Hydropower – Is there a road ahead?

August 26, 2015 5:17 am0 commentsViews: 196

L(28_2015_Hydropower)1Asks Umesh Agrawal, Associate Director – Energy, Utilities & Mining, PricewaterhouseCoopers, in conversation with R Srinivasan.

What has been happening in this sector?
Nothing too positive. India has the fifth highest hydropower potential in the world (140 GW). However, there has been an addition of just ~5700 MW (Source: CEA, MNRE) to the hydro capacity over the last 5 years in spite of the increasing requirement of power. Of this, 1300 MW was from small hydro plants (<25 MW). Considering that this capacity includes a substantial portion which was spilt over due to delays from previous years, the capacity addition is dismal.

Even more dismal is the fact that just 2,694 MW (Source: CEA) of large hydro plants (greater than 25 MW) have been developed by the private sector till date (yes, since 1947). Of this, less than 100 MW of hydro projects (greater than 25 MW) is in the Northeastern part India, where the potential is the highest.

The only major news in the past year was that of Jaypee group (the only private player with signifi – cant hydro assets), which sold its hydro assets to JSW Energy in 2014 after the deals with TAQA and Reliance Power fell through for various reasons.

What are the issues being faced which has contributed to such low capacity addition?
The key issues being faced include that of poor geology, delay in clearances, local opposition to project and R&R resulting in significant time and cost overruns. Almost every hydro project is affected by at least one of these factors.

It has become almost impossible for the developer to accurately estimate the capital cost and time for construction beforehand. The high uncertainty on cost and time is the key reason for such low capacity addition. Further, buyers of hydropower are not willing to take hydropower on a cost plus basis. The costs have been increasing over the years which had led to lower interest among developers and buyers. The lenders too are apprehensive to finance such “open cost” projects.

Most of the issues being faced are related to inadequate support of the government to help address the issues faced by developers relating to clearances, R&R and local opposition. The government needs to take a proactive role in addressing issues faced and bring out policy and regulatory interventions to turnaround the sector.

L(28_2015_Hydropower3 L(28_2015_Hydropower)2Is hydropower a thing of the past?
Over the long run, India, like any country, needs to have a balanced portfolio of power. Hydro power helps manage peaking loads and is a renewable source of energy.

The power sector, especially developers, is already undergoing tremendous stress on account of coal and gas shortfalls, weak rupee, delays in clearances, piling losses of discoms, etc. Developers of hydro projects are not keen in getting into any sale agreement which does not have a full pass-through on capital cost and allowance for time delays for reasons beyond their control. Such opportunities are limited. Due to the above reasons, hydropower has gone into the background off late.

The focus of the government too seems to be largely on solar, wind energy and resolving the issues relating to coal and gas supply. The MNRE target for capacity addition of SHP, which was 350 MW for FY12, had been reduced to 250 MW for FY15. The case of hydro is further weakened because of the cost of construction and delays in construction (leading to higher interest costs).

Only 6% of the large hydro plants are from the private sector as compared to the thermal capacity where the private sector contributes 36%.

The share of hydro power in the power portfolio has reduced from 26% in 2007 to just 17% in 2015. The way things stand, it is almost certain that the share of hydropower in the power portfolio will reduce even further.

It’s too early to signal the end of the hydropower story, but, it is receding into the background. Fast.

L(28_2015_Hydropower)5What will get the focus back on hydro?
Climate change and pollution effects of fossil fuels along with ever growing concerns over energy security will drive the growth of renewable power including hydropower going forward.

Large hydro projects have issues related to R&R and environment. However, the same isn’t a concern for SHP projects, which are typically run-of-river and don’t have signifi cant environmental effects. Taking this into account, a National Mission on Small Hydro (NMSH) is expected to be launched by the government. Under this mission, a capacity addition of 5000 MW is being targeted in the next 5 years starting FY 2015-16, with a bulk of the addition (4500 MW) being targeted from FY 2017-18 to FY 2019-20. The target of 5000 MW addition was also mentioned in the budget speech this year.

The growth in the thermal sector has been possible largely due to the participation of private players. For hydro, such participation has been minimal. The government introduced a scheme in July, 2014 where central financial assistance of INR 1-1.5 Cr/ MW is being made available for private developers for SHP development. The progress under the said scheme is would be clear in the coming years. The sector can witness significant growth only with participation of private players.

The active involvement of the government is an absolute must in hydro projects. The government should provide prompt clearances, ensure no disputes in water sharing, ensure central planning of hydro plant locations and enable quick resolution of R&R and local issues.

There needs to be a push from the government for procuring hydro power specifically (a hydropower obligation) to give the next thrust to hydro power. Discoms are in financial distress and cannot enter into any long-term power purchase agreement without going through competitive bidding and discovering a pre-determined price. Hydro specific bidding guidelines may need to be introduced taking into account the risks faced by hydro plants.

There also needs to be an active role of the state regulators who need to revise tariff s regularly to reflect the actual cost of construction taking into account the various risks faced.

The increasing cost of coal and gas over the coming years may also provide a greater push to renewable energy including hydro in the future. But for now, there are too many speed breakers on the road.

With inputs from Ashwin Durga, Manager, Energy, Utilities and Mining, PwC.

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