Throwing good money after bad

The Ministry of Power, Government of India, on its website, states that hydropower is cheaper than electricity from coal and gas powered plants, and is “inflation free”. This is part of the oft-repeated claim that hydropower is amongst the cheapest source of electricity. Given this, one is left bewildered to read the news that the Government is considering massive financial and policy support to the hydropower sector to help revive stranded projects and encourage the sector’s growth. If hydropower is really cheap, then why does it need such support? Given the huge social and environmental disruptions that hydropower project causes, it is important to critically examine the proposed financial support to the sector.

NITI Aayog’s Draft Energy Policy

On 27th June 2017 the NITI Aayog released the Draft National Energy Policy for public comments. The policy listed as its broad objectives enhanced energy independence, increased access at affordable prices, greater sustainability and higher economic growth. One of the interesting aspects of the draft policy is its emphasis on large hydropower projects. The Draft Energy Plan proposes that hydropower capacity will increase from 44,600 MW today (June 2017), to 61,000 MW by 2022 and between 71,000 to 92,000 MW by 2040.

But the problem is the “dismal” addition of hydropower in the 12th plan period (2012-17) and in general the slow pace of hydropower capacity addition in the earlier decade. According to the Central Electricity Authority (CEA), the 12th Plan had targeted a capacity addition of around 11,000 MW of hydropower, but the final capacity addition is expected to be only around 5,525 MW.

Though the NITI Aayog report acknowledges that “Experience tells us that R&R are not the only reason, though a major one, for poor development of hydro resources”, the solution it seems to offer is mainly financial. The NITI Aayog document says that “… There are adverse consequences, too, [of hydropower development] which call for quality research at the stage of project development and provision of funds for implementation of safeguards. It is envisaged that the Central and State Governments will cooperate in reorienting the current hydro-power strategy for course correction. A salient part of the above will be financial rehabilitation of the on-going/stranded large hydro projects so that the funds already invested in them can be put to good use.”

Foundering hydropower projects

In spite of the many incentives, and the expectation that private sector will help increase the pace of hydropower development, capacity addition in hydropower has been slow and a large number of hydropower projects are floundering. According to the reply by the Minister for Power, Shri Piyush Goyal to a question in the Rajya Sabha, on 24 July 2017, “14 under construction Hydropower Projects (above 25 MW), totalling 5,055 MW… are stalled due to various reasons. The cost overrun calculated by CEA due to these stalled projects is Rs. 25,593.78 cr.” This represents an increase of several times over their original costs for many of the projects.

One of the consequences of the increased project costs is that it will make the power from these projects unaffordable and costly. This is on top of the fact that electricity from even projects that are not stalled is turning out to be very costly.

Hydropower: cheap?

For example, the All India Power Engineers Federation (AIPEF) have criticised the 1200 MW Teesta-III hydropower project in Sikkim, pointing out that the tariff from the project has escalated to Rs. 6 per unit from the original promised Rs. 1.92 Rs per unit. As a result, Punjab, Haryana, Rajasthan and Uttar Pradesh refused to buy electricity from it. It is because the project was becoming unviable that the private developer of this project, the Athena group, was bailed out by the Sikkim government taking over the project. But now the project is in trouble because of the high cost of power, and the state government is left holding it.

Similarly, the Power Finance Corporation recently bailed out the 400 MW Maheshwar project on the Narmada, which was being developed by S.Kumars. According to the above mentioned statement in Parliament, the cost of the project went up from Rs. 1569 crores to Rs. 6793 crores. The developer did not have the financial resources to complete this project with such huge cost overruns. However, cost of power from the project had already reached Rs. 8.50 per unit in 2011 itself. So it is a question as to who will buy this power.

In a more recent development, Larsen and Toubro has asked the Himachal Pradesh government to undertake to buy all the power from two projects it is developing – the 430-MW Reoli Dugli project and the 267-MW Sach Khas project. This is because the cost of the power from the projects is working out to be Rs 9.90 per unit and the company fears that there will be no buyers.

These are not isolated cases. Given that new solar plants are bidding for power at less than Rs. 4 per unit, and with many existing thermal power plants languishing at very low operating rates as there are no takers for the power, it is no wonder that such high cost power from hydropower is being seen as being unviable.

Even if the financial rehabilitation results in bringing back the stranded projects online, will there be a market for the expensive power they produce? If not, it is likely that they will once again become stranded assets. So why the push for these projects?

Grid stabilising role of hydro

One of the reasons given for pushing for more hydropower projects is that they can play a role in stabilising the power grid, and providing peaking power (when demand for power is at an extreme high). In fact, the government has often indicated in its policy documents that power from hydro projects should be paid a premium for this role played by it. There have been various recommendations that power at the peak times must be priced higher. However, this is mostly not being done in the country. But the question is that even if it were to be done, would buyers be willing to pay such high tariffs for peak rates – from Rs.6 to Rs. 10 per unit?

Another important aspect is that not all hydropower projects can provide grid stabilising services to the same extent. It depends on the storage available, the rainfall in that year, other demands for the water in the basin, cascade of projects in the same basin and so on. For example, the NITI Aayog report itself notes that “Large hydro-power can play a key role in balancing variable electricity due to its ability to store water in comparison with small hydro power, which are essentially run-of-the-river projects.” But many of the hydropower projects in the Himalayan regions are precisely these “run-of-the-river” projects. (A misnomer actually, and misleading in that it can wrongly imply that the project is benign in terms of its impacts).

This situation is highlighted by the fact that one of the categories of hydropower projects which are in fact specially designed to meet peak loads – the pumped storage hydropower projects – are operating far below their capacity. In a meeting held by the CEA on 28 June 2017, it was revealed that “At present, there are 9 (nine) pumped storage plants in the Country with an installed capacity of 4785.6 MW. However, for various reasons, only 5 plants (2600 MW) are being operated in pumped storage mode.” The meeting also discusses how a hydropower plant’s ability to provide peaking power or grid stabilising power can be constrained by various factors ranging from tribunal awards, environmental releases, technical reasons etc. <%=insert_related_articles%>

Thus, one cannot justify in a blanket manner any and all hydropower projects – and their high costs - on the ground that they provide this service. The grid stabilising functions and ability to meet peak demand would need to be worked out for each of the project on a case by case basis. One of the reasons why a differential pricing policy for hydropower is not being put in place is precisely because there is no framework in place that will allow us to state which hydropower projects will provide this function at what time, and to what extent.

New hydro policy – good money after bad

Given all this, it is really shocking that the government is considering bringing out a new policy for hydropower development which will provide a number of sops to the sector. Reports indicate that the policy, which may involve financial support to the tune to Rs. 15,000 crores, would also have other elements like declaring large hydro as a renewable source, significant interest subsidy on loans, mandatory hydropower purchase obligations for electricity distribution companies etc. It is difficult to understand why the government should extend this support to projects which will generate very high cost power, and which will have serious social and environmental impacts. On the other hand, if the power is not expensive, then why suggest legally binding mandatory obligations on distribution companies to purchase power from hydro-generators? Presumably, distribution companies would want to purchase hydropower as first preference on their own.

If the idea is that this support would go to projects that would provide additional benefits to the grid like peaking power, then there must be strict criteria to identify and quantify such benefits, and only projects that meet these criteria, and which do not cause severe social and environmental impacts, must be supported. Unfortunately, there are no reports that any such criteria is under consideration. Nor are there any indications of issues like environmental impacts and social impacts will be given serious considerations in the policy. Therefore, there is full likelihood that the fresh financial and policy support will turn out to be another bailout and throwing good money after bad.