New Hydro Electric Policy
to boost generation capacity
[R V Shahi's Weekly Column for Infraline,
February 11, 2008]
We have only partially succeeded in convincing the global community that Hydro
Electric Projects are Renewable Energy providers irrespective of their size of
units and capacity of the plant. In the context of climate change concern all
over the world, development of hydro electric potentials could prove to be a
substantial and solid answer to the challenges posed by fossil fuel based power
generation. Except for a few countries in the world, where their hydro
potentials have been exploited for generation of electricity to the extent of 70
to 80%, in rest of the world the average exploitation of hydro electric
potentials is less than 25%. It is amazing that while fossil fuel based
generation continued to rise unabated, having its inevitable effect on increased
CO2 emissions, development of hydro potential remained neglected.
The present uproar about global warming could perhaps have been avoided had the
global policy planners focused, in last forty to fifty years, on two important
energy sources viz. water and sun. Exploitation of hydro potential to a level
less than 25% of the potential as a global average, and struggling on
technologies to harness solar energy with insignificant impact, are in a way sad
examples for energy professionals and a very adverse commentary on their zeal
and devotion to research and innovate technologies to utilize these potentials.
is no exception in the matter of utilization of its hydro electric potential.
We have hardly harnessed about 23% - 35,000 MW out of 1,50,000 MW - of the
potential. Right in the beginning of the 10th Plan this issue was
captured as one of the priority items on the agenda of Power Ministry. Central
Electricity Authority carried out a ranking study which involved about 400
small, medium and large projects aggregating to a capacity of about 110,000 MW.
These projects were ranked in terms of the extent of assessed difficulty in
their execution. It was observed that about 160 projects aggregating to over
50,000 MW capacity could be taken up in the first instance and could be
investigated in detail. Accordingly "50,000 MW Hydro Electric Initiative" of
the Power Ministry was launched in August 2003 by be then Prime Minister Shri
Atal Bihari Vajpayee. The Ministry prepared a crash programme to prepare the
Feasibility Reports of these 162 projects. About a dozen agencies in the
country, which had the expertise of conducting such studies and preparing
Feasibility Reports, were engaged. As targeted, by September, 2004, i.e. within
one year, we had the reports for all these projects totaling to over 50,000 MW.
These reports provided good base line data and adequate information for further
investigations with a view to preparing Detailed Project Reports. At this
stage, on the basis of the data and information contained in the Feasibility
Reports, it was concluded that a further prioritization could be made for early
execution. Accordingly, seventy projects aggregating to a capacity of about
34,000 MW were identified to be taken up first. All these projects, it was
observed, could deliver power at Rs. 2.00 per Kwhr or less. This was on the
basis of data then available and therefore very tentative.
The next step envisaged was to carry out further detailed investigations to
prepare Detailed Project Report (DPR). It required a systematic procedure for
allocation of projects to public and private sector companies in accordance with
the Policy on the subject. However, a number of States started formulating their
own schemes and procedures in sharp departure from then existing Government of
India policy. This obviously led to considerable amount of confusion
particularly due to lender's concern to fund such projects which may face
problems relating to PPA, CEA's concurrence and transmission / evacuation of
power etc., as they were not in line with the Government of India guidelines.
The situation of flux continued for a number of months. "Water" and "Water
Power" in the Indian Constitution are State subjects (Entry 17, State List of
the Seventh Schedule of Constitution). But as per List I (Union List) Entry 56
says "Regulation and development of inter-State rivers and river valleys to the
extent to which such regulation and development under the control of the Union
is declared by the Parliament by Law to be expedient in the public interest". It
is very clear that the Constitution provides for a law, to be enacted by the
Parliament, to ensure proper development and regulation in relation to
inter-State rivers. Unfortunately we do not have a Water Act. Even now Ministry
of Water Resources could consider an early enactment on water. This alone will
provide the much needed speedy and coordinated developments of our river
systems, aimed at flood control, irrigation, drinking water and hydroelectric
In absence of this, Power Ministry has been using the provisions relating to
requirement of concurrence of Central Electricity Authority, previously under
India Electricity Supply Act 1948, and now under Electricity Act 2003 to provide
the regulatory input. This is however, only the second best solution in a
roundabout manner and hence it faces problems. Water Act, therefore, is a must.
