Inclusive Approach

Large hydro gets a new lease of life with renewable energy status

By Ashay Abbhi

On March 7, 2019, the Cabinet Committee on Economic Affairs (CCEA) gave its approval for the inclusion of  large-hydropower in the renewable energy sector. The move essentially ends the distinction between small-hydro projects (SHPs) with a capacity of less than 25 MW and large-hydro projects. With the addition of around 45 GW of hydro capacity, the total renewable energy capacity now stands at over 121 GW although the Ministry of New and Renewable Energy website is yet to reflect this change. The draft policy was released in 2017 but was awaiting the government’s approval. The approval has a multilevel impact on all associated sectors and segments. That said, it is not clear whether the policy will be adopted as it is or it will be modified.

India’s hydropower potential stands at 145 GW, of which only 45 GW has been tapped so far. Over the past 10 years, 1 GW per annum of hydropower capacity has been added on average. Hydro uptake has reduced with the growth of the renewable energy market. The issues associated with hydropower include a long gestation period, its capital-intensive nature and high tariffs. In addition, there is lack of investor confidence in the segment owing to resettlement and rehabilitation requirements, and flooding concerns. As a result, a number of projects have been stalled. The draft hydropower policy was aimed at removing these bottlenecks and reviving   stranded hydro assets. With the CCEA’s approval, the revival of stressed hydro assets is expected to take off.

Key elements

  • HPO trajectory: The CCEA approval calls for the introduction of hydropower obligations (HPOs) for large-hydro projects under non-solar renewable purchase obligations (RPOs). Power from SHPs, however, will remain a part of non-solar RPOs. According to the Press Information Bureau (PIB), the trajectory for annual HPO targets will be defined by the Ministry of Power based on capacity additions planned for the large-hydropower segment.
  • Tariff amendments: To operationalise the HPO targets, the necessary amendments will need to be made to the tariff policy and regulations.
  • Tariff rationalisation: The policy provides flexibility to developers to determine their tariffs taking into account project life of 40 years, debt repayment period of 18 years and tariff escalation of 2 per cent.
  • Budgetary support: The new hydropower policy provides budgetary support for flood moderation. Financial support for enabling infrastructure such as roads and bridges will be provided on a
  • case-to-case basis. This will be Rs 15 million per MW for projects with a capacity of up to 200 MW and Rs 10 million per MW for projects of more than 200 MW.

The draft policy offers multiple financial incentives to upcoming hydropower projects. It proposes to provide an interest subvention (subsidy on interest for debt taken for the development of hydropower projects) of 4 per cent either up to seven years during construction or for three years after the commencement of commercial operations. Considering that large-hydro projects are highly cost intensive, subsidy on interest will help developers reduce

capital costs and improve margins, thereby promoting hydropower development. In addition, subsidies and incentives, such as accelerated depreciation (AD), available for renewable energy projects including SHPs are proposed to be extended to large-hydro projects as well. However, these incentives have not been discussed in the PIB brief released on the subject.

Bailout plan

Multiple hydropower projects in India remain stalled, limiting sector growth and eroding investor confidence in hydropower projects. The draft policy includes a bailout plan for these projects. It proposes diverting Rs 160 billion into a hydropower development fund. The creation of this fund is expected to expedite under-construction projects, while also helping improve prospects for upcoming hydropower plants. However, given the huge cost implications of stalled projects, additional amounts will need to be diverted to the hydropower development fund. With the segment now under the purview of renewable energy, it will be eligible for other green funds that enable tax holidays, subsidies on equipment, and fiscal benefits that can complement the proposed bailout plan. Moreover, stalled projects will be eligible for investment through green and masala bonds that channel funds to be used purely for renewable energy projects. Besides, it is imperative for the government to improve associated infrastructure for better offtake of hydropower. This entails grid strengthening, standardisation of grid codes and transmission lines, and development of a competitive market.

The PIB brief on the CCEA’s approval of hydropower projects, however, does not mention the bailout plan proposed in the draft policy. The budgetary support mentioned in the report could be converted into a hydropower development fund. Policy amendments, as mentioned in the brief, may include details about the bailout plan, the status of which remains unclear at this point.

Impact analysis

The hydropower segment’s performance has deteriorated significantly in the recent past. This has called for immediate policy intervention, which has been provided by the CCEA’s approval of the draft policy. While the HPO will help ensure the offtake of hydropower, tariff rationalisation measures will reduce the burden on offtakers. Meanwhile, the flexibility given to developers to determine their own tariffs will result in more competitive tariffs.

The renewable energy status granted to large-hydropower projects will give them the much-needed access to funds in the form of green bonds and other such instruments that can be used only for renewable energy projects. AD benefits will now be available to hydropower projects, improving their economic viability and reducing tariffs.

As of January 2019, 37 hydropower projects with a cumulative capacity of 12,178.5 MW were under construction. Almost all of these are either stressed or stalled due to a host of reasons and have incurred time and cost overruns. As per the Central Electricity Authority’s hydro capacity addition programme for 2018-19, 840 MW was to be added during the year. However, only 140 MW had been commissioned as of January 2019. With the recent policy measures, it is expected that the commissioning of new capacity may be expedited.

It is, however, difficult to ascertain short-term gains from this policy move and the impact will largely be felt in the long term. The market will need a considerable amount of time to adjust to the changes and put the incentives in place. Meanwhile, mobilising investments by generating investor interest may take some time depending on the HPO targets and tariff rationalisation measures. It may be a couple of years before the impact of the policy amendments is felt.

Conclusion

Classifying hydropower as renewable energy has been a key step towards reviving the segment. The benefits of hydropower outweigh the associated challenges. In a scenario where the Indian power sector is trying to move away from coal-based power generation, hydropower plants provide an alternative for load balancing. Moreover, the policy move will help increase the pumped hydro storage capacity, which will further mitigate the grid integration issues associated with intermittent renewable energy. The move gives ample time to revive hydropower projects by 2022. These projects will support the integration of the additional 100 GW of renewable energy targeted to come online.

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