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Hydro Electric Policy Must Aim At Faster Capacity Addition, Shri R V Shahi, Former Secretary, Ministry Of Power

Hydro Electric Policy Must Aim At Faster Capacity Addition

Monday, May 14, 2007


About a week back an interactive seminar was organized at Delhi on "National Strategy on Hydro Power Development". I had the privilege of participation in this seminar and also present inaugural address. The more importantly, I thought it was proper to facilitate an interaction among the participants and generate some consensus on a few specific issues and approaches. In view of the keen interests in the subject and its extreme importance, a number of observations and suggestions by emerged.

The seminar captured a number of important facts and issues. It would be relevant to put a few facts so that the issues come into focus keeping these in mind.

  1. In the 10th Five Year Plan we added largest amount of capacity of over 8,000 MW, almost equal to the sum of capacities added in any two five year plans put together in the past.

  2. Inspite of best efforts, the proportion of Hydro electric capacity has been reducing. There was some upward change during the 10th plan, but it was only marginal. From more than 40% of the total capacity at one time, the hydro electric capacity is now only about 26% of the total installed capacity, which is about 34,000 MW.

  3. It is estimated that the total potential of Hydro electric capacity in the country is more than 150,000 MW.

  4. A ranking study carried out by the Central Electricity Authority (CEA) covered almost 400 project locations with aggregate capacity of 107,000 MW. The ranking study aimed at classifying these projects into various categories form the point of view of difficulties in execution.

  5. The Ministry of Power launched a 50,000 MW Hydro Electric Initiative in August 2003. This involved preparation of feasibility reports for 162 Hydro electric projects with an aggregate capacity of about 50,000 MW. This was facilitated by the Ministry and about a dozen agencies were put on this job under the overall co-ordination by Central Electricity Authority so that these feasibility reports could be prepared for further action on preparation of Detailed Project Report etc followed by execution. This was completed within one year.

  6. The bulk of the unexploited hydro potential is concentrated in the hill States of Jammu & Kashmir, Himachal Pradesh, Uttrakhand and the North East. In the North East the potential is of the order of 60,000 MW and more than 95% of the potential remains to be harnessed.

  7. Among the north eastern States Sikkim & Arunachal Pradesh would be accounting for more than 80% of the potential.

  8. After the preparation of the feasibility reports for 162 projects under the 50,000 MW Hydro Electric Initiative it was observed that about 70 projects with a total capacity of about 34,000 MW were such as could deliver power at the rate of less than Rs. 2.00 per unit and, therefore, they could be taken up on a priority basis.

  9. Hydro energy is hidden in water provided we are able to store, raise the height and use it when needed. If we allow it to flow into sea without storing, we can tap only limited portion of energy in the run-of-river (ROR) schemes.

  10. Storage schemes, with dams and reservoirs, offer maximum opportunities of tapping the energy when needed, particularly to meet the peak hour electricity requirement.

  11. In India less than 20% of storage has been developed. This is partly on account of our overall inadequate performance on Hydro project development but mainly on account of resistance and opposition toward reservoir projects as they invariably involve submergence of huge areas.

  12. Water is a State subject. Obviously State governments have an important role in facilitating developmental of Hydro Electric Projects.

  13. Some of the problems which had been experienced in the past, particularly with reference to development of these projects in hill States are as follows:

  1. Remote sites with practically no communication facilities.

  2. Creation of basic infrastructure namely roads even before commencement of construction inevitably increases the cost of the project.

  3. The recent approach of the Ministry of the Environment & Forest based on Court Judgement on computation of Net Present Value (NPV) for forest diversion has significant cost implication.

  4. In certain States law & order problems and insurgency have led to adverse effect on projects - both those yet to begin and also those under construction.

  5. While environment clearance has been faster, forest clearance, particularly for project involving wild life in these forests, has been experienced to be a very long process.

  6. Rehabilitation and resettlement issues pose particularly difficult situation.

  7. In many cases of rivers flowing through a number of States, difficulty has been experienced in taking up power projects because of protracted inter state water disputes.

  1. Apart from the above which are beyond the control of developers, some of the difficulties arise on account of inadequate preparations on the part of the project developers. A few important of these are listed below:

  1. If Geological investigations have not been done properly, during implementation serious geological surprises crop up. Of course, geological surprises do come up even where comprehensive geological investigations have been carried out. These can be minimized if thorough investigations are done. Himalayan mountain range, in many areas, presents very difficult geology.

  2. If surveys and investigations on the site are not carried out properly then problems do crop up with reference to foundations for dam, and on hydrological issues such as predicted quantity of water as well. Recently experiences have shown on issues pertaining to un predicted quantity of silt including unpredicted quality of silt.

  3. There is a need for an organization in the country which could acquire the expertise for comprehensive and reliable studies. A few organizations are there but we need to develop one which could acquire international acceptance on the strength of its knowledge & expertise.

In the recent months a point has been raised as to why the initiative of the type that the government launched, through ultra mega projects, for thermal power plants, and similar initiatives, which the Ministry of Power suggested to the State governments to initiate, at the State level as well, could not be taken up even for hydro electric projects. The concerns have arisen from the fact that after the feasibility reports under the 50,000 MW initiative, not much could be done to make further progress. The Hydro Electric Private Power Policy of the Govt. of India issued in 1998 and further clarified in 2002, required development of projects upto 100 MW through MOU with the State government and beyond 100 MW on the basis of selection of developers through bidding.

