Over the last five years, hydropower project development has gained momentum with the Indian government's multi-pronged approach of involving more stakeholders in alleviating the causes for the delays—encouraging private developers, pushing the concerned authorities to expedite statutory clearances, engaging developers and the ministries involved in dialogue to handle environment and rehabilitation issues, and developing conducive policies along the way.
However, there are still several technological and socioeconomic issues that need to be addressed by the stakeholders, including promoters, so that the identified hydro potential is fully developed in a scheduled time-frame.

Hydro potential
India has an assessed hydro potential of about 150,000 mw. The provincial states of Arunachal Pradesh, Uttarakhand and Jammu & Kashmir have the highest hydro potential as they are located along the Himalayan ranges. But they also have the least exploited hydro potential. While Himachal Pradesh has a substantial potential under construction or already developed, the other three provincial states are only starting to develop their hydropower potential.
The target for the next two five-year plan periods i.e. from 2007 to 2017 is to add 48,000 mw of hydro capacity. In fact, the corporate objective is to add 123,500 mw by the year 2027. The funds requirement for harnessing the balance potential of projects under these plans is about $127 billion, including $1.12 billion, for completing surveys and investigation.
Currently, in the total installed power capacity of 130,000 mw, hydro share constitutes about 34,044 mw, including pumped storage schemes (PSSs). This is less than 30 per cent of the installed capacity. During the last five years, the Central sector has added 4,105 mw, while the state government sector added 2,549 mw and the private sector, a mere 700 mw.

Issues and concerns
Although the capacity addition in the last five-year period was higher than that in the corresponding previous period, many projects were delayed, thereby necessitating a scaling down in the capacity addition programme. Some of the common reasons for delays relate to land acquisition, environment and forest clearances, geological surprises, resettlement and rehabilitation issues, funding issues, and law and order
problems. These issues are well known. While some of the issues have been addressed, others are still being debated
at several forums for appropriate solutions.
Long-drawn land acquisition processes have delayed several provincial states projects as will as federal Central government controlled projects, and deterred private sector promoters. Such delays escalate project costs and build in higher risks. Since the provincial state governments are statutorily involved in the land acquisition process, their level of cooperation impacts the pace of project development significantly.
Dislocation of project affected people is another major factor leading to time and cost overruns. There are several examples of delays due to resettlement and rehabilitation issues in projects like the Sardar Sarovar, Indira Sagar and Tehri hydroelectric project where more than the local residents, the environmental activists resisted project development. The common causes of such resistance are also poor local area studies, lack of communication with the affected parties in their local language, and insufficient infrastructure development at the sites where the residents are relocated. In the Sardar Sarovar project, the project cost was estimated in 1998 at about $1.45 billion. The final cost of completion in 2005-06 is higher than $4.8 billion. This escalation is mainly due to delays on account of prostests for higher compensation to the project affected people.
Hydro projects in India are mainly located in the higher reaches of the Himalayas, which have large forest tracts that need to be cleared for project development as well as construction of roads for transportation and related infrastructure. Clearance for this is provided by the ministry of environment and forests. Delays in environmental clearances typically relate to studies for environmental impact on ecology, monuments and seismicity. They include processes like catchment area treatment, forest clearances, and sometimes relocation of game reserves, and displacement of local residents also. Forest clearances invariably require compensatory afforestation on non-forest lands of twice the area of forests being diverted for project use, including area coming under submergence.
Geological surprises have been yet another cause for delays in the construction of a project. Rock slides, floods, sudden cloud bursts are some of the common surprises. These can, however, be minimised if during preparation of the detailed project reports detailed hydrological and geological studies are carried out based on recent data rather than historical extrapolated data as is common practice. The investigation method also needs to be based more on fieldwork than on extrapolated data. Adopting new investigation and construction techniques is also imperative. Inadequate survey and investigation can haunt a project even after it has been commissioned and cause problems in its operations. As the Nathpa Jakhari project experience indicates, due to the design parameters being based on historical silt load statistics, even one of the largest desilting chambers in the world could operate suboptimally, thereby affecting generation capability adversely.
While the life of a hydro project typically exceeds 40 years, funding is usually available for only 10-15 years making the tariffs front loaded. The financial institutions typically attach high risk to hydro projects because of delays and geological uncertainties. Many IPP developers have found it easier to secure projects than achieve financial closure for them. A few yeas back, payment security was a major reason for sub-delays.
However, the problem has been addressed through policy provisions of open access by allowing them to sell their power to other buyers, if the contracted buyer defaults in payments. In fact, Electricity Act, 2003 has reduced entry barriers across the entire supply chain of the electricity market. This has led to a gradual change in risk perception and Indian banks are now willing to fund hydro projects without government guarantees. The Indian financial institutes now consider viable projects promised by credible developers as the sole evaluation criteria without recourse to government guarantee.
Funding risks also arise due to poor consensus on apportionment of benefits to the stakeholders, especially for projects located in power-surplus area where the provincial state government consents to development of the project essentially to sell its share of power to other consumers in deficit areas. Most of the hydro potential is concentrated in the regions which are power-surplus. The power developed is for transmission to deficit regions mainly north and west India. In addition, while allocating projects to private developers, the state governments ask for premium to the extent of 12 to 16 per cent of the generation, thereby decreasing the returns from the project to the developer. Instead, some states ask for equity participation at the cost of the developer. In a BOOT project, this makes long-term returns less attractive.
In a typical hydro cost profile, investments are made in the first five-seven years. In the next 10 years, debt servicing consumes a substantial share from the revenues. During the remaining life, the project turns into cash cow yielding high returns as there are no associated 'fuel' costs—the fuel being provided free of cost by nature. The capital cost contribution in a hydro tariff is as high as 90 per cent as compared to 40-45 per cent for a thermal projects; fuel cost contribution in tariffs are relatively high and escalable. By following an appraisal methodology similar to that of thermal projects, the inherent benefits of hydro get discounted as all costs are loaded upfront. High capital costs and short financing tenures increase initial tariffs by almost double that of thermal projects. This provides little comfort to the financier, especially when a lower risk alternative is available form the thermal plants. As hydro projects typically face high construction risks but very low post-construction risks, experts suggest separation of construction and post-construction funding with separate risk allocations.