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New Hydro Electric Policy to boost generation capacity, Shri R V Shahi, Former Secretary, Ministry Of Power

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.

India 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 generation.

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 development process.

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, 2006.

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:

  1. 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.

  2. Concurrence of the Central Electricity Authority and Power Purchase Agreement to achieve financial closure will be necessary.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. Similar approach shall have to be followed for all projects above 100 MW which have already been allocated by various states to private developers.

  9. 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.

  10. 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 families.

  11. 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 :

  1. 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 bound schedule.

  2. 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 concerned.

  3. 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.

  4. (d) 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 introduced.

  5. 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.

  6. 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.