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New Policy will improve efficiency of project management in Hydro Electric Projects, Shri R V Shahi, Former Secretary, Ministry of Power

The Ministry of Power have issued a notification on 31st March, 2008, on development of Hydro Electric Projects. This notification is by way of an amendment to the Electricity Tariff Policy (January 2006). It may be recalled that the Tariff Policy provides for development of power projects on the basis of competitive bidding for tariff. The policy on Competitive Bidding envisages two optional routes. In pursuance of this Policy, in the thermal sector, both the options on competitive bidding are in action - bidding for tariff for developing a specified power project duly identified inclusive of location, fuel etc., example of which is the Ultra Mega Project Scheme (Case-II Bidding). Another option is, what is known as Case-I Bidding, in which the project developers have to themselves identify projects and bid for a tariff with reference to the requirement of a State utility or a distribution company.

In the case of hydro electric projects, this type of dispensation could not be made applicable because of the lack of reliable detailed project reports. There is a major difference in so far as preparation of a DPR is concerned in relation to thermal projects on the one hand and the hydro projects on the other. In the latter case considerable amount of time is required for investigations entailing much larger amount of fund besides prolonged process of studies and clearances for environment and forest. Unless authentic DPRs are made available, no project developer can determine the extent of risk involved in the development of project, as the cost is estimated on the basis of some project reports which have not been developed based on comprehensive studies. In view of these practical difficulties the provision of the Tariff Policy in relation to competitive bidding - either Case-I Bidding or Case-II Bidding - could not materialize. Accordingly, no such initiative could be taken on hydro side. In view of this the Power Ministry started working, in September 2006, on revision in the Tariff Policy, which would address this specific need of the hydro sector.

The revision in the Policy has recognized the distinction, and has allowed a different dispensation, which is available to the public sector companies till January 2011, i.e. exemption from the requirement of competitive bidding, even for private sector developers. The transition period till January 2011 is on the understanding that reliable DPRs would be prepared, which could then form the basis for competitive bidding, as is being done in the case of thermal power projects. In any case, for large hydro projects, under Section 8 of the Electricity Act 2003, the concurrence of Central Electricity Authority (CEA) is required. This provision helps also in the process of estimating, based on the specific nature of the project, the type of dam, tunnel etc. and the capital cost required to build the project. This would be useful for the Regulatory Commission to determine the tariff.

Obviously, the ideal situation would have been that after the Feasibility Reports (FR's) were prepared under the "Ministry of Power 50,000 MW Hydro Electric Initiative" for over 160 projects, this exercise should have been followed by a similar initiative by the Govt. to engage reputed national and international consulting agencies to prepare DPRs. In fact, such a proposal was initiated by the Ministry of Power in 2004 but it did not find favour with other concerned agencies in the Govt. including Planning Commission. This will, in any case, be necessary after the transition period till January 2011 is over. The Ministry of Power and Central Electricity Authority should, in fact, restart that process so that for the remaining hydro electric projects such DPRs are prepared and made available to developers, whether in public sector or in private sector. This proposal which had been mooted by the Power Ministry in 2004 did not require the expenditure to be incurred to be a sunk cost for the Govt. The stipulation was that the expenditure incurred alongwith interest will be reimbursed to the Govt. by the agency which finally uses the DPR and develops the project. From January 2011, in any case, the present approach of "cost plus norm based" tariff determination by the Regulatory Commission, as per the Electricity Tariff Policy, is to be completely replaced by the tariff determination through competitive process. Therefore necessary mechanism will need to be put in place at the Central level and at the State level, both for thermal projects and hydro projects. Such a mechanism could prepare for the projects (something similar to what is being done for Ultra Mega Projects), initiate the process of bidding for selection of developers and ensure that the revised dispensation does not lead to delays as compared to what is happening under the present arrangement. If this is not done, one could see the situation of uncertainty, and interruptions in the process of taking up projects. In such a situation there would be no alternative than to extend the transition period beyond January 2011. If this has to be avoided - and it must be avoided - advance preparations, right from now, are essential. It needs to be kept in mind that the special dispensation in the Tariff Policy, for the public sector undertakings, which provided for the transition period during which they were not obliged to take up the projects on the basis of competitive bidding, was criticized by private sector on the alleged ground that the Policy violated the principle of level - playing - field. Though there are genuine counters to this criticism, that is not the issue in this paper, and therefore, we will avoid discussing the same. However, since this perception is deep rooted, atleast after the transition period, the stipulated arrangement, under which all projects could get developed under competitive bidding process, must be ensured.

