By A.K. Mathur
India needs to develop more of its significant hydropower potential to ensure its long-term energy security. Well over 100,000 mw of additional capacity could be developed. To develop this potential, billions of dollars of investment is required. It is not realistic to expect that federal and state governments can, by themselves, provide the large sums needed for power development. Private sector participation is needed.
Private sector participation in overall power development in India has been about 11 percent. Reasons include: bureaucratic delays, uncertainty in power payments, lack of sanctity regarding contracts, insufficient infrastructure, and unknown hydrology and geology. Other limitations include regulatory barriers, high financing costs, land acquisition problems, difficulty regarding rehabilitation and resettlement of project-affected persons, a slow legal system, concerns about availability and reliability of data from the government, and interstate matters.
Based on 25 years of power development experience in both the public and private sector in India, recommendations have been made for policy changes that, if implemented, could help minimize the problems articulated above and, eventually, attract more private sector investment. While my focus is India, many of these suggestions would be applicable in other countries keen to develop its hydropower potential.
Some of the suggestions are already being implemented and some others are expected to be included in the government’s new national hydro policy, which is currently being prepared. These are suggestions regarding the establishment of an organization necessary to develop hydro potential, preparation of detailed project reports, land acquisition, privatization of distribution, and more.
For various reasons, some of these suggestions cannot be adopted or will be viewed as impractical at present. Nonetheless, I put them forth as measures having the prospect of contributing to beneficial change, in an arena where constructive change is very much needed. I hope that many will view the suggestions as worthwhile steps in the right direction – or, at the very least, worthy of consideration and debate.
In India, power is a state subject. The central government can, however, provide guidelines. In that regard, I recommend establishing a single federal authority be established, such as a National Hydropower Development Authority, to provide guidance for all aspects of hydropower development, including:
- Identification of project sites;
- Collection of hydrological and meteorological data;
- Performance of geological and other subsurface investigations;
- Allotment of hydroelectric project sites to either the public or private sector for development;
- Preparation of pre-feasibility and bankable detailed project reports;
- Involvement of central/state governments in providing services and facilities to project developers; and
- Transmission of electricity from the powerhouse to the nearest switchyard.
The authority would also monitor the progress of hydro project implementation, both in the public and private sectors, and help solve difficulties faced by developers.
Details about each suggestion are given in the following paragraphs.
Identification of project sites. The federal authority would coordinate state governments’ efforts to identify sites for project development. Most sites have already been identified, but remaining sites would be identified to arrive at the exact hydro potential of each state. Project sites may be finalized by means of local public consultation.
India needs to develop its significant hydro potential. The author offers suggestions to expedite project development and construction.
Collection of hydrological and meteorological data. Reliable hydrological and meteorological data is the backbone of successful and viable hydropower projects. Long-term discharge data is essential for dependable hydrology. In India, the federal government’s Central Water Commission is collecting such data on some rivers. By enlarging the scope of this commission’s work, all potential hydropower project sites could be covered so that reliable and dependable hydrology is available to developers.
Allotment of sites to either the public or private sector. Potential projects should be targeted for development by either the public or the private sector. Projects to be developed by the public sector may be the ones that are large (more than 400 mw), involve multiple states, use water for multiple purposes, and/or are faced with security issues in the vicinity of the development site. Other projects may be developed in the private sector.
The private sector should only be invited to develop a project after bankable detailed reports are ready and all clearances have been obtained. Developers should be selected through an international competitive bidding process on the basis of their experience, financial strength, technical expertise, and managerial competence. The process should involve a request for qualification (RFQ) and request for proposal (RFP). The RFQ would result in a short list of competent and serious developers. The final selection would be made through the RFP, on the basis of a minimum completion period that includes financial closure of the project. Or, if all the short-listed developers are capable of building the project, the winner could be chosen by a lottery system (known as “draw of lots” in India) in which one developer is picked randomly, either through a computer or manually.
Further, I recommend the practice of allotting a project site to the developer offering the highest premium, as is being done in some Indian states, should be discouraged. This practice results in high tariffs, which is contrary to the mission of making power available to the common man at affordable cost, as outlined in India’s Electricity Act of 2003.
Preparation of pre-feasibility and detailed project reports. After a topographical survey has been completed for a project, a pre-feasibility report should be prepared to communicate the government’s assessment of preliminary viability.
