Why Hydro Power Is Struggling To Become A Business Case In India
Though private participation in the hydropower sector has gained momentum in the recent past, it still faces many impediments across various stages of a project development life cycle, with almost 13,363 megawatt (MW) capacity registering cost overruns worth over Rs 52,000 crore
While solar and wind, in spite of hiccups, have been able to stand tall on their feet, Hydro has failed to get its due share in India’s energy mix and take off in its full potential.
India has the fifth largest hydropower reserve in the world. In spite of the abundance of the reserves that India enjoys, the total installed capacity of large hydropower projects with a capacity greater than 25 MW till date is only 45 gigawatt (GW), representing only 30 per cent of the total potential. A comparison with the global levels shows that the extent and overall pace of hydropower development in India are well behind those of other hydro-rich nations, according to the recent report by Assocham and PWC.
The report also states that though private participation in the hydropower sector has gained momentum in the recent past, it still faces many impediments across various stages of a project development lifecycle. Several hydropower projects with a cumulative capacity of about 13,363 MW are stranded at various stages of project development, resulting in significant time and cost overruns worth Rs 52,697 crore as of December 2016.
There are whole lot of issues that come into play - Delays in clearances, local issues, law and order problem which affect the commissioning of these projects. Contractual disputes seem to affect central and state government schemes disproportionately more than private sector schemes.
Private Pitch
The government over the years has made efforts to pitch in the private sector in the hydro sector via joint ventures and public private partnerships, but till date only 3.2 GW has been commissioned through the private route, constituting only 7 per cent of the total installed hydropower capacity as of May 2017.
The major problem begins with dispute over common river system. With water being categorised as a state subject, the consent of states impacted by the projects is required. As a result, a large number of hydropower projects with common river systems between adjoining states are delayed due to the lack of interstate agreements on water usage, evident from the ongoing conflict between Assam and Arunachal Pradesh over the utilisation of the Brahmaputra River.
Then comes the difference in the bidding norms across states, with varying minimum thresholds for royalty/ free power, upfront premiums and free equity. The bidding norms themselves involve a lot of cash outflow even before commissioning of the project, impacts its financials and viability.
The whole process of preparation and approvals of the detailed project report (DPR) is cumbersome and expensive ranging from Geological Survey of India, the Hydrology Directorate and Inter-State Matters Directorate, CEA. This sometimes led to reluctance of the project developers in the report preparation which later causes discrepancies and disputes over project costs and revenues.
Land acquisition has been one of the other key reasons for delays in hydropower projects. For instance, ideally, land acquisition should be complete before a project is tendered. In India, however, projects are often awarded with only part of the land physically acquired. This leads to delays on account of undervaluation of land price, dependence on state governments for land acquisition, etc. Furthermore, the unavailability of reliable land records with the requisite government departments often adds to existing complexities.
The capital cost of hydro projects ranges between Rs 60 million per MW and Rs 80 million per MW as compared to Rs 30 million per MW and Rs 50 million per MW for thermal plants.
Hydro projects require higher upfront costs to address greater complexities and risks. In such a case, long construction periods lead to high interest during construction. Also, delays in cash inflows increase uncertainty and risks, resulting in higher risk premium on financing charges.
The recent initiatives proposed by the government for the hydropower sector like interest subsidy, hydropower purchase obligations, classification of hydropower as renewables (irrespective of its capacity) are likely to accelerate growth for the sector and reduce the impediments faced by hydropower developers. This will help revive many of the hydro projects in the country which are currently stranded,” says Yogesh Daruka, Partner -Hydropower and Resources, PwC India.
By design, hydropower is ideally suited to cater to the specific demands of the Indian power system. Thus, there is a need to focus on responsible and accelerated hydropower development, which will address the collective concerns of hydropower developers while ensuring sustainability and addressing socio-economic concerns around developing projects, adds the report.
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