To give a major leg-up to the ailing hydropower segment, the government, in March 2019, approved a slew of policy measures, including the much-awaited renewable energy status to large hydropower projects (LHPs) (of more than 25 MW of capacity). Notifying the hydropower purchase obligation (HPO) as a separate entity within the non-solar renewable purchase obligation (RPO), revising the tariff determination methodology, and extending budgetary support for flood moderation and enabling infrastructure were the other key highlights of the measures announced for the revival of the hydropower segment, which has been battling slowing capacity additions and waning investor interest. Industry experts comment on the impact of the new measures on the hydropower segment, as well as the issues and concerns that remain to be addressed…
What are your views on the measures announced for the hydropower segment?
Our observations on the measures approved by the cabinet, on March 8, 2019, for promoting the hydropower segment are as follows:
LHPs to be declared as renewable energy source (according to the existing practice, only hydropower projects of less than 25 MW capacity are categorised as renewable energy): This will provide HPPs access to the subsidies and benefits available to renewable projects thereby bringing hydropower and renewables, both of which are green and clean sources of energy, on an even keel. For example, benefits such as waiver of interstate transmission charges for interstate sale of hydropower (similar to solar and wind projects developed under auctions, and selling power to discoms), “must-run” status and accelerated depreciation will promote investments in hydropower. To take care of sustainability concerns, LHPs will continue to require appropriate statutory clearances which are exempted for small hydro.
HPO as a separate entity within the non-solar RPO to cover LHPs commissioned after the notification of these measures: Notifying the HPO as a separate entity within the non-solar RPO will mandate state distribution utilities to meet a certain proportion of their total power requirement through hydropower. This will promote the market for operational hydro projects with uncontracted capacity and for upcoming projects it will facilitate the signing of power purchase agreements (PPAs) and enable financial closure. The HPO targets will be notified subsequently, while amendments will be made in the extant tariff policy and tariff regulations to operationalise the HPO. However, more clarity will be needed on:
- The export-oriented hydropower projects of capacities ~2,640 MW in Bhutan and ~2,500 MW in Nepal that are at various stages of development. A significant portion of power from these projects will be imported to India. However, clarity is needed on whether the power purchased from such projects by Indian discoms will be counted towards the HPO.
- The notification mentions that the HPO will be applicable for untied capacity for operational projects. Further clarity will be needed on its applicability for the currently tied up capacity in the medium term/short term due to the lack of procurer interest in long-term arrangements.
Tariff rationalisation measures: The debt repayment period has been increased from 12 years to 18 years and project life from 35 years to 40 years. The government has also allowed a 2 per cent escalation in hydropower tariffs, which is subject to approval of the appropriate regulatory commissions. This is a good measure to enhance viability and make projects more competitive by back loading the debt repayment requirements and lowering the regulated tariff in the initial years. The implementation of these measures will depend on subsequent amendments to the Central Electricity Regulatory Commission/ Science and Engineering Research Council tariff regulations. Further, it needs to be seen how the financial institutions will look at this when evaluating the financing terms and conditions, so that project developers’ returns on investment in the initial operating period are not impacted.
Budgetary support for funding the flood moderation component of HPPs and enabling infrastructure on a case-by-case basis: The notification provides for budgetary support for setting up enabling infrastructure (roads, bridges, etc.) for HPPs as well as for flood moderation components for storage-based hydroelectric projects. Thus, these costs will be excluded for the purpose of tariff determination and hydropower tariffs will become more competitive. This will incentivise hydropower’s multi purpose use and will also aid the development of projects that are remotely located. The amount of funds to be released will be decided on a case-by-case basis, following the appraisal of each project by the Public Investment Board/Cabinet Committee on Economic Affairs. The upper limit of the grant for this has been set at Rs 15 million per MW for projects up to 200 MW, and at Rs 10 million per MW for projects above 200 MW. It may be noted that the development of enabling infrastructure requires significant upfront payments and it will be useful if more clarity is provided and a part of such payment is released before the construction stage.
