FINANCING ISSUES INVOLVED

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FINANCING ISSUES INVOLVED IN DEVELOPMENT OF
HYDRO POTENTIAL S.D.Dubey,
Director,CEA
P.K.Shukla,

Dy.Director,CEA
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HYDRO SCENARIO IN INDIA
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HYDRO POTENTIAL DEVELOPMENT AT A GLANCE
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(No Transcript)
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VISION FOR HYDRO POWER DEVELOPMENT

• Plan to develop the balance potential by the end
  of 14th Plan i.e. by 2026-27
• For development of entire potential , over Rs.
  5,00,000 crores would be required.
• Survey Investigation activities of all
  identified projects would need to be completed by
  the end of 12th Plan i.e. by 2016-17.
• Completion of Survey Investigation activities
  would involve an expenditure of over Rs. 5000
  Crs.

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VISION FOR HYDRO POWER DEVELOPMENT
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FUNDS REQUIRED FOR HYDRO CAPACITY ADDITION
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ADVANTAGES OF HYDRO POWER

• RENEWABLE, ECONOMIC AND NON POLLUTING SOURCE
  OF ENERGY
• PROMOTES CONSERVATION OF NON-RENEWABLE FOSSIL
  FUEL
• ENVIRONMENTAL FRIENDLY AND DOES NOT ADD TO GREEN
  HOUSE EFFECT AND PROBLEMS OF SOLID WASTE DISPOSAL
• ABILITY FOR INSTANTANEOUS STARTING, STOPPING AND
  LOAD VARIATION THEREBY IDEALLY SUITED FOR
  PEAKING OPERATION
• LONGER USEFUL LIFE SPAN
• IMPROVES RELIABILITY OF POWER SYSTEM

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ADVANTAGES OF HYDRO POWER

• NO FUEL COST DURING THE LIFE OF THE STATION AND
  THUS REMAINS ESCALATION FREE
• EMERGES TO BE CHEAPEST SOURCE OF POWER IN LONG
  RUN
• ACCRUAL OF INCIDENTAL BENEFITS OF
  DEVELOPMENT OF ROAD/ RAIL COMMUNICATION,
  ELECTRIFICATION, INDUSTRIALIZATION IN THE
  AREA OF HYDRO PROJECTS
• IMPROVEMENT OF THE QUALITY OF LIFE OF THE
  REMOTE HILLY AND BACKWARD AREA
• STORAGE PROJECTS PROVIDE FLOOD CONTROL,
  IRRIGATION, DRINKING WATER SUPPLY, RECREATION
  FACILITIES ETC AND THUS HELP IN THE MAXIMUM
  UTILIZATION OF OUR SCARCE WATER RESOURCES

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ISSUES INVOLVED IN HYDRO POWER DEVELOPMENT

• LAND ACQUISITION PROBLEMS
• RESETTLEMENT REHABILITATION PROBLEMS
• ENVIRONMENT AND FOREST ISSUES
• GEOLOGICAL SURPRISES
• INTER-STATE ASPECTS
• PAUCITY OF FUNDS AND LONGER GESTATION PERIOD
• LAW ORDER PROBLEMS

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ISSUES INVOLVED IN HYDRO POWER DEVELOPMENT

• APPORTIONMENT OF PROJECT COST AMONG VARIOUS
  AGENCIES
• EXORBITANT CALCULATIONS OF NET PRESENT VALUE
  (NPV)
• ENSURING OPTIMUM DEVELOPMENT AND SAFETY ASPECTS
• ALLOCATION OF PROJECTS FOR DEVELOPMENT
• STORAGE VS. R-O-R PROJECTS

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Land Acquisition Problems

• The problems arising in acquisition of land for
  hydro- electric project construction are causing
  suspension and delay in the construction
  activities.
• This problem may be minimized with the
  co-operation of concerned state Govts.