In early 2006, as required under Electricity Act 2003, with due approval of the
Union Cabinet the Ministry of Power notified the Electricity Tariff Policy.
This policy provides that development of projects could be undertaken on the
basis of competitive bidding for tariff and all future projects would be
allocated through such tariff based competitive bidding. Since bidding process
involves almost a year of pre bid meeting, bidding, bid evaluation etc., the
policy also provided that during the transition period upto January, 2011, the
Central Public Sector and State Public Sector organizations may be allowed to
take-up projects and get their tariff fixed by the Regulatory Commissions based
on capital cost and performance efficiency norms. Since MOU. route to
allocate power projects to the private sector did not succeed in the past for
variety of reasons, and also created a number of issues relating to
transparency, similar dispensation was not provided, in the Tariff Policy, for
private sector. This approach has been more than vindicated through the
satisfying outcome of the Ministry of Power Initiative on Ultra Mega Projects.
This initiative has yielded highly aggressive tariff and the scheme has proved
that competitive bidding process can deliver as low a tariff as Rs. 1.20 per KWH
in a pit head project.
Why did the Ministry of Power not bring out a scheme similar to the Ultra Mega
Project Scheme for hydro electric projects? A short answer is that we could not
have been able to do it. For an effective response to a bidding process, and
particularly the bid which requires the developers to quote for price of power,
it is essential that a reliable DPR with authentic data is made available to
them. Only on the basis of authentic information as contained in the DPR will
they be able to prepare their tenders and commit, over a long period of time,
the tariff at which they will supply electricity. This task could be done
without much difficulty in case of thermal power projects, because the time
taken for preparing DPR as well as the cost involved is significantly less. In
case of hydro projects, investigations required are much more and accordingly
time and cost both are significantly larger. After the Feasibility Reports of
the 50,000 MW hydro electric initiative were available by September, 2004, the
Ministry of Power did make an attempt with Planning Commission that DPR's could
be taken up with necessary funding from the Government (to be reimbursed by the
project developers at the time when the projects are allocated to them for
development). The Planning Commission, however, did not agree to such an
approach. Enhancing the quality of investigations in hydro projects is essential
for reliable DPR and Information Memorandum. The proposal of Ministry of Power
could have, perhaps addressed this requirement by getting these DPR's done
through reputed national and international consultants. This need is absolute
irrespective of whether projects are executed by government or private agencies.
Non acceptance by Planning Commission has obviously affected the hydro project
In the light of the Tariff Policy, and considering the peculiarities of the
Hydro Electric Projects, the predicament was that while projects could be
allocated to public sector because Regulatory Commission would have access to
all the cost data and determine their tariff on the basis of cost and efficiency
norms, an attempt on similar process to be followed for private sector was
considered to be difficult. Tariff based bidding was not possible because
reliable DPR's were not available. The only way therefore was to evolve a
special policy for hydro projects which could take care of these difficulties.
Accordingly a draft for such a policy was prepared in September, 2006 and
discussed with Planning Commission even before the same could be presented for
inter ministerial consultation before being placed for consideration and
approval of the Cabinet. All the issues which were standing in the way of
allocation of hydro electric projects to different developers, the criteria for
such allocations, the concerns of the State Governments, the incompatibility
with the Tariff Policy and the process through which the cost and tariff could
be examined and regulated, were captured in this draft document. Accordingly,
a draft policy paper for interministerial consultation was prepared in December,
It has taken more than a year for these consultations and comments by various
departments. These are needed before the proposal could be processed by the
Ministry of Power for approval by the Cabinet. Finally the new Hydro Policy has
been approved by the Union Cabinet (January 2008). The salient features of the
policy could be summarized as below:
Till January, 2011 the allocation of hydro projects to project developers, both
in public sector and private sector can be done without necessarily having to go
through tariff based competitive bidding.