The measures announced by the government are positive for hydroelectric power development. It is a well-established fact that hydropower is not only renewable in nature but also plays an important role in the development of other renewables such as solar and wind, as it provides the required support for balancing the grid during the fluctuations caused due to the integration of these sources. Thus, LHPs (>25 MW) should be considered as renewables.
The government has also notified that it will fix separate targets for the HPO within the non-solar RPO. This will create a niche market for hydropower. Further, the measures announced include steps to reduce the cost of purchasing hydropower. Hydroelectric plants are capital intensive and have a longer gestation period as compared to plants based on other sources of power due to obligations like free power to home state, resettlement and rehabilitation activities, and development of supporting infrastructure such as roads and bridges. Also, unlike thermal plants but similar to solar and wind power generators, hydropower plants have almost negligible recurring costs. Basically, the entire cost is the capital expenditure shared by the developer and the banks. It has been observed that hydro plants have a much longer life as compared to thermal plants or other renewable energy plants. The life of hydro plants can be upwards of 50 years if they are maintained properly. The earlier tariff regulations considered the life of a hydro plant as 35 years. Further, a major portion of the debt had to be repaid in the first 12 years. All this made the tariff for hydro plants very high and unattractive, especially during the initial years, even though the tariff was much lower when seen over the useful life of the project. So, by making a provision for increasing the life of the project to 40 years, increasing the debt repayment period to 18 years, providing tariff flexibility within the regulatory norms and providing aid for the building of roads and bridges, we can reduce the tariff and make hydropower attractive for discoms to purchase. Going forward, we will see more discoms coming up with tenders for hydropower purchase.
The measures to promote hydropower have been issued after a long time. The much-awaited changes in the hydropower policy were the need of the hour since, so far, hydro was given a stepmotherly treatment and developers were losing interest in developing new projects. The much-needed measures were discussed with the Ministry of Power (MoP) three times during roundtable discussions and at every occasion it was assured that the policy would be relooked at. However, it was only after almost 2.5 years that suitable measures were issued. Although positive changes have been made, the support needed for enhancing the value of hydropower still lacks in the right earnest, at least for private developers. For instance, stressed projects may benefit as the policy applies to new projects that will be taken up after April 2019. However, it is commendable on the part of the government to have notified such favourable measures. These policy changes will, to some extent, bring private developers back to the segment. The most important decision has been to declare all hydro projects as renewables, as, except for India, everywhere else hydro projects are categorised as renewables. Another pertinent decision has been the notification of the HPO as a separate identity. This will encourage private developers, if further clarity is provided on the application of the HPO. Moreover, clarity on budgetary support for storage projects and enabling infrastructure is required.
In March 2019, the government approved various measures to promote the hydropower segment. These include declaring LHPs (>25 MW capacity) as renewable energy projects and approving a separate HPO under the non-solar RPO to cover the LHPs commissioned post the notification of the norms. The annual HPO trajectory will be notified by the MoP with the required amendments to the existing tariff policy and regulations. Further, the government has approved budgetary support for funding enabling infrastructure and the flood moderation component of HPPs. It has also proposed certain tariff rationalisation measures. The budgetary support for funding the cost of building supporting infrastructure will be provided on a case-by-case basis as per actuals, subject to a limit of Rs 15 million per MW for HPPs of up to 200 MW of capacity and Rs 10 million per MW for HPPs above 200 MW of capacity. The tariff rationalisation measures include providing flexibility to developers to backload tariff, increasing the debt repayment period to 18 years and escalating the tariff by 2 per cent. These measures have been approved amidst a slowdown in the addition of new hydro capacities over the past few years. As per ICRA estimates, these measures are likely to reduce the levellised cost of generation for a 100 MW HPP by around 35 paise per unit over its useful life, thereby improving its tariff competitiveness.
What are some of the unaddressed concerns?
