Limping Along

Growth in the small-hydropower (SHP) segment has been sluggish year after year. While the government has been fairly optimistic about the segment, there has not been any substantial increase in the installed capacity. The industry remains largely underdeveloped with an installed base of only 4,485 MW as of March 2018, against an estimated potential of 20,000 MW across 6,474 sites. A back-of-the-envelope calculation shows that in order to achieve the target of installing 5 GW of SHP projects by 2022, over 129 MW of capacity needs to be installed every year from now on. This will be difficult to achieve considering the issues plaguing the segment.

Key developments in 2018

In May 2018, the Himachal Pradesh government made significant changes in its hydro policy. These included mandatory purchase by the Himachal Pradesh State Electricity Board of the entire power generated from projects with a capacity of up to 10 MW, commissioned after the May 2018 notification. The time of tariff calculation has also been amended. As per the policy changes, the Himachal Pradesh Electricity Regulatory Commission will determine the tariff on the date of the commissioning of the project and not on the date of signing of the implementation agreement, provided the project is completed within the stipulated timeline.

Deferring the 12 per cent free power for the first 12 years in the case of already allotted projects is another positive highlight of the policy. It also offers rationalisation of royalty rates for the allotment of new projects. Projects of up to 10 MW for captive use of power for existing or new industrial units within the state will be allocated without competitive bidding. Further, wheeling charges for hydropower plants of up to 25 MW capacity were exempted, thereby enabling them to sell power at competitive rates outside the state as well. The changes made in the new policy are expected to revive stalled projects and attract developers to invest in new ones.

In another development, in July 2018, the Ministry of New and Renewable Energy asked all the state governments to exempt SHP project developers from cess and taxes for six years from the commencement of commercial operations. This was done to avoid contradictory policies between the central and the state governments. While the central government provides financial assistance to SHP projects, the states impose several taxes and cess.

In August 2018, the Maharashtra Electricity Regulatory Commission (MERC) fixed tariffs for mini, micro and small-hydropower projects commissioned between August 1, 2018 and March 31, 2019.

In a relief to developers, in October 2018, MERC passed an order directing Maharashtra State Electricity Transmission Company Limited to pay Rs 5.5 million to Mahati Hydro Power Projects Private Limited. The latter had, however, requested for a payment of Rs 14.4 million towards the additional amount spent on the construction of evacuation facilities beyond the inter-connection point and as interest on unpaid dues.

MERC also provided relief to Mohite Industries, which owns a 10 MW SHP project in Radhanagari, Maharashtra. The developer had filed a petition with MERC regarding Maharashtra State Electricity Distribution Company Limited’s (MSEDCL) non-compliance with the Distribution Open Access Regulations, 2016. In its petition, the developer requested payment for the unutilised banked energy from the project from April 2017 up to the date of release of payment. After assessment of the petition, MERC directed MSEDCL to purchase 10 per cent of the unutilised banked energy at the end of 2016-17 at Rs 3.35 per kWh.

These orders will, no doubt, provide some financial respite to the developers. But the larger financial and infrastructural challenges still remain for the segment.

Debate over SHP

While solar and wind power make greater commercial sense, SHP too offers its own set of benefits. Although SHP projects are cost intensive, they also offer significant returns over the long run. Moreover, their capacity utilisation factor is high as compared to other sources of renewable energy. There are several examples in India where these projects have helped in powering remote villages, and thereby raising the social and economic standard of people in these areas. However, there are a series of challenges that are impeding growth in the SHP segment. These issues have remained more or less the same over the years owing to the lack of proactive government intervention in tackling these. Delays and difficulties in obtaining permissions from multiple government agencies increase the gestation period of plants, thereby reducing their viability, increasing the interest burden, and making them unattractive for private developers.

Also, the private sector is reluctant to invest in the segment due to the large investments, low tariffs and modest returns involved. Moreover, seasonal variability and unpredictability of rainfall restrict power generation and hence affect revenues. Another concern is inadequate grid availability. The lack of grid connectivity has often led to losses for developers, who are forced to curtail generation, leading to revenue losses and under-utilisation of the plant. Besides, SHP projects have come under the scrutiny of ecologists, who believe that building SHP projects in the fragile, geologically sensitive Himalayan terrain poses environmental challenges. As glaciers shrink in the Himalayas, the flow of rivers is likely to reduce and SHPs would further compound this issue. Some recent studies have also linked the recent Kerala floods with multiple, cascading dams that were built in quick succession in ecologically fragile geologies. While no concrete theory has been established yet, such concerns slow down the approval process for these projects at various levels.

In view of these concerns, SHP projects clearly need to be examined in much greater detail. The need of the hour is to regulate and formulate processes for addressing not just the economic concerns regarding SHP projects but also their environmental and social challenges. This would instill greater investor confidence in the segment.

The way forward

The outlook for the SHP segment looks uncertain, given the policy uncertainty at the central level and the investor reluctance to foray into this area. However, the policy changes made by the Himachal Pradesh government are a beacon of hope. Going forward, other states with major hydropower potential such as Jammu & Kashmir, Uttarakhand and Arunachal Pradesh should come up with similar investor-friendly measures. To reap the significant social and economic gains that SHP projects offer, government agencies need to provide financial and technical support to scale up development in the small hydropower segment.

 

 

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