Power to the rich, literally
A new policy framework for hydro-electric power seems to have given confidence to private corporations to enter the sector, with a large number of mega projects lined up. But the same policies raise critical questions in relation to equity and access, writes Shripad Dharmadhikary.
There is a wave of private sector hydropower projects in the country. More than 30 projects of over 100 MW have been allotted to various private companies on some variant of Build, Own Operate and Transfer (BOOT) basis.
Reliance Power is gearing up to build the 1000 MW Siyom, 1000 MW Middle Siang and the 700 MW Tato II project in Arunachal Pradesh, and the 400 MW Urthing Sobla project in Uttarakhand. Jaiprakash industries has already commissioned the 300 MW Baspa II project in Himachal Pradesh and the 400 MW Vishnu Prayag project in Uttarakhand, and is building the 1000 MW Karcham Wangtoo in HP. In Arunachal Pradesh, it is planning the 500 MW Hirong project. Other companies with major projects, mainly in the states of Arunachal, Himachal and Uttarakhand include the GMR group, DS Constructions, KSK Electricity Financing India Pvt. Ltd., Mountain Falls (India) Ltd. and Lanco Energy Pvt Ltd.
This is in significant contrast with the dismal early experience when the power sector was first opened up for privatisation in 1991. At the time, there was a rush by private companies, many of them foreign, and 243 MoUs were signed for projects of around 90,000 MW. This was more than the total installed generation capacity at that time in the country. But few of these were hydropower projects. Out of the 13 hydro projects from this that could get the Central Electricity Authority (CEA) clearance, some like Karcham Wangtoo and Allain Duhangan are still under construction, some like Baspa II (2003) and Vishnu Prayag (2007) have been only recently commissioned and the Maheshwar project has effectively been taken over into the public sector.
What are the reasons for this new-found confidence of the private sector? Why do the new developers believe their experience this time will be different?
New markets
The major issue for the earlier round of privatisation in power sector was that the sole buyers of the power to be generated - the state electricity boards (SEBs) - were virtually bankrupt and hence there was little assurance regarding the payments for power sold. Guarantees by the State and Central governments and use of escrow mechanisms helped somewhat, but there were limits to this. The cost of power from hydro stations was considerably more than the cost of thermal power and the risk in hydro projects was higher. Hydropower also faced issues of large scale displacement and geological uncertainties that could lead to unplanned escalations in construction costs.
As a first step of Open Access, any generating company is allowed to sell a portion of the power it generates to any distribution licensee in the country. In the second stage, the generating company will be able to sell power directly to bulk consumers, bypassing the distribution company.
The passing of the Electricity Act 2003 (EA 2003) has opened up the possibilities of new markets for electricity generators and this is largely responsible for the confidence of power generators this time around. The EA 2003 aims to create a competitive electricity market in the country, and the central measure for this is Open Access. In the Open Access system, a power generation company can sell power to anyone in the country and not just to the concerned SEB.
Under the power sector reforms, the three key functions of power generation, transmission and distribution, hitherto all with the SEBs, are being ‘unbundled’ and separate licensees will be carrying out these activities. As a first step of Open Access, any generating company is allowed to sell power to any distribution licensee anywhere in the country. In the second stage, the generating company will be able to sell power directly to bulk consumers, bypassing the distribution company. As of now, consumers with requirements greater than 1 MW will be able to avail of Open Access.
As such consumers are mostly industrial consumers with good purchasing power, they would not only be able to buy power even if it is at a somewhat higher cost, but would also be able to provide assurance of payment to the supplier. Thus, a power generation company in say Arunachal Pradesh could sign an agreement with an industry in Maharashtra for selling its power.
For the rich, by the rich
However, it is precisely this arrangement that raises the concern that private hydro will develop into a power system ‘by the rich, for the rich’ especially as the cost of the power from these projects is relatively high, at least in the initial years.
For example, the Tariff Order of the Himachal State Electricity Regulatory Commission puts the tariff of power generated from the Baspa II project at Rs. 3.20 per KWH (per unit) for the year 2006. This includes an assured rate of return of 16 per cent on equity to the private company. It is important to note that this is the tariff paid to the company; the consumer will have to pay for the transmission and distribution (T&D) costs, and the losses. At a 30 per cent T&D loss, the tariff would work out to be Rs.4.57 per unit.