Some of the unaddressed concerns are:
- River basin plans and interstate coordination: Hydropower planning and subsequent project development are generally carried out on a case-by-case/individual project basis. With water being categorised as a state resource, a large number of HPPs with common river systems between adjoining states have been delayed due to the lack of interstate agreements on water usage. The new measures do not provide any guidance on the development of an integrated river basin plan, one that would alleviate such problems going forward.
- Evacuation infrastructure for projects in remote areas: Most HPPs lack adequate power evacuation infrastructure as they are usually located in remote areas, thus making sites inaccessible for project development. Geographical constraints in developing requisite transmission infrastructure for power evacuation may lead to high project costs. The new measures have not specifically dealt with these issues. The existing tariff framework may require further changes to improve the viability of hydro projects considering the high upfront costs of enabling infrastructure.
- Financing challenges: The major commercial deterrents for private developers are geological risks, high capital costs and a long payback period due to the high gestation period, which creates issues in financing. The government should introduce necessary provisions to improve the investment climate by making available long-term finance with low interest rates. Such innovative financing models will be imperative for the growth of the hydropower segment.
- Others: For rationalising tariffs and incentivising hydropower, measures like peaking tariff, suitable ancillary market mechanisms, etc. are yet to be announced.
Gyan Bhadra Kumar
We had hoped that some more steps will be taken to reduce the purchasing cost of hydropower and make it more attractive for discoms to buy. The government had earlier announced the interest subvention scheme for stalled hydro projects. However, we have not seen this being covered in the latest measures announced by the government. Further, unlike thermal plants that can have capacity utilisation up to 100 per cent, hydro plants generally have a capacity utilisation factor of 50 per cent as the generation is dependent on water availability, which reduces significantly during winter months. Similarly, solar and wind also have a capacity utilisation factor varying between 16 per cent and 25 per cent depending on weather conditions. Whereas solar and wind power plants either pay no charges or pay concessional charges for the transmission and wheeling of electricity, hydro plants are required to pay these charges for full capacity. This effectively doubles the transmission charge per unit for a hydropower plant and increases the overall cost of hydropower purchase.
There is no reason why these concessions should be restricted to solar and wind only, especially considering the fact that the tariff for solar and wind power is now below the average purchase price of discoms. In fact, with such a large increase in solar and wind power generation capacity, hydroelectric plants, especially pumped hydro storage plants, need to be promoted so that the transmission and wheeling charge benefit available to solar and wind is extended to pumped hydro storage projects. We would also like to see that the government comes up with a standard bidding document (SBD) for the purchase of hydropower by discoms based on the recently announced measures. It would be essential that the SBD is framed in consultation with developers and discoms so that all practical aspects are taken care of and a competitive market is established.
We would like the government to issue the guidelines and directives for the application of the HPO, and for penalising defaulters. Similarly, guidelines should be issued for a decision on budgetary support for infrastructure development and cost reimbursement. One of the unaddressed concerns is rationalisation of subsidy for free power by keeping the unit cost of power affordable. Directives regarding free power should be a part of policy guidelines. State governments say that the provision of free power is as per central government guidelines, as mentioned in the hydropower policy, while the central government views it as a state subject and puts the onus on states to take a decision. It is accepted the world over that grid balancing can be achieved with hydropower smoothly during the peak hour requirement or whenever the need arises, therefore, the harnessing of hydropower to its full potential is a must and is possible at affordable rates. It is to the benefit of state governments to either defer the provision for free power suitably or reduce the percentage depending upon the viability of individual hydropower projects at the time of commissioning.
The introduction of a separate HPO is positive for new HPPs, although its timely adoption and implementation by various SERCs will be crucial. While these measures are positive in the long run, the major challenge for HPPs is the timely implementation of projects, which is impaired by delays in securing approvals, mainly environmental clearances, and logistical challenges, as the majority of the projects are located in the hilly terrain of the north-eastern region.