Hydropower gains pace, but constraints linger
Hydropower development is gathering pace, but
technological and socioeconomic issues are major concerns, writes Sanjay
Chadha, Director (IPC & Hydro), Ministry of Power, Government of India.
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
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.
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
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
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.
[May 19-25, 2008]