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Resettlement And Rehabilitation Issues

• The progress of some of the projects has been
  severely affected on account of opposition to the
  construction by environmentalists and project
  affected people.
• -Sardar Sarover,
• - Indira Sagar,
• - Bansagar Tons
• - Tehri
• These are some of the hydro projects where the
  progress has/ is being severely hampered from
  sustained opposition to project construction.
• R R is becoming a major issue in the
  implementation of storage-based hydro
  development.
• Many times, it is one of the main reasons for the
  delay in the execution resulting in Time Cost
  Over-runs

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Issues Related to Environment And Forest

• The progress of some of the projects has
  been affected on account of delay/non-clearance
  from Environment and Forest aspects.
• Hydro electric projects involve submergence
  causing displacement of project area people and
  often require forest land for their
  implementation.
• The impact on ecology, monuments, seismicity,
  resettlement and rehabilitation, catchment
  area treatment, flora and fauna are assessed in
  the environment appraisal of the project.
  Forest clearance requires compensatory
  afforestation on the non forest lands.
• These aspects need to be looked into carefully to
  avoid undue problems during execution of the
  projects.

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Geological Surprises

• The features of the hydro electric projects,
  being site specific, depend on the geology,
  topography and hydrology at the site. The
  construction time of a hydro project is greatly
  influenced by the geology of the area and its
  accessibility.
• It is, therefore, essential that state-of-the-art
  investigation and construction techniques are
  adopted to minimise geological risks as well as
  the overall gestation period of hydel projects.
• Even if, extensive investigation using new
  techniques of investigations, are undertaken
  an element of uncertainty remains in the
  sub-surface geology and the geological surprises
  during actual construction can not be ruled out.
  

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Inter State Issues

• A substantial hydel power potential has remained
  locked up and many mega hydel projects could not
  be taken up , even though these projects are well
  recognized as attractive and viable, because of
  unresolved Inter-State issues.
• At present 34 hydro electric projects (6810 MW)
  are held up because of various interstate
  disputes.
• Govt. of India recognizes the need for evolving
  an approach to ensure that the available
  hydro-electric potential is fully utilized
  without prejudice to the rights of the riparian
  States as determined by the Awards of the
  Tribunals/ Agreements arrived at among the party
  States for a given river basin with regard to
  water sharing.
• A consensus would need to be evolved amongst
  the basin states regarding the location of such
  project, basic parameters involved and mechanism
  through which each project would be constructed
  and operated.

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Paucity of Funds and Longer Gestation Period

• Paucity of funds in the past has been the major
  cause of slow hydro development.
• There has been the reluctance of FIs to fund
  these projects given the risks of geological and
  hydrological uncertainties, delays in land
  acquisitions, rehabilitation and resettlement
  problems, law and order problems and poor
  communications in addition to the general
  problems of IPPs like payment security etc.
• The thermal projects used to get priority in fund
  allotments with a view to get early benefits, as
  the gestation period of thermal plants is
  comparatively short.

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Law and Order Problems

• Disturbed condition in some part of the country
  is one of the factors causing delay in project
  execution and even suspension of work. Some of
  the hydro-electric projects suffering due to
  these problems are
• Dulhasti
• Upper Sindh
• Dhansiri
• Tuirial
• Gundia,Agnashini,Gangavali and Kalinadi stage-III
  etc.

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Apportionment of Project Cost Among Various
Agencies/States

• Efforts need to be made to evolve consensus for
  apportioning the costs , among various Agencies
  on account of extra security charges, additional
  cost on flood moderation, irrigation, drinking
  water, infrastructure (access roads) development
  etc.
• Approx. 37 of hydro potential is concentrated in
  North Eastern region of the country, where demand
  of power is quite low as compared to the
  available potential. The major chunk of power
  would be required to be transmitted to other
  states.This would necessitate cost sharing among
  various beneficiaries.
• Large Storage Projects developed in the higher
  reaches of river give benefits to the projects
  downstream and there should be apportionment of
  project cost among all the beneficiaries.

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Exorbitant Net Present Value (NPV)

• Excessive burden of NPV - Based on the Supreme
  Courts orders, MoEF vide letter dated 18.9.03
  has issued guidelines for collection of NPV
  (_at_Rs.5.80 lacs to Rs.9.20 lacs per ha. depending
  upon the quantity and density of forest land
  involved).
• This even covers land with no vegetation at all
  like river bed etc. Moreover, this is in addition
  to, payment of compensatory Afforestation for
  double the area of forest land diverted for the
  project, catchment area treatment, the value of
  the timber standing on the land to be inundated
  by the reservoir which is credited to the State
  Forest Department etc.
• Loading of NPV on the project would result in
  increase in tariff of hydro-electricity. e.g. in
  the Tipaimukh Project the NPV has resulted in an
  increase in the cost of the project by over
  Rs.1000 crores i.e. over 20 increase in the
  project cost.