The revised Policy has a number of provisions which have the potential of not only facilitating hydro electric project development process to be smooth but they will also lead to more efficient project management. Some of these provisions and their strengths need to be highlighted:

  • As much as 40% of the capacity of the project (saleable energy) has been earmarked to be sold outside the long term Power Purchase Agreement. This obviously would prove to be a great relief and incentive for project developers. This is in recognition of the difficulties and challenges which are normally faced, due to several types of uncertainties, in developing hydro projects. Keeping in view the serious mismatch between demand and supply of power throughout day and night, but more particularly during peak hours, the power which is traded on medium and short term basis, beyond PPA arrangement, generates significantly higher revenue for developers. This has enthused a number of private developers - in fact even some of the public sector companies like NTPC - to develop merchant plant capacity, which would not be tied with any long term Power Purchase Agreement. This summer already there are examples of power being traded at the rates between Rs. 7 to Rs. 10 per unit of electricity as compared to long term PPA rates which may be in the range of Rs. 1.50 to Rs. 3.00. Enthusiasm for merchant capacity is indeed a good development and therefore it must be encouraged as it will contribute immensely towards electricity market development which has been a long felt need. This will also lead to reduction in price of traded power as the volume of traded power increases. In the revised Hydro Policy, therefore, 60% of design energy meant for PPA and 40% left for short and medium term trading has the twin advantages of inducing and inspiring the developers for hydro projects and at the same time it will emerge as a great enabler for power market development. What is even more remarkable feature of this provision is that 40% for merchant trade would be available only if the project is commissioned as per the committed schedule. And, for every six months of delay the volume will be reduced by 5% and to that extent the PPA capacity will be enhanced by 5%. This carrot and stick approach will obviously have remarkable effect on efficiency of construction of hydro electric projects. All developers will try to see that they don't slip on their schedule and get the best possible incentive under this provision of the Policy.

It is well known that most of hydro electric project potential is concentrated in the hilly States of Jammu & Kashmir, Himachal Pradesh, Uttranchal, Sikkim and North-Eastern States. Almost 80% of the unexploited potential is in North-Eastern States and Sikkim. Power demand is mostly going to be there in other States. No doubt, the per capita consumption of electricity in North-Eastern States is very low and therefore a good amount of additional electricity generated can be consumed in this region, yet almost 80% of additional power will need to be transmitted to other regions viz. West, North and South - in that order of demand intensity. In the next 15 to 20 years, we could expect more than 50,000 MW of capacity to be transmitted from North-East (including Sikkim) and Bhutan to other parts of the country. Transmission systems therefore will have to be innovatively planned and executed. As it is, it is a mammoth task - in fact a challenge: what compounds the problems is on account of 40% of power to be treated in the merchant category about which exact destinations may not be known in advance. Transmission system planning to take care of this specific need will obviously require a lot of studies, prediction of likely behavior of power flow and more importantly implementation of so planned and designed transmission networks. Success of 40% of merchant capacity to be realized during implementation would, therefore, largely depend on how imaginatively we plan and execute the transmission projects to evacuate power from North-East to other regions and the desired destinations.