So far as government companies are concerned such as Central Public Sector Undertakings, State generating Companies, State Electricity Boards etc., they have been able to get allocation of hydro electric projects by the State governments for preparation of detailed project reports and subsequent execution. In many cases, however, even for government companies, allocations of power projects by State governments, have met with resistance and considerable delays. In the cases of projects developed by government organizations, the tariff will be determined and approved by the concerned Regulatory Commissions.

On allocation of power projects to private sector organizations, however, there has been some confusion. Some of the State governments have allocated a number of projects to various private sector companies. In certain cases they adopted a method of some normative criteria for their selection, though in none of these cases, tariff was taken as the basis for selection. In some cases, in fact, the amount of premium that an organization will offer to the State government was one of the main determining factors for allocation of projects, while in some other cases the quantum of equity that a developer would contribute on behalf of the State government was the main basis. 12% free power to the State has been a normal practice in hydro projects. In some cases, the State governments decided to make the amount of free power beyond 12%, which a private developer will offer to the State, as the basis for selection and allocation of projects. In absence of clarity, financial closures of most of these projects have not happened - developers feel apprehensive whether at some stage there would be some procedural problems in moving forward, lenders also feel apprehensive whether these allocations themselves are entirely in line with the government policy at all. Almost a dozen of these projects, allocated by States, have not moved forward. These is a need to provide clarity and certainty.

In recent months this issue has received some attention. The Ministry of Power drafted a policy document on the subject in December 2005 which has been under circulation for inter mistrial comments and consultation. Some of the experts have observed and the media also has brought out an analysis articulating that competitive billing on tariff for these projects is difficult to follow. They have been appreciative of the fact that in the absence of comprehensively prepared reliable Detailed Project Reports, it may be difficult for a developer to assess the Capital Cost and to properly bid for tariff for these projects.

It is true that preparation of DPR for hydro electric projects is significantly different from that for DPR for thermal projects. For hydro projects it would require more than two years of detailed site investigation including geological, hydrological and seismological studies. In many cases even for these investigations, infrastructural developments like approach road connectivity, construction power etc., have to be created. DPR for hydro projects may cost almost Rs. 20-50 crores, in some cases more depending on size and nature of projects. Invariably for very large projects, for which if we need to invite international competitive bidding, vetting of these DPRs may also be required to be done by internationally reputed engineering consultants. This is considered necessary as DPR's so prepared would inspire right type of confidence and fetch most competitive tariff.

If we need to follow a pattern of Ultra mega projects, the government or government authorized companies may need to put in place fund and agencies to have reliable detailed project reports prepared so that the projects then could be offered for competitive bidding on tariff for selection of project developer. An effort was made during 2003-04 by the Ministry of Power that a revolving fund could be created by the government for this purpose. Reimbursement of the expenditure could be made by the finally selected developer which would mean that there would be no financial burden on this score on the government. The proposal of the Ministry of Power didn't find favor from a number of other departments and therefore it did not move forward. This is one option which could be taken up even now, if not for all projects, for a select number of projects to validate this process and to take up more projects if this process succeeds. This is, no doubt, a time consuming process. In any case, even the approach had not been decided because of differing views on this procedure.

Considering the peculiarities of the hydro electric projects as mentioned above, one could attempt an alternative approach, and both the approaches could be allowed. A guideline to be followed by the concerned state governments for identifying the developers, who should be able to meet certain specified qualifying requirements, could be formulated. It is the developers who could be entrusted with the task of preparing the detailed project reports, incur the required expenditure on various activities of investigation and related infrastructure development. Since there is a risk, there could be a corresponding benefit for them. They could be allowed to keep certain proportion of the capacity of the project out of the purview of the power purchase agreement obligations, and could sell that portion of power as merchant plant. In the case of these projects the tariff determination could be done and approved by the concerned regulatory commissions. Obviously one of the difficult tasks for the Commission would be to assess the capital cost. The Commission could decide to depend on the examination and assessment by Central Electricity Authority. They could also depend on any other expert agency which the commission may consider appropriate. This process, if adopted, could take care of the risk a private investor will be exposed to by suitably compensating it through the arrangement being suggested. Project execution could be perhaps faster through this option. The role of Regulatory Commission and Central Electricity Authority would be crucial.

One of the important requirements for this alternative approach to succeed would be to formulate a set of criteria for prequalification and to adopt a transparent process for identifying the project developer. In case that is not done, it may face, at a later stage, administrative and legal difficulties.

Some other aspects which will be necessary to keep in mind would be as follows:

  1. A proper and clear Rehabilitation policy for those who get affected due to submergence and in other ways.

  2. A mechanism to evolve proper project specific rehabilitation package and to monitor its implementation. Cost of R&R package needs to be duly recognized and considered in tariff determination.

  3. Follow up and implementation mechanism for Catchment Area Treatment and Afforestation has to be strengthened. Experience of past at State level does not inspire any confidence.

  4. On overall basis, our approach on the R&R has to raise the level of trust and confidence in and a positive mood and support for reservoir based hydro projects. It would call for a better package than we have done so far.

Finally, we need to create a positive atmosphere in the country for hydro projects. Advantages of these projects have to be properly communicated. During seventies and eighties large dam projects were decried globally, mainly motivated by vested interests. The whole world is suffering its consequence both by way of climate change related problems as well as by way of highly volatile and manipulated prices of petroleum fuels. Hydro-project developers, professionals and others should be able to effectively counter any such move. We must carry conviction on this. Hydro-projects have a good case. Unfortunately due to lack of right efforts to communicate and campaign, those with negative perception and assessments sometimes succeed in conveying messages which may not be entirely correct.