Rs/kWh).The Hydro Power Policy 2008 directs that states need to follow transparent procedure for awarding potential sites, mandates developers to go through International Competitive Bidding for award of contracts and tariff determination by ERCs for the portion of long-term power. To incentivise developers, the policy allows for merchant sales up to a maximum of 40 per cent based on project completion timelines.Hydro-rich states like Arunachal Pradesh, Uttaranchal, Himachal Pradesh and Sikkim have also taken several initiatives to attract investments particularly from private sector. They followed a focussed approach by categorising projects based on capacity (less than 25 MW, 25 to 100 MW and above 100 MW). To facilitate joint venture projects, some states have nominated a state nodal agency with an option of equity investment by state governments. The concession period ranges from 40 to 45 years with bidding generally based on upfront premium to be provided to the state. The initial euphoria of the private sector (where some developers paid upfront premiums to states ranging from Rs 30 lakh to Rs 1 crore per MW) pushed up the project costs and the tariff required for viability.Private participation in developing hydropowerThe Indian power sector opened up for private participation in 1991. Thermal power has attracted a lion’s share of private investments with capacity addition by private sector of 25,855 MW in thermal and only 2,525 MW in hydro (as on 31.12.11). Private participation in hydropower sector has gained some momentum over the last 5-6 years with large capacities being awarded to the private sector. However, actual progress on most of these projects has been slow.Accelerating hydropower developmentThe strength of the private sector and some public sector companies with good hydropower development experience is strong in project execution and financing compared to public sector companies at state levels. States may leverage the strong experience of hydropower companies – the states may focus more on project conceptualisation, securing clearances and then encourage the private sector to take on. Of course, states need robust monitoring of awarded projects to ensure smooth and timely implementation and identify appropriate interventions where necessary.Generally, the burden of building supporting infrastructure has been entirely on developers. To promote project development and pass on economic benefits to local people, states need to share the responsibility of developing infrastructure with project developers.The capital markets need to be deepened to help provide long-term debt financing for capital-intensive nature and high gestation periods for hydropower projects. Some initiatives like IIFCL for developing infrastructure lending have been taken. However, given the large-scale requirements of infrastructure and hydropower development, many more initiatives are required to channelise long tenure funding (from pension funds, banks, etc) to these sectors. Multi-lateral institutions and green funds have, in recent times, shown some appetite to fund private sector hydropower investments and can be a good source for investors if a sound business case can be demonstrated.Lack of skilled manpower for project execution is also becoming a bottleneck for faster completion of projects. The Central government has initiated an ‘Adopt an ITI’ scheme under which project developers can adopt an Industrial Training Institute (ITI) or open a technical training centre in the neighbourhood of the project. This can be mutually beneficial to both the project developer and local residents since developers can get skilled labour and the latter employment opportunities.Developers need to conduct robust technical studies during the project preparatory stage and prudent due diligence on commercial and financial aspects to reduce project execution risks and provide more certainty to lenders and investors on project viability. Governments should relook at policies and streamline processes for project clearances, bidding and award. Subsequently, implementation of robust monitoring frameworks by government to assess roadblocks and initiate corrective actions can help accelerate project development.The author is Director - Energy, Utilities, and Mining, PwC India. With inputs from Samrat Roy, Manager and Sriram Siddhartha Potluri, Consultant, PwC India. Views are personal.
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