  • The Policy provides that upto 13% of the power generated to be given to the State concerned as free power will be duly reckoned by the Regulatory Commission, while determining tariff, as an accepted element of cost. If a developer has agreed to provide free power more than 13% to the concerned State Govt., the same will not be reckoned as an acceptable element of cost for tariff determination. Similarly if a developer has committed any other additional benefit by way of premium, or Govt. equity in the project to be borne by the developer, these will also not be accepted as components of cost for fixing tariff. These are very important provisions, and they were badly needed, because in the last few years a number of developers have been making all types of commitments to the concerned State Governments by way of providing free power very much beyond 12% (in many cases as high as 25%), absurdly high premium, a good amount of equity to be paid by the developer on behalf of the State Govt. thinking that all these commitments will become a pass through in tariff. This clear provision in the Policy will definitely work as a powerful deterrent for such unrealistic approach on the part of many developers. It must be appreciated that all efforts are required to be made to see that power is produced at as low a rate as possible, of course with good and reasonable return on investment by developers, but any unreasonable elements which have the tendency to push up the cost of power and therefore the rate at which power will be available to consumers will need to be discouraged. It can be expected that this provision will bring in the desired discipline among the developers while they prepare their bids for getting these projects.

  • Till now the Policy provided for 12% free power for the State Govt. The revised Policy has added 1% additional for local area development. This will definitely be appreciated by the local community. In the earlier Policy, when the 12% free power was provided, the clear understanding was that the revenue generated from the free power given to the States will be used, or atleast will be used to a great extent, to address the distress and hardships caused to the people in the area. This has not been happening. 1% free power would mean a nominal amount. For example, a 500 MW power project the total power generated annually would be about 2,000 million units (? 10% depending on the nature of the project). A 1% free power would mean 20 million units equivalent to about Rs. 4 to 5 crore per year. This amount is very small. But, if even this is used properly, it would definitely bring some relief. State Governments, however, need to work out a mechanism whereby atleast half of the other component of free power of 12% is also channelized for larger infrastructure and social projects in the area. If this is done we will definitely have whole hearted support from the affected persons and the local people in general for these projects.

  • 100 units of electricity to be provided free every month to each of the project affected families is again a very powerful provision of the new Policy which will fetch positive cooperation and response from the affected people. They will see very directly their own interest in early development of the project. A word of caution, however, would be relevant. Implementation of this provision will require the local area Electricity Board or Distribution Company to be fully committed to this Scheme. Necessary distribution infrastructure alongwith connectivity upto every household and reliable power supply will ensure confidence of people. I recall, way back in mid 80's, when NTPC wanted to provide power to the local area project affected colonies of their first Super Thermal Power Project at Singrauli, the State Electricity Board did not permit saying that distribution of power is their sole domain and that this could not be allowed to be entrusted to any other agency. The best possible way to implement this new provision, in order to establish and maintain in a sustainable manner the confidence of the affected people, will be to let the project developers have the license to distribute power. And, with this authority in place, they should be held accountable for any gap in implementation. The very fact of such an announcement will enhance the level of confidence and therefore extent of positive response of the people.

  • The Scheme also provides for the salient features of the rehabilitation and resettlement provisions. A few of this specific and focused requirement are worth mentioning:

  1. Project developers have been obliged to provide training to the project affected people as also to the local population for a sustained livelihood. Specific training programmes in the industrial Training Institutes which should equip them with required skills so that the possibility of their employment in the project improves, should be undertaken.

  2. Scholarship for meritorious students of project affected families, extension of medical facilities, sustenance grants, assistance in creating income generation schemes through cooperatives and self help groups, assistance in agricultural activities by way of provision of seed, fertilizer etc. are some of the other provisions which have been highlighted in the Scheme to instill confidence among the project affected people.

Though it has taken almost one and half years from the time the amendment was initiated by Power Ministry sometime in September 2006 to the final notification after due approval of the Cabinet, as discussed above, the Policy has several positive and powerful features to facilitate faster development of hydro electric projects. Some of the cautions during implementations, which have been mentioned in this paper, will, however, be necessary for deriving the desired outcomes and benefits.