While cost of generation can be location specific in the case of hydro, these figures can still give us some idea. For example, the Baspa project with 300 MW installed capacity cost about Rs. 1600 crores - Rs.5.33 crore per MW. The 1000 MW Siyom project of Reliance is expected to cost about 5780 crores or Rs. 5.7 crore per MW. It is also expected to generate proportionate amount of energy. Thus, we can expect the tariff to be similar. It is difficult to see how a poor household or a small farmer can afford power at this price.
Nor are the private hydro companies likely to serve these consumers. A new hydropower policy passed by the central Cabinet in January 2008 allows private hydro projects to sell 40 per cent of the saleable power on merchant basis, that is, to anyone they want, at the price they can get.
The arrangements for the remaining 60 per cent are not clear but the new policy exempts private hydro from competitive tariff bidding, and this implies that they could directly negotiate the tariffs, and if the State or Central Regulatory Commissions intervene, it will be to determine the tariff essentially on a cost-plus, assured profit approach. Thus, the remaining 60 per cent power is also likely to be priced highly.
In effect, the private hydro projects are likely to end up being developed for supplying power to those who can afford to pay high prices. Indeed, the National Tariff Policy 2006 says: “Consumers, particularly those who are ready to pay a tariff which reflects efficient costs have the right to get uninterrupted 24 hours supply of quality power.”
In the process, the water resources of the country will be effectively earmarked for the people who can pay high prices, i.e. the rich, while denying the access to those citizens who can’t pay high prices, including for livelihood needs of vulnerable sections like small and marginal farmers. This of course, is characteristic of privatisation in the water supply sector also.
Aggravating the problem
The new hydro policy has brought to the fore an earlier concern once again. When the power sector was opened up for private ownership in 1991, the tariff was calculated based on a cost-plus approach, that is, the private company would be paid all its costs, including debt repayment, operating costs, and a 16 per cent assured rate of return. This led to problems of cost-padding (artificially inflating costs to push up tariffs that can be collected and hence revenue accrual) by companies developing private projects.
To address this, in 1996 it was mandated by the Central Government that all projects would have to go by the competitive bidding route and not the MoU route where there was direct one to one negotiation with the company. In 2006, the new Tariff Policy laid down that all distribution companies will use tariff based competitive bidding to procure power, except from public sector projects. That is, private generation companies will have to quote the tariff at which they will supply power and the lowest bidder would be selected. Thus, the cost-plus approach was put aside in favour of tariff based competitive bidding. The new policy has reversed this and the cost-plus approach is back in place for the private hydropower projects, with all its potential problems.
The cost-plus approach is back in place for the private hydropower projects, with all its potential problems.
In case of projects in the North East, there is an additional consideration - the huge distance between the generating project and the centres of use. The National Electricity Policy mandates that the tariffs for transmission should be proportionate to the distance involved.
At a fundamental level, the issue is that there has hardly been any process of cost optimisation. Least Cost capacity addition planning, a process through which new power plants are planned in a manner as to minimise the cost of the energy generated, has not been followed and there is no guarantee that new plants will provide power at the lowest costs.
Socially and environmentally benign?
It is also being assumed that the other serious issue with hydropower - major social and environmental impacts - will not be a problem in case of these projects partly because the displacement expected to be much smaller due to the sparse population in these areas.
In reality, this is a misconception and the social and environmental impacts are likely to be as serious, if not more, as those of dams in others areas (see for examples, this article). There are also certain issues that are specific to the operation of private sector projects. For example, the 40 per cent power that projects are allowed to sell on merchant basis will be sold so as to maximise the profits of the company. Naturally, how much and at what time this power is to be supplied will vary according to the market. This in turn means that the water releases from the dams will vary, and would be in general unpredictable. The downstream impacts of these projects on riverine flora and fauna, and cultural impacts, depend critically on the quantum, timing and pattern of the flows. However, as the flows will be subject to the market, there is no way to even capture the impacts in any Environmental Impact Assessment.
Another important issue is the impact of the power transmission lines from the North East, where a significant of chunk of the new hydropower capacity is proposed - both public and private. As the requirement of the North East is far less than the power that is expected to be generated, much of this will have to be transmitted over large distances to load centres in other parts of the country. Unfortunately, these areas are connected through a narrow ‘chicken neck’ (the area between Siliguri and Bidhan Nagar in West Bengal), and hence the transmission lines will have to be bunched together. The Working Group on Power for the 11th Five Year Plan estimates that to evacuate all the surplus power from the North East will require a set of transmission lines with a right of way of about 1.5 kms width. The impact of this on the ecologically sensitive area is unknown. Indeed, it has hardly been considered so far.