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Ensuring Optimum Development And Safety Aspects

• As per Section 8 (1) of Electricity Act, 2003 the
  generating company intending to setup a hydro
  generating station shall prepare and submit to
  Authority for its concurrence, a scheme estimated
  to involve a capital expenditure exceeding such
  sum, as may be fixed by the Govt. from time to
  time by notification.
• During concurrence by CEA, the following concerns
  get addressed.
• Optimal development of the projects in the river
• Optimum design of project to get maximum power
• Civil designs incorporating safety aspects
• Adherence to inter-State water regulation
  /allocation
• Tying up of all inputs for development of the
  schemes including transmission aspects,
  MOEF clearance etc.
• Determining of capital cost which becomes the
  basis for tariff fixation by Regulators etc.
• The above requirements would need to be ensured
  whether concurrence of CEA is required or not.

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Allocation of Projects

• Allocation of hydro projects are within the
  domain of respective States
• Their concern lies with maximisation of their
  return by way of free power/equity return in the
  project.
• Presently, free power is fixed at a maximum of
  12 and return of equity fixed at 14 for
  projects that come under the regulatory regime.

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Allocation of Projects

• States are following different models for
  allocation of hydro projects to Private
  developers.
• While some states are allocating projects on the
  basis of per MW upfront payment to the state and
  additional free power over and above 12 .
• Others are making allocation on the basis of
  equity participation to the state at the cost of
  the developer and additional free power over
  and above 12 .
• Many States are allocating projects to developers
  with conditions that the project should revert
  back to the State after periods varying from 15
  to 45 years.

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Storage Vs. R-O-R Projects

• There is a lot of controversy in the
  development of Hydro Projects as Storage or
  R-O-R .
• The development of a Storage scheme involve huge
  complexities in issus like land acquisition,
  rehabilitation, environment concerns , water
  management etc, and most of the available sites
  for storage schemes are located in the Hill
  states, whereas the downstream benefits of flood
  control, drinking water, irrigation etc. become
  available to the states in the plains.

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Storage Vs. R-O-R Projects

• Thus, most of the distress caused by storage
  schemes occur in the Hill states whereas the
  benefits are largely in the states in the plains
  which are perceived to be more prosperous.
• Therefore , Hill states prefer R-O-R schemes and
  there is a move by states like Arunachal Pradesh
  to convert identified storage schemes to R-O-R,
  which is not desirable keeping the larger
  interest of the country in view.
• The type (Storage/ROR) of a hydro project depends
  upon the topography, geology and hydrology of the
  area and is site specific. The storage sites in
  the country are limited and hence their optimum
  development would need to be ensured .

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FINANCING ISSUES INVOLVED IN DEVELOPMENT OF
HYDRO POTENTIAL

• Developing Appropriate Funding Strategies
• Providing Longer Tenure Loans
• Rationalisation of Hydro Tariff
• Promoting Small and Mini Hydel Projects
• Mega Power Projects Policy

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Developing Appropriate Funding Strategies

• Power being most crucial infrastructure, public
  sector investments, both at the Central
  Government and State Governments, will have to
  be stepped up. Considering the magnitude of the
  expansion of the sector required, a sizeable part
  of the investments will also need to be brought
  in from the private sector .
• The Electricity Act, 2003 creates a conductive
  environment for investments in all segments of
  the industry, both for public sector and private
  sector by removing barrier to entry in different
  segments. Section 63 of the Act provides for
  participation of suppliers on competitive basis
  in different segments, which will further
  encourage private sector investment.