Then, for a project that initially appears viable, the authority would coordinate preparation of a “bankable” detailed project report. For projects earmarked for public sector development, such reports could be prepared by a public sector organization, such as the National Hydroelectric Power Corporation (NHPC), NTPC Limited, or North Eastern Electric Power Corporation Ltd. (NEEPCO). For projects identified for development by the private sector, a consultant would prepare the report. In either case, I recommend that financial institutions and insurance companies be involved and consulted. This will give these entities exposure to the intricacies and risks involved in hydropower development.
Involvement of central/state governments in providing services and facilities to project developers. I recommend the central and state governments be involved in providing facilities and services to project developers. The federal authority would provide guidelines about this involvement. For example, I recommend the government acquire land required for implementation of a project and then lease the land to a developer at reasonable rates. I also recommend that state governments agree to compensatory aforestation and assume the responsibility of providing resettlement and rehabilitation of project-affected persons.
Construction of resettlement colonies, such as shown here, is one way to resettle people displaced by development of a hydro project.
Transmission of electricity from the powerhouse to the nearest switchyard. I recommend the authority’s guidelines indicate that the government is responsible for providing the entire power transmission system, including the movement of electricity from the powerhouse to the nearest switchyard (rather than requiring private developers to fund the construction of transmission lines).
The primary regulatory hurdle for hydro project development in India relates to timely clearances by the federal government. Two main statutory clearances are required: a techno-economic clearance by the Central Electricity Authority (CEA) and an environmental clearance by the Ministry of Environment and Forests.
I recommend that CEA limit its technical/economic examination to the effects of a proposed project on downstream flows and public safety. Furthermore, this examination, and a subsequent issuance/non-issuance of a clearance, should be required to be completed in three months or less.
With regard to the environmental clearance, I recommend no formal approval be required. Rather, the Ministry of Environment and Forests would provide guidelines about how to mitigate the effects of project construction. With proper guidelines, adverse effects can be controlled. Examples include:
- Effect on the land. For construction of the project, material (both soil and stones) is excavated. The guidelines would cover how to fill excavated pits after project completion.
- Effect on water quality. Many workers and staff typically are located near the project site during construction. If the sewage created by these people is not treated, the water in the river may become polluted. Guidelines can be prepared to force treatment of this sewage.
- Effect on flora and fauna. The influx of workers and staff to the project site can damage the flora and fauna in nearby areas. For example, these workers may cut an excessive number of trees to use as fuel. Guidelines for the provision of alternative fuel sources, such as natural gas or electricity, can be issued to prevent this damage.
The two biggest effects of hydro project development in India are the cutting of trees in the project area and displacement of people living in the area.
To compensate for the loss of forest cover, I recommend the government’s guidelines require a project developer to provide compensatory aforestation – equivalent to the forest cover lost as a result of the project – at his cost.
Most hydroelectric projects involve displacement of some local population. Their resettlement and rehabilitation sometimes creates law and order problems and judicial interventions. The resettlement process should be handled by the government, as it is very difficult for private project developer to handle such sensitive issues, and should be treated as a welfare scheme, with the government bearing the cost of implementation.
I offer six suggestions toward improving the climate in India for financing hydroelectric project development.
Penalize delays in project implementation
There should be a heavy monetary penalty for delays in project development. Each developer should be required to submit a bank guarantee of 3 to 5 percent of the cost of the project as a performance guarantee. If project development is delayed by more than one year due to reasons attributable to the developer, the contract to develop the project should be cancelled. These penalties would be used to partially offset the loss of free power to the government that results from project delays.
Offer payment security
Lack of payment security is a primary reason the private sector shies away from developing power projects in India. Several factors contribute to this problem. For example, utilities are mostly government agencies; in many cases, these agencies are bankrupt and do not have the money to pay for power purchases. To compound this problem, utilities often are not paid for the power on the grid. For instance, they are required to provide power for free or at a reduced rate to farmers for agricultural purposes. And many states continue to experience very high transmission and distribution losses (up to 70 percent), a major part of which is due to theft of electricity.
While some reform is under way to address payment security problems, I recommend the central government pursue reform more rigorously, particularly in distribution. This will help ensure that state government utilities are self-reliant and are able to pay for the power they purchase. If they fail to pay, the money may be recovered from the state’s share of central taxes.