Thus, while a new policy framework seems to have given confidence to private corporations to enter the hydropower sector, with large number of mega projects lined up, the same policies raise critical questions in relation to equity and access, of whether profits are compatible with social obligations. Indeed, these are the very questions that have around the world fundamentally challenged the privatisation of resources and services that are essential for life and survival.
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Cite this article
Shripad Dharmadhikary (2008) ‘Power to the rich, literally’, India Together, 21 April 2008. https://indiatogether.org/richpower-economy/
9 reader responses
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Vivek · 23 April 2008
An urgent issue for economic development of the country is shortage of power. In such a scenario, these relatively low social & envriomental impact projects are welcome even at a higher cost.These projects would fill in only a certain portion of the gap with coal based plants filling in the rest.Continuing shortage of power will certainly hurt the industries (& the rich) but will have an impact on the poor of the country. Also on an overall basis, the project owners would also not have out-of-the world profits.
Ganga Prasad Rao · 25 April 2008
Having commented on the environmental aspects of hydropower development in earlier articles, I limit these comments to policy matters. It is interesting to note that distribution licensees are no longer obliged to source hydro power competitively. The article states that competitive bidding was excused for power sourced from public sector projects. Public sector thermal power plants are beset by coal shortages while public sector hydro generation is dictated by irrigation policies and the whims and fancies of politicians. Power sources from public sector producers is likely to reflect these inefficiencies. What this means is that distribution licensees, though operating in a supposedly competitive environment with many potential suppliers and many distributors, are unlikely to obtain truly competitive prices. Specifically, the overlap of the new cost-plus policy and the existing 'public sector power' exemption is likely to bring about a situation in which private hydro producers are likely to benefit by cost-padding to the extent of the inefficiency permitted in public sector power generation. Requiring transmission costs to vary with distance is no panacea to the underlying problems of monopolistic power and supply of transmission capacity. The costs of construction, operation and maintenance of power transmission systems vary with several variables, notably, distance, transmission capacity, difficulty of (and hence access to) terrain, right of way, optional spare capacity to accommodate future increase in power transmission and so on. Ideally, a transmission licensee too should have the power to dynamically set transmission levies reflecting 'congestion', system reliability, and the availability of substitutes. Problems such as the 'Chicken neck' could be easily overcome if India invited Bangladesh to participate in the (inter-) national transmission grid extending from Iran and Pakistan on the west to Burma on the East. In the case of private power plants, the crucial determinant of project feasibility (and funding terms) seems to be the volume of power that is contracted and guaranteed for with a PPA. Power producers would like to have it both ways - the freedom to sell on the Power Exchange when prices are high and the comfort of PPA price floors and off-takes at other times. With demand for power growing and the government apparently none too bothered about efficiency or the environment, that is likely to be the case.
Shripad Dharmadhikary · 25 April 2008
Vivek, it is a misconception that these hydro projects, coming up mainly in the Himalayan areas, have low social and environmental impacts. The impacts of these projects are no less than other dams. Among the more serious impacts could be virtually wiping out of the culture and identity of several communities. Your idea that these projects fill only part of the gap and rest would come from coal, presumably implies that this cheaper power source could be used to supply to consumers with lesser purchasing power. This is an important idea, and is in fact nothing but another form of cross-subsidy. However, elimination of cross subsidies is one of the explicitly stated goals of power sector reforms in the country. Rajan, I agree private sector will not come unless they can make good profits, that is certain; but the key question is whether this then makes the tariffs un-affordable for the poor and the vulnerable. Unfortunately, the way the current policies are structured, this is what is happening. (For example, the competitive bidding policy has been reversed in favour of a cost plus policy) Also, the regulation and the policy regimes are such that it is aiming to ensure higher and higher profits to the private companies, as I have tried to point out. We should also think about whether the market can really be competitive in a regime where shortages rule. To remove shortage, you need to produce more power at lower costs. But this very cost optimisation is not being done. Given this, the privatisation can only lead to a high cost power which only some can afford. Rich producing for the rich is okay, but the problem is that common property and natural resources of water, land etc are being used for it. These resources should be used to produce both, for the rich and for the common person. While we are not there completely yet, increasing parts of the Indian economy are exhibiting the 'enclave' feature - production of goods and services by the rich for the rich, and the rest left outside to fend for themselves. I with my computer am certainly better off than many in the country (though I would hardly call myself rich, middle class would be more where I would place myself), but does that mean that I can't point out that the system is being shifted to cater more and more to the rich? That is not hypocrisy. Also, we should keep in mind that there are critical differences in the privatisation and liberalisation of the telephone sector and power or water sector.