Concurrence of the Central Electricity Authority and Power Purchase Agreement to
achieve financial closure will be necessary.
In absence of the competitive bidding, a transparent procedure will have to be
followed by the State Governments for awarding project sites to private sector
developers. The criteria for selection should include experience of the
developers for infrastructure projects, financial strength of the developers,
past record of performance, turnover of the developer in comparison with the
size of the project. The State Governments could use these criteria, call for
bids from the short listed developers who qualify at the R.F.Q. stage (based on
above criteria) and ask them to quote a single quantifiable parameter which
could be either the extent of free power beyond 12% or equity participation or
upfront payment to the State Government etc.
The developers will be expected to follow the procedures of Central Electricity
Authority for obtaining their concurrence and of the Environment Ministry for
Environment and Forest clearances.
They will be required to go through the process of ICB for award of contract
either through Turn Key Contract or through a few well defined packages.
The tariff of the project shall be decided by the Regulatory Commission. While
12% free power will be taken into account in determining tariff, any other
additional financial commitments given by the developer, for example, free power
beyond 12% or any other financial concessions, shall not be allowed while
determining the tariff.
Since the project developer will have to incur or undertake additional financial
burden for getting the site allocated on the basis of the bidding criteria, he
will be allowed a special incentive by way of merchant sales upto a maximum of
40% of power generated. This incentive, however, has been preconditioned on
project management performance in terms of schedule etc.
Similar approach shall have to be followed for all projects above 100 MW which
have already been allocated by various states to private developers.
An additional 1% free power shall be earmarked for local area development fund.
Revenue from this will be used for welfare schemes, creation of additional
infrastructure and common facilities in the local area. State Governments have
also been advised to provide a matching 1% out of their share of 12% free power
towards this local area development fund.
For a period of ten years from commissioning of the project, 100 units of
electricity per month would be provided by the developer to the affected
For the displaced families, a more liberal approach may be adopted as compared
to the National Policy on Rehabilitation and Resettlement.
This policy should facilitate faster decision making at the level of the State
Government for allocation of projects. This will definitely boost hydro capacity
addition programmes. The success of the policy will, however, depend on a
number of factors. A few important issues are given below :
Since a large number of DPR's will require concurrence of the Central
Electricity Authority both CEA and CWC will require necessary strengthening of
the concerned groups so that this process is expedited with reference to a time
The mechanism for revisiting various components of costs depending on the
ground realities during execution (for example Geological and Hydrological
surprises, realignment of certain project components etc.) will need to be put
in place. If the methodology to handle these issues could be predetermined and
notified as a guidance by CEA it will be more smooth and convenient for all
Regulatory Commissions should invariably go by the recommendations of the CEA in
respect of cost related matters, so that tariff fixation does not get into too
lengthy a process.
1% additional free power for local area development fund is exactly in line with
what was decided in Arunachal Pradesh in September, 2006, when NTPC, NHPC and
NEEPCO signed Memoranda of Agreements with the Govt. of Arunachal Pradesh for
developing a number of projects aggregating to 15,000 MW capacity. This will
bring about the desired relief in and therefore acceptance by the local area.
1% matching free power from the State Government quota towards the local area
development fund will further facilitate this process and therefore even better
response and acceptance. However, the remaining 11% free power, which was also
meant for development of infrastructure, and for addressing hardships and
distress in these areas, should not be left totally to the State Government for
using it elsewhere. If not all, a major part of this revenue should be utilized
for the purpose for which it was meant when the concept of 12% free power was
Funds generated for Compensatory Afforestation and for Catchment Area Treatment
are also not being utilised properly by most of the concerned State governments.
A mechanism needs to be put in place so that activities and progress in these
two areas are monitored regularly.
Both Power Grid and CEA are fully conscious of the need to create major
transmission systems from North East where almost 80% of hydro potentials
exists. Modalities of the coordination with various project developers,
particularly keeping in view the 40% component of merchant capacity, will need
to be worked out.