I also recommend that private sector generators be allowed to sell power to any consumer through open access and that the central government offer to purchase the hydropower produced at a pre-announced tariff for the first seven years. This way, the investor will know in advance that it has a guaranteed source and price for power.
Provide funding for report preparation
I recommend the government create a fund of about US$2 billion for use in paying for preparation of bankable detailed project reports. This special-purpose funding vehicle is known as a corpus fund. Funds would be made available through a central hydro authority to the agencies involved in preparation of the reports. The cost of report preparation would be recovered from the developer to whom the project is allotted. Thus, the fund becomes “revolving.”
In addition, financial institutions could join together to form a “hydro bank” specifically to provide loans at attractive rates to project developers. Generally, banks provide loans at the prime lending rate, or PLR. The hydro bank could offer loans with interest less than the PLR. In addition, the hydro bank should be allowed to increase loan repayment periods beyond the typical ten years. Doubling this repayment period – to 20 years – could significantly improve the project’s financial position.
I recommend India’s Power Finance Corporation take the lead with these two suggestions.
Make purchase of green power compulsory for utilities
All distribution companies should be required to buy at least 40 percent of their needed electricity from hydropower and 5 percent from other renewable sources, subject to availability. This will help maintain the country’s desired generation mix of 60 percent thermal and 40 percent hydro and other renewables.
‘Backload’ amount of free power to states
In India, in exchange for use of water, developers are required to provide power from their projects to the state free of charge. The amount required ranges from 12 to 30 percent of the electricity generated. Water is a resource, but it is not consumed in generating hydropower. Therefore, there should be no concept for free power. If it is given at all, the amount required should be no more than 5 percent in initial years of project operation, when tariffs are highest. When most of the loans for project development have been paid, the amount of power given to the states could be increased. However, the required amount should never be more than 10 percent. This “backloading” concept will keep the hydropower developer’s tariff low and competitive during initial years.
Require ‘time-of-day’ metering
A significant advantage of a hydroelectric project is the ability to provide peaking power in the mornings and evenings when electrical demand is highest. Owing to the high demand, the rate paid for this peaking power is substantially higher than for electricity produced at non-peak hours. However, to compensate a hydro project owner, arrangements for “time-of-day” metering – in which electricity consumed at different times of the day is recorded – is required. I recommend time-of-day metering be implemented and tariffs for peak power be higher than those paid for baseload power.
The central government can play an important role in facilitating efficient, effective, and timely project completion by building access roads to project sites, acquiring land needed to develop the project, providing telecommunication facilities, and developing a master plan for transmission.
Some project sites are not approachable by roads that are suitable for motorized vehicles. Access roads benefit not only the project but also adjoining villages. Therefore, access roads should be constructed by the government, and these costs should not be loaded on the project.
Land required for development should be acquired by the government and made available to the developer at nominal lease charges. The land acquisition process is time-consuming and can meet roadblocks and judicial intervention, resulting in delays the private developer cannot absorb.
Telecommunication facilities on the way to and at each project site will provide the ability to communicate quickly and effectively.
Reducing the amount of import duty that hydro project developers are required to pay for importing construction and generation equipment will help reduce overall costs for developers.
A master plan for transmission of electricity generation should be prepared by the central government for the national grid and by each state government for the state grids. The master plan should include transmission schemes for every generating plant in the state, both existing and future.
Ultimately, real development of hydroelectric power will take place only if its tariff is competitive compared to other sources of electricity. Hydroelectric projects are capital intensive. Consequently, the initial generation tariff is higher compared to some other sources of electricity. If the suggestions made in this article are adopted, hydroelectric tariffs are likely to become more competitive, which, in turn, will attract private sector participation.
A.K. Mathur is managing director of Synergics Hydro (India) Pvt. Ltd. A former engineer—in—chief and the head of the Uttar Pradesh State Government’s Irrigation Department, he has been associated with hydropower development in the Indian states of Uttar Pradesh and Uttaranchal for about 25 years.
Mr. Mathur may be reached at Synergics Hydro (India) Pvt. Ltd., D-37, Panchsheel Enclave, New Delhi 110 017 India; (91) 11 26496780; E-mail: email@example.com.