Sreekumar N · 29 April 2008
Shripad's article and comments highlight the need to reflect on the changing role of electricity. Is it to be a market commodity or a development input? In 1990s, the policy pendulum started the swing towards making electricity a commodity. The IPP process, privatization in Orissa and the Electricity Act were all part of this swing. The 2004 elections, where the majority expressed their idea of where and for whom India was shining, started a swing back. The massive rural electrification program, amendment to the E-Act (to remove clauses on elimination of cross subsidy) and pronouncements of the new Minister of State in support of public sector are all parts of that swing. Considering the prevalent wide inequity (social & economic), power shortages and the questionable experience with market forces (Enron, World Bank or California), it is clear that State will continue to play a significant role in regulating and operating the Indian power sector. To broaden the debate (from public Vs private, or poor Vs rich), let me add few points: Irrespective of ownership, weak public monitoring makes organizations neglect issues of the poor. If PDS is corrupt, government hospitals do not work or public transport is inefficient, it is the poor who suffer more. And all these work only when there is vigilant monitoring by public. In the mad rush for big centralized hydro, coal or nuclear projects, the high potential for energy conservation and renewable have been neglected. Considering the climate challenge, it is imperative for all to put in efforts in these areas. As Shripad says, there are no problems with rich producing for the rich. But the issue that his critiques should address is how such a system would provide sustainable electricity access to the majority poor in the country. They should question the efficacy of 'trickle down theory' to solve the problems of the poor.
himanshu · 29 April 2008
I need more electricity in my village so that: 1. Villagers can stay-up late and watch TV, eat and njoy. 2. store food in fridges. eat and sell food. 3. Use more electricity for farming. 4. students can study at night instead of getting-up early morning and use natural light. 5. Market place can be open till late, shops-restaurants can flourish. First let's have electricity, then we can worry about ill-effects on environment, society, health etc.
Thomas · 2 May 2008
Rich need cheap labour to become richer. Poor people are treated as the captive labour bank (Political parties use them as vote banks). Only pro rich policies ensure that there is abundant supply of cheap labour. Our politicians and bureaucrats work together with the rich to achieve this task. See the example of Mumbai, the economic capital of India, which has more than half of its people living in slums. Alas the largest slum is in Mumbai. Other cities are soon catching up. India may be adding few hundred billionaires every year but at the same time millions of people are forced to live in subhuman conditions.
Kannan Kasturi · 2 May 2008
Sripad's article performs an important service by tracking and examining major policy changes related to power and water that are being effected pretty much under the carpet without public discussion and debate. Natural resources like flowing water and underground oil & minerals belong to the nation and their exploitation must benefit all its citizens. If any peoples deserve a greater share of the benefits, it is those who live by the river or in the land bearing oil or mineral deposits. The article has rightly raised the issue of equity in the sharing of natural resources.
Srinivas · 1 June 2008
This article is well written on the development in power sector. It is presumed that competitive bidding will reduce the cost but there are various elements in the competitive bidding system which are escalable. Therefore even in competitive bidding there is a possibility of escalating prices at later stage. If any body could elaborate this issue then true picture on tariff based bidding system will be more clear.
vivek Joshi · 4 May 2009
Hi, friends. I feel we can add one component of cooperative approach here, where-in we make a cooperative of the villages displaced or villages within a certain area around the project site. This cooperative shall have a stake in the project and which can be translated into commercial gains. This way the projects will move faster as villagers are a part of it and villagers shall reap the benefits for times to come which can subsidize the higher tariff cost also. Companies will also gain a lot by partnering with the villagers and sharing their earnings. I hope this adds to the solution .. I saw a mention about monitoring I feel the matter is not monitoring it is the empowerment of the people using the service. Once they start demanding we shall have an inbuilt monitoring system. We cant do on building monitoring agency for every government policy we launch.