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Providing Longer Tenure Loans

• A special requirement of hydel projects is the
  availability of long term funding at reasonable
  interest rates for back ending of tariffs so that
  the cost of power during the initial years is
  reasonable.
• The FIs perceive a lower payment security risk if
  the first year tariff is reasonable and are
  reluctant to fund project with high first year
  tariff even if it is demonstrated that the tariff
  would be reasonable in the later years .
• The minimum tenure of PPAs should be atleast 25
  years. Institutions like the Power Finance
  Corporation have developed special schemes for
  funding hydro projects with tenures of upto 25
  years to address this concern.This would ensure
  equitable benefits to flow to the lenders,
  consumers at large and reasonable returns to the
  developers.

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Rationalisation of Hydro Tariff

• The hydro projects involve longer gestation
  period, difficult approach and construction of
  large infrastructure development etc. There is a
  need to reformulate the principles on the basis
  of which tariff is determined for hydel
  generation .
• Recognising the difficulties in execution of
  hydro projects, the Government has decided to
  rationalize the existing hydro tariff norms,
  improve the incentives for better operation and
  evolve a solution to the contentious issue of
  computing the completing cost in the face of
  geological uncertainties and surprises and
  natural incidents of rock slide etc.
• Recognising the problems in operation of hydro
  power stations in the initial years especially in
  project with silt laden water, the normative
  availability factor has been reduced from 90 to
  85. Further the rate for secondary energy has
  been made equal to rate for Primary energy.
• Review of Design Energy by CEA every five years.

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Providing Longer Tenure Loans

• Encouraged by the provisions of the Electricity
  Act, 2003, the financial institutions are no
  longer looking for Government guarantees and
  have reiterated that there would be no dearth of
  fund for projects with viable tariffs promoted by
  credible developers.
• An inter-institutional group (IIG) with the MD,
  SBI as its convener and representatives from
  other financial institutions and the Ministry of
  Power has been constituted to facilitate
  financial closure of private sector power
  projects.
• .

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Promoting Small and Mini Hydel Projects

• Ministry of Non-Conventional Energy Sources
  (MNES) has been vested with all matters related
  to Small Hydel Projects (up to 25 MW capacity).
  These projects are being provided with the
  following incentives .
• Incentives for detailed survey investigation
  and preparation of DPR.
• Incentives during the execution of the project in
  the form of capital/interest subsidy.
• Special incentives for execution of small hydro
  projects in the North Eastern Region by the
  Government departments/SEB/State agencies.
• Financial support for renovation and
  modernization and uprating of old small hydro
  power stations .
• .

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Mega Power Projects Policy

• Revised in May2006.
• Keeping in view the requirements of power
  projects located in certain special category
  States of JK, Sikkim and the seven states of
  North East, the minimum qualifying capacity of
  hydro power plants for availing mega benefits has
  been reduced from 500 MW to 350 MW..

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Mega Power Projects Policy

• The following are the Fiscal concessions/benefits
  available to Mega Power Projects
• Import of capital equipment free of customs duty.
  
• Deemed export benefits as per the Foreign Trade
  Policy to domestic bidders.
• Income Tax holiday regime as per section 80-IA of
  the Income Tax Act,1961.
• Price Preference of 15 to domestic PSUs bidders.

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CONCLUSION

• The changes now brought about in Mega Power
  Policy will facilitate setting up of Mega Power
  Plants in the country and the special category
  states of North-East including Sikkim and Jammu
  Kashmir.
• Inter-Institutional Group (IIG) with the MD, SBI
  as its convener and representatives from other
  financial institutions and the Ministry of Power
  is likely to facilitate financial closure of
  private sector power projects .

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CONCLUSION

• In view of the huge complexities involved in
  storage schemes ,the involvement of public sector
  in hydel projects particularly in storage
  projects would have to be enlarged.
• The IPPs may be allotted simpler/R-O-R schemes.
  
• The hydro projects should be allocated by the
  States on tariff based competitive bidding based
  on the quality DPRs to ensure that the inherent
  low tariff benefit of hydro resource is captured
  and passed on to the consumers.

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CONCLUSION

• There is an urgent need to formulate long term
  strategy for harnessing the balance 75 untapped
  potential of the country.
• In order to develop the balance potential by the
  end of 14th Plan ( 2026-27) , Survey
  Investigation activities would need to be
  completed by the end of 12th Plan i.e. by 2016-17
  
• Storage reservoir schemes with flood control and
  other benefits must be taken up for development
  keeping in view the overall requirement of the
  country.

